Add the files for the take-home exam

exam/original-files/LMD_pos_master_dictionary_2018.txt

@@ -0,0 +1,354 @@
+ABLE
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+VERSATILE
+VERSATILITY
+VIBRANCY
+VIBRANT
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+WINNER
+WINNERS
+WINNING
+WORTHY

exam/original-files/Overview_File_Problem_1.csv

@@ -0,0 +1,61 @@
+index;filename;ticker;company_name_transcript
+1;2013-Jan-29-AMZN.OQ-139057386295-Transcript.txt;AMZN;Amazon.com Inc
+2;2013-Apr-25-AMZN.OQ-139339186971-Transcript.txt;AMZN;Amazon.com Inc
+3;2013-Jul-25-AMZN.OQ-137712068210-Transcript.txt;AMZN;Amazon.com Inc
+4;2013-Oct-24-AMZN.OQ-139066299673-Transcript.txt;AMZN;Amazon.com Inc
+5;2014-Jan-30-AMZN.OQ-141027717464-Transcript.txt;AMZN;Amazon.com Inc
+6;2014-Apr-24-AMZN.OQ-140443160996-Transcript.txt;AMZN;Amazon.com Inc
+7;2014-Jul-24-AMZN.OQ-138703384359-Transcript.txt;AMZN;Amazon.com Inc
+8;2014-Oct-23-AMZN.OQ-140669099674-Transcript.txt;AMZN;Amazon.com Inc
+9;2015-Jan-29-AMZN.OQ-136951423128-Transcript.txt;AMZN;Amazon.com Inc
+10;2015-Apr-23-AMZN.OQ-139804865882-Transcript.txt;AMZN;Amazon.com Inc
+11;2015-Jul-23-AMZN.OQ-140462931809-Transcript.txt;AMZN;Amazon.com Inc
+12;2015-Oct-22-AMZN.OQ-137384537916-Transcript.txt;AMZN;Amazon.com Inc
+13;2016-Jan-28-AMZN.OQ-139696494446-Transcript.txt;AMZN;Amazon.com Inc
+14;2016-Apr-28-AMZN.OQ-137577237096-Transcript.txt;AMZN;Amazon.com Inc
+15;2016-Jul-28-AMZN.OQ-138879486315-Transcript.txt;AMZN;Amazon.com Inc
+16;2016-Oct-27-AMZN.OQ-139909051245-Transcript.txt;AMZN;Amazon.com Inc
+17;2017-Feb-02-AMZN.OQ-139452463844-Transcript.txt;AMZN;Amazon.com Inc
+18;2017-Apr-27-AMZN.OQ-139668306179-Transcript.txt;AMZN;Amazon.com Inc
+19;2017-Jul-27-AMZN.OQ-137040257613-Transcript.txt;AMZN;Amazon.com Inc
+20;2017-Oct-26-AMZN.OQ-140695336667-Transcript.txt;AMZN;Amazon.com Inc
+21;2013-Jan-17-BAC.N-137118030967-Transcript.txt;BAC;Bank of America Corporation
+22;2013-Apr-17-BAC.N-140727993387-Transcript.txt;BAC;Bank of America Corporation
+23;2013-Jul-17-BAC.N-138558829694-Transcript.txt;BAC;Bank of America Corporation
+24;2013-Oct-16-BAC.N-137085760338-Transcript.txt;BAC;Bank of America Corporation
+25;2014-Jan-15-BAC.N-138523498996-Transcript.txt;BAC;Bank of America Corporation
+26;2014-Apr-16-BAC.N-139135830280-Transcript.txt;BAC;Bank of America Corporation
+27;2014-Jul-16-BAC.N-137162730136-Transcript.txt;BAC;Bank of America Corp
+28;2014-Oct-15-BAC.N-137877397872-Transcript.txt;BAC;Bank of America Corp
+29;2015-Jan-15-BAC.N-138737516690-Transcript.txt;BAC;Bank of America Corp
+30;2015-Apr-15-BAC.N-138140128784-Transcript.txt;BAC;Bank of America Corp
+31;2015-Jul-15-BAC.N-137368163905-Transcript.txt;BAC;Bank of America Corp
+32;2015-Oct-14-BAC.N-139658820022-Transcript.txt;BAC;Bank of America Corp
+33;2016-Jan-19-BAC.N-137516735613-Transcript.txt;BAC;Bank of America Corp
+34;2016-Apr-14-BAC.N-138757977086-Transcript.txt;BAC;Bank of America Corp
+35;2016-Jul-18-BAC.N-138282004512-Transcript.txt;BAC;Bank of America Corp
+36;2016-Oct-17-BAC.N-139667176127-Transcript.txt;BAC;Bank of America Corp
+37;2017-Jan-13-BAC.N-137706007374-Transcript.txt;BAC;Bank of America Corp
+38;2017-Apr-18-BAC.N-141158160180-Transcript.txt;BAC;Bank of America Corp
+39;2017-Jul-18-BAC.N-138882471971-Transcript.txt;BAC;Bank of America Corp
+40;2017-Oct-13-BAC.N-136999269367-Transcript.txt;BAC;Bank of America Corp
+41;2013-Jan-30-FB.OQ-140751793850-Transcript.txt;FB;Facebook
+42;2013-May-01-FB.OQ-140634585149-Transcript.txt;FB;Facebook
+43;2013-Jul-24-FB.OQ-140049061003-Transcript.txt;FB;Facebook
+44;2013-Oct-30-FB.OQ-138249704477-Transcript.txt;FB;Facebook
+45;2014-Jan-29-FB.OQ-139655634314-Transcript.txt;FB;Facebook
+46;2014-Apr-23-FB.OQ-137448671471-Transcript.txt;FB;Facebook
+47;2014-Jul-23-FB.OQ-137343825744-Transcript.txt;FB;Facebook Inc
+48;2014-Oct-28-FB.OQ-140415619254-Transcript.txt;FB;Facebook Inc
+49;2015-Jan-28-FB.OQ-139431073452-Transcript.txt;FB;Facebook Inc
+50;2015-Apr-22-FB.OQ-141043150939-Transcript.txt;FB;Facebook Inc
+51;2015-Jul-29-FB.OQ-141107486910-Transcript.txt;FB;Facebook Inc
+52;2015-Nov-04-FB.OQ-139744337761-Transcript.txt;FB;Facebook Inc
+53;2016-Jan-27-FB.OQ-137249190020-Transcript.txt;FB;Facebook Inc
+54;2016-Apr-27-FB.OQ-137612530009-Transcript.txt;FB;Facebook Inc
+55;2016-Jul-27-FB.OQ-139115186913-Transcript.txt;FB;Facebook Inc
+56;2016-Nov-02-FB.OQ-137048274923-Transcript.txt;FB;Facebook Inc
+57;2017-Feb-01-FB.OQ-140831484304-Transcript.txt;FB;Facebook Inc
+58;2017-May-03-FB.OQ-137850824087-Transcript.txt;FB;Facebook Inc
+59;2017-Jul-26-FB.OQ-136950829491-Transcript.txt;FB;Facebook Inc
+60;2017-Nov-01-FB.OQ-137641444844-Transcript.txt;FB;Facebook Inc

exam/original-files/Overview_File_Problem_2.csv

@@ -0,0 +1,61 @@
+index;filename;filename_questions;filename_answers;ticker;company_name_transcript
+1;2013-Jan-16-JPM.N-140961136671-Transcript.txt;1_questions.txt;1_answers.txt;JPM;JPMorgan Chase & Co.
+2;2013-Apr-12-JPM.N-137249419186-Transcript.txt;2_questions.txt;2_answers.txt;JPM;JPMorgan Chase & Co.
+3;2013-Jul-12-JPM.N-140859159651-Transcript.txt;3_questions.txt;3_answers.txt;JPM;JPMorgan Chase & Co.
+4;2013-Oct-11-JPM.N-139104526385-Transcript.txt;4_questions.txt;4_answers.txt;JPM;JPMorgan Chase & Co.
+5;2014-Jan-14-JPM.N-137354865185-Transcript.txt;5_questions.txt;5_answers.txt;JPM;JPMorgan Chase & Co.
+6;2014-Apr-11-JPM.N-140165606470-Transcript.txt;6_questions.txt;6_answers.txt;JPM;JPMorgan Chase & Co.
+7;2014-Jul-15-JPM.N-140321260641-Transcript.txt;7_questions.txt;7_answers.txt;JPM;JPMorgan Chase & Co.
+8;2014-Oct-14-JPM.N-138918479517-Transcript.txt;8_questions.txt;8_answers.txt;JPM;JPMorgan Chase & Co
+9;2015-Jan-14-JPM.N-140213325968-Transcript.txt;9_questions.txt;9_answers.txt;JPM;JPMorgan Chase & Co
+10;2015-Apr-14-JPM.N-137731590648-Transcript.txt;10_questions.txt;10_answers.txt;JPM;JPMorgan Chase & Co
+11;2015-Jul-14-JPM.N-137463527529-Transcript.txt;11_questions.txt;11_answers.txt;JPM;JPMorgan Chase & Co
+12;2015-Oct-13-JPM.N-140561706149-Transcript.txt;12_questions.txt;12_answers.txt;JPM;JPMorgan Chase & Co
+13;2016-Jan-14-JPM.N-139240302492-Transcript.txt;13_questions.txt;13_answers.txt;JPM;JPMorgan Chase & Co
+14;2016-Apr-13-JPM.N-138592450715-Transcript.txt;14_questions.txt;14_answers.txt;JPM;JPMorgan Chase & Co
+15;2016-Jul-14-JPM.N-140164291407-Transcript.txt;15_questions.txt;15_answers.txt;JPM;JPMorgan Chase & Co
+16;2016-Oct-14-JPM.N-136934024381-Transcript.txt;16_questions.txt;16_answers.txt;JPM;JPMorgan Chase & Co
+17;2017-Jan-13-JPM.N-139316849748-Transcript.txt;17_questions.txt;17_answers.txt;JPM;JPMorgan Chase & Co
+18;2017-Apr-13-JPM.N-138307122418-Transcript.txt;18_questions.txt;18_answers.txt;JPM;JPMorgan Chase & Co
+19;2017-Jul-14-JPM.N-138724678832-Transcript.txt;19_questions.txt;19_answers.txt;JPM;JPMorgan Chase & Co
+20;2017-Oct-12-JPM.N-138888592504-Transcript.txt;20_questions.txt;20_answers.txt;JPM;JPMorgan Chase & Co
+21;2013-Feb-12-KO.N-137022867242-Transcript.txt;21_questions.txt;21_answers.txt;KO;The Coca-Cola Company
+22;2013-Apr-16-KO.N-139599548880-Transcript.txt;22_questions.txt;22_answers.txt;KO;The Coca-Cola Company
+23;2013-Jul-16-KO.N-140843862347-Transcript.txt;23_questions.txt;23_answers.txt;KO;The Coca-Cola Company
+24;2013-Oct-15-KO.N-138489121635-Transcript.txt;24_questions.txt;24_answers.txt;KO;The Coca-Cola Company
+25;2014-Feb-18-KO.N-138408934080-Transcript.txt;25_questions.txt;25_answers.txt;KO;The Coca-Cola Company
+26;2014-Apr-15-KO.N-139157937760-Transcript.txt;26_questions.txt;26_answers.txt;KO;The Coca-Cola Company
+27;2014-Jul-22-KO.N-138547566546-Transcript.txt;27_questions.txt;27_answers.txt;KO;The Coca-Cola Company
+28;2014-Oct-21-KO.N-140354489389-Transcript.txt;28_questions.txt;28_answers.txt;KO;The Coca-Cola Co
+29;2015-Feb-10-KO.N-138013855540-Transcript.txt;29_questions.txt;29_answers.txt;KO;The Coca-Cola Co
+30;2015-Apr-22-KO.N-137018502034-Transcript.txt;30_questions.txt;30_answers.txt;KO;The Coca-Cola Co
+31;2015-Jul-22-KO.N-139813926443-Transcript.txt;31_questions.txt;31_answers.txt;KO;Coca-Cola Co
+32;2015-Oct-21-KO.N-137832140186-Transcript.txt;32_questions.txt;32_answers.txt;KO;Coca-Cola Co
+33;2016-Feb-09-KO.N-140614720811-Transcript.txt;33_questions.txt;33_answers.txt;KO;Coca-Cola Co
+34;2016-Apr-20-KO.N-141172130225-Transcript.txt;34_questions.txt;34_answers.txt;KO;Coca-Cola Co
+35;2016-Jul-27-KO.N-141070210688-Transcript.txt;35_questions.txt;35_answers.txt;KO;Coca-Cola Co
+36;2016-Oct-26-KO.N-140963352890-Transcript.txt;36_questions.txt;36_answers.txt;KO;Coca-Cola Co
+37;2017-Feb-09-KO.N-138416362262-Transcript.txt;37_questions.txt;37_answers.txt;KO;Coca-Cola Co
+38;2017-Apr-25-KO.N-138858781409-Transcript.txt;38_questions.txt;38_answers.txt;KO;Coca-Cola Co
+39;2017-Jul-26-KO.N-137990434146-Transcript.txt;39_questions.txt;39_answers.txt;KO;Coca-Cola Co
+40;2017-Oct-25-KO.N-136945571518-Transcript.txt;40_questions.txt;40_answers.txt;KO;Coca-Cola Co
+41;2013-Feb-27-TGT.N-139792946792-Transcript.txt;41_questions.txt;41_answers.txt;TGT;Target Corporation
+42;2013-May-22-TGT.N-136980779761-Transcript.txt;42_questions.txt;42_answers.txt;TGT;Target Corporation
+43;2013-Aug-21-TGT.N-139892388396-Transcript.txt;43_questions.txt;43_answers.txt;TGT;Target Corporation
+44;2013-Nov-21-TGT.N-138993533906-Transcript.txt;44_questions.txt;44_answers.txt;TGT;Target Corporation
+45;2014-Feb-26-TGT.N-137355844814-Transcript.txt;45_questions.txt;45_answers.txt;TGT;Target Corporation
+46;2014-May-21-TGT.N-139074919254-Transcript.txt;46_questions.txt;46_answers.txt;TGT;Target Corporation
+47;2014-Aug-20-TGT.N-138325416922-Transcript.txt;47_questions.txt;47_answers.txt;TGT;Target Corporation
+48;2014-Nov-19-TGT.N-141033583785-Transcript.txt;48_questions.txt;48_answers.txt;TGT;Target Corp
+49;2015-Feb-25-TGT.N-138988132416-Transcript.txt;49_questions.txt;49_answers.txt;TGT;Target Corp
+50;2015-May-20-TGT.N-137082306821-Transcript.txt;50_questions.txt;50_answers.txt;TGT;Target Corp
+51;2015-Aug-19-TGT.N-137786497465-Transcript.txt;51_questions.txt;51_answers.txt;TGT;Target Corp
+52;2015-Nov-18-TGT.N-140736694649-Transcript.txt;52_questions.txt;52_answers.txt;TGT;Target Corp
+53;2016-Feb-24-TGT.N-137915462232-Transcript.txt;53_questions.txt;53_answers.txt;TGT;Target Corp
+54;2016-May-18-TGT.N-139736856349-Transcript.txt;54_questions.txt;54_answers.txt;TGT;Target Corp
+55;2016-Aug-17-TGT.N-137580578182-Transcript.txt;55_questions.txt;55_answers.txt;TGT;Target Corp
+56;2016-Nov-16-TGT.N-138221177745-Transcript.txt;56_questions.txt;56_answers.txt;TGT;Target Corp
+57;2017-Feb-28-TGT.N-138037321026-Transcript.txt;57_questions.txt;57_answers.txt;TGT;Target Corp
+58;2017-May-17-TGT.N-137922466556-Transcript.txt;58_questions.txt;58_answers.txt;TGT;Target Corp
+59;2017-Aug-16-TGT.N-138067107203-Transcript.txt;59_questions.txt;59_answers.txt;TGT;Target Corp
+60;2017-Nov-15-TGT.N-137953624001-Transcript.txt;60_questions.txt;60_answers.txt;TGT;Target Corp

exam/original-files/Problem_1_Sample/2013-Apr-25-AMZN.OQ-139339186971-Transcript.txt

@@ -0,0 +1,534 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2013 Amazon.com Inc Earnings Conference Call
+04/25/2013 02:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Tom Szkutak
+   Amazon.com, Inc. - SVP & CFO
+ * Sean Boyle
+   Amazon.com, Inc. - VP of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Ken Sena
+   Evercore Partners - Analyst
+ * Jordan Rohan
+   Stifel Nicolaus - Analyst
+ * Stephen Ju
+   Credit Suisse - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Doug Anmuth
+   JPMorgan - Analyst
+ * Jason Helfstein
+   Oppenheimer & Co. - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Co. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Matt Nemer
+   Wells Fargo Securities - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Anthony DiClemente
+   Barclays Capital - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone; thank you for standing by. Welcome to the Amazon.com first-quarter 2013 financial results teleconference. At this time all participants are in a listen-only mode and after the presentation we will conduct a question-and-answer session. Today's call is being recorded. And for opening marks I will be turning the call over to the Vice President of Investor Relations, Mr. Sean Boyle. Mr. Boyle, please go ahead.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello and welcome to or Q1 2013 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, April 25, 2013 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 2012. Now I will turn the call over to Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Sean. I will begin with comments on our first-quarter financial results. Trailing 12-month operating cash flow increased 39% to $4.25 billion. Trailing 12-month free cash flow decreased 85% to $177 million. Trailing 12-month capital expenditures were $4.07 billion. This amount includes $1.4 billion in purchases of our previously leased corporate office space as well as property for development of additional corporate office space located in Seattle, Washington which we purchased in fourth quarter 2012.
+The increase in capital expenditures reflects additional investments in support of continued business growth consisting of investments in technology, infrastructure including Amazon Web Services and additional capacities to support our fulfillment operations.
+Return on invested capital was 1%, down from 12%. 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 471 million shares compared with 464 million one year ago.
+Worldwide revenue grew 22% to $16.07 billion or 24% excluding the $302 million unfavorable impact from year-over-year changes in foreign exchange rates. We are grateful to our customers who continue to take advantage of our low prices, vast selection and shipping offers.
+Media revenue increased to $5.06 billion, up 7% or 10% excluding foreign exchange. EGM revenue increased to $10.21 billion, up 28% or 30% excluding foreign exchange. Worldwide EGM increased to 64% of worldwide sales up from 60%.
+Worldwide paid unit growth was 30%. Active customer accounts exceeded 209 million. Worldwide active seller accounts were more than 2 million. Seller units represented 40% of paid units.
+Now I will discuss operating expenses excluding stock-based compensation. Cost of sales was $11.8 billion or 73.4% of revenue compared with 76.1%. Fulfillment, marketing, technology and content and G&A combined was $3.83 billion or 23.8% of sales, up approximately 289 basis points year-over-year. Fulfillment was $1.74 billion or 10.8% of revenue compared with 9.5%. Tech and content was $1.26 billion or 7.9% of revenue compared with 6.5%. Marketing was $616 million or 3.8% of revenue compared with 3.6%.
+Now I will talk about our segment results and, consistent with prior periods, we do not allocate to segments our stock-based compensation or other operating expense line item. In the North America segment revenue grew 26% to $9.39 billion. Media revenue grew 14% to $2.51 billion. EGM revenue grew 28% to $6.13 billion representing 65% of North America revenues up from 64%.
+North America segment operating income increased 31% to $457 million, a 4.9% operating margin. In the international segment revenue grew 16% to $6.68 billion. Adjusting for the $301 million year-over-year unfavorable foreign exchange impact revenue growth was 21%.
+Media revenue grew 1% to $2.54 billion or 7% excluding foreign exchange and EGM revenue grew 28% to $4.09 billion or 32% excluding foreign exchange. EGM now represents 61% of international revenues up from 56%.
+International segment operating loss was $16 million, a 0.2% negative operating margin compared with income of $49 million. CSOI increased 11% to $441 million or 2.7% of revenue, down approximately 27 basis points year-over-year.
+Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 6% to $181 million or 1.1% of net sales.
+Our income tax benefit was $18 million and includes $46 million of discrete tax benefits primarily resulting from the retroactive reinstatement of the federal research and development credit that was enacted in January 2013. GAAP net income was $82 million or $0.18 per diluted share compared with $130 million and $0.28 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $2.18 billion year-over-year to $7.89 billion. Inventory increased 27% to $5.4 billion and inventory turns were 9.5, down from 10.4 turns a year ago as we expanded selection, improved in-stock levels and introduced new product categories. Accounts Payable increased 29% to $8.92 billion and accounts payable days increased to 68 from 62 in the prior year.
+I will conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we have seen to date and what believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending. It is not possible to accurately predict demand and therefore our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as -- settling intercompany balances and foreign currencies amongst our subsidiaries; unfavorable resolution of legal matters; and changes to our effective tax rates can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments or settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they have been recently.
+For Q2 2013 we expect net sales of between $14.5 billion and $16.2 billion or growth of between 13% and 26%. This guidance anticipates approximately 275 basis points of unfavorable impact from foreign exchange rates, GAAP operating income or loss to be between a $340 million loss and $10 million income compared to $107 million income in the prior year period. This includes approximately $340 million for stock-based compensation amortization of intangible assets.
+We anticipate consolidated segment operating income which excludes stock-based compensation and other operating expense to be between zero and $350 million compared to $360 million in the prior year period. We remain heads down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks. With that, Sean, let's move to questions.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions). Brian Pitz, Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Great, thanks. In February you changed your FBA fulfillment fees. Any comments on how this affected third party sales and what was the overall merchant response? And then just quickly, any update on your latest plans for new fulfillment centers in 2013? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [3]
+--------------------------------------------------------------------------------
+
+    I will take the second part of the question first. In terms of new fulfillment centers, we have announced three in the US right now and then a few outside of the US consistent with prior years. It is early; we really like the growth that we are experiencing. We will be adding more FCs through the course of the year. But stay tuned and we'll update you as we go.
+In terms of FBA, there's not a lot I can talk to there. We are very pleased with the FBA business. We think it is great for sellers, great for customers and we are pleased to offer that service.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [4]
+--------------------------------------------------------------------------------
+
+    Great, thanks.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+    Scott Devitt, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [6]
+--------------------------------------------------------------------------------
+
+    Thanks. Tom, the international segment sales growth of 21% (excluding foreign exchange rates) continues to show modest deceleration and I think with the exception of 4Q it has been trailing US growth. And I understand that AWS is mostly booked in the US so that is a piece of the delta. But you have talked in the past quarters about the investments in international driving margin to these breakeven levels in international. I was wondering if you could just talk through the deceleration in the revenue growth in those markets and whether that is comp related, Europe macro or otherwise?
+And then secondly, shipping cost on a net basis is again leveraging, I think that is the second consecutive quarter. I just wonder if you could refresh us in terms of when the accounting change occurred in terms of the shipping revenue calculation for FBA to just understand if that is an organic number now. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [7]
+--------------------------------------------------------------------------------
+
+    The second half of the question there's -- it is organic so there is no -- it is consistent year-over-year. So this is the first quarter that it will be consistent year-over-year.
+In terms of your question on international, we are seeing still very solid growth, 21% on a local currency basis. As you have read, certainly there is some softness from a macro standpoint that others are seeing. Hard to know whether that is impacting us and how much; we are not a bellwether for the economy. But we are very pleased with the growth that we are seeing; again 21% on a local currency basis, unit growth is actually growing substantially faster than that. So again, that is what we are seeing.
+In terms of investing, you're absolutely right; we are investing in a number of geographies including certainly China we have been investing for several years, we continue to invest in there. We think it is a great long-term opportunity, but we are in investment mode. And certainly some of the more recent additions that we have had with Italy and Spain, that's certainly in investment mode as well.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [8]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney, RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [10]
+--------------------------------------------------------------------------------
+
+    Thanks. Just a broad question on demand, this kind of midteens at the low-end revenue growth that you have been kind of guiding to for a quarter or two now, that would seem well below the average that you've seen in the past. Are there any other factors you would want to call out or specifically not call out?
+Do you think that things like the imposition of state sales taxes are having a near-term drag on growth rates? Last quarter I think you talked about consumer electronics at the high-end. Are there any particular categories there you would want to call out as maybe driving that low that could produce the low-end of the range outside of negative FX? Thanks, Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [11]
+--------------------------------------------------------------------------------
+
+    Sure. As we've been consistently doing, we're giving a wide range. We think that's appropriate given all the factors. That is not something new that we are doing, that is something that we have been doing for some time. And you are right; the growth rate guidance for Q2 is 13% to 26%. Certainly foreign exchange is having an impact, that includes approximately 275 basis points of foreign exchange. So it is approximately 16% to 29% on a local currency basis.
+So again, it's a wide range. And there's probably not a lot to add there, but it takes into account all of the things that we think we need to take into account as we give guidance. And in terms of the absolute dollar range, it is very similar to what we would have -- in terms of the dollar range; we would have given for Q1. I think it is maybe a $100 million difference in terms of the absolute value of that range that we gave. So again, a wide range; we think that that is appropriate.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [12]
+--------------------------------------------------------------------------------
+
+    Thank you, Tom.
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+    Ben Schachter, Macquarie.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [14]
+--------------------------------------------------------------------------------
+
+    Are there any factors that are impacting the unit growth, particularly the shift from physical to digital? For instance a rented video versus purchasing a video? Or are there any other factors that you would highlight that are impacting the unit growth?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [15]
+--------------------------------------------------------------------------------
+
+    The one factor I would call out -- first of all in terms of overall unit growth, our overall unit growth is 30% year over year, again very solid growth. It compares to approximately 49% in Q1 of last year. So we are certainly overlapping a pretty strong growth last Q1.
+In terms of the physical and digital, certainly one thing that we are seeing is certainly digital is growing at a much faster rate. And where you do see that a little bit is in our third-party units as a percentage of total units. You will see that that's approximately 40% this quarter. That compares to last year up about approximately 100 basis points.
+But what we are seeing is because the digital units are growing at a faster rate and they are mostly first party, you are seeing that number impacted where that percentage as a percentage of our total is not growing as fast as it has the last few quarters. And again, that is largely driven by the digital units growth that you are seeing.
+So again, that's -- if you were to back out, for example, and just look at our physical units, our third party physical units as a percentage of total physical units this year versus last year is up over 300 basis points. Again, that is 3P growth as a percentage of total physical units.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [16]
+--------------------------------------------------------------------------------
+
+    Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+    Ross Sandler, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [18]
+--------------------------------------------------------------------------------
+
+    Thanks, guys. A question on the -- a follow-up question on the shipping. So just your shipping cost, not your net shipping margin, but just shipping cost relative to gross profit declined about 300 basis points, similar to what you have seen over the past four quarters. So as you start to comp some of these efficiency gains that you are seeing in shipping, do you think that line will continue to show leverage or is it going to start to level out from here? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [19]
+--------------------------------------------------------------------------------
+
+    We are not giving -- certainly not giving guidance on any specific line item, but certainly over a long period of time we think there is opportunity to be more productive there and there are certainly efficiency gains to be had there. And that's something that certainly the team will continuously work on.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+    Colin Sebastian, Robert W. Baird & Co.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Co. - Analyst    [21]
+--------------------------------------------------------------------------------
+
+    A question on Web services. I wonder if you can comment on enterprise-level adoption and whether there are any meaningful barriers to that happening over time. We noticed you have been pretty aggressive in hiring enterprise-level salespeople. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [22]
+--------------------------------------------------------------------------------
+
+    No, I don't think that there is. I think that the team is doing a fantastic job in terms of developing services that are great for many different customer types including enterprises. And the team is heads down focused on making sure we have a great operational -- these services are great from an operational standpoint and security standpoint and they are doing a terrific job.
+And so, it is a very great opportunity for enterprises to adopt our Web services and the team is certainly focused on that along with the other customers, and so -- other customer sets. So again, it is a great opportunity for those customers and for us.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Co. - Analyst    [23]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Doug Anmuth,  JPMorgan - Analyst    [25]
+--------------------------------------------------------------------------------
+
+    Thanks for taking the question. You have clearly been more aggressive in terms of video content recently and you are sort of leading with it more in the release tonight in terms of the business content. I was hoping you could just add some more color here on the value that you think that TV and movie content adds to consumers' overall purchase patterns? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [26]
+--------------------------------------------------------------------------------
+
+    Sure. It is certainly one of our digital offerings and we have a number of different -- a few different services. We have certainly content that we are using as part of our Prime offer that we have a lot of free content for customers. We think that is a great service to customers along with our express shipping offers, as well as other content that we have free, for example our Kindle owners lending library for books.
+So again, we think it is a great -- Prime is a great value for customers and it's part of that value proposition. We also have a very good transaction business for video as well that's growing very, very fast and certainly customers like it and we are seeing that reflected in the results that you see today.
+
+--------------------------------------------------------------------------------
+Doug Anmuth,  JPMorgan - Analyst    [27]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+    Justin Post, Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [29]
+--------------------------------------------------------------------------------
+
+    I was wondering if you could help us a little bit about the Kindle ecosystem. On prior calls a few years ago you singled it out as a fast growth area and you were very happy with the performance. We haven't heard as much about it lately. Kind of the impact part of how units are doing against your expectations and then the impact it is having on Prime subs and also your gross and operating margins? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [30]
+--------------------------------------------------------------------------------
+
+    We are very pleased with our Kindle and digital business and we are super excited. In terms of the ecosystem, you are certainly seeing that in our results that you see today. For example, if you look at our media growth we are certainly -- that ecosystem is more penetrated there than it is in international and you see that reflected in those associated growth rates.
+Another way you see it is if you take a look at our top 10 best-selling items worldwide in Q1, the top 10 are all either digital or Kindle related, Paperwhite is our best-selling product worldwide. But again, all 10 spots in the Q1 were either Kindle or digital items and I believe that that is the first time that we have seen that.
+We have been looking at that from a quarterly results standpoint for some period of time and we have had various levels of the top 10, but I think this may be the first quarter that we have had all top 10 being either or Kindle related or digital related. So again, we are very pleased with what we are doing there and we are going to continue to innovate on behalf of customers.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [31]
+--------------------------------------------------------------------------------
+
+    And any impact on your gross or operating margins that you want to call out?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [32]
+--------------------------------------------------------------------------------
+
+    The one thing I would say is we certainly are investing. It is certainly an area of investment and you are seeing that reflected. We are making a number of investments across the business and certainly we are investing in Kindle and our digital offerings, we are investing in some of the other things I mentioned earlier like China, some of the emerging geographies. So those are certainly some of the larger key investments we are making.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [33]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+    Matt Nemer, Wells Fargo Securities.
+
+--------------------------------------------------------------------------------
+Matt Nemer,  Wells Fargo Securities - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    Good afternoon. We are hearing reports that there is refrigeration equipment going into some of your fulfillment centers outside of the Seattle area. Just wondering if you can update us on plans to expand AmazonFresh? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [36]
+--------------------------------------------------------------------------------
+
+    No, have nothing to announce. We are very pleased with what we have seen in the Seattle area, but again it has been a test and we continue to monitor that test carefully. It is certainly something that we see that customers love the experience. The challenge has always been making sure we can get the economics right and that is something we will continue to focus on.
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+    Stephen Ju, Credit Suisse.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [38]
+--------------------------------------------------------------------------------
+
+    Anything you can say in terms of how much Amazon is in video as well as potentially your own in-house produced content currently helps and should in the future help reduce churn in Amazon Prime? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [39]
+--------------------------------------------------------------------------------
+
+    Thanks for the question. Yes, it is something -- we haven't released any of the numbers, it is something that we are tracking very closely. It is something that we believe over time will reduce churn and is certainly helping today.
+What we are seeing is great traction. We see a lot of usage of the service. Customers love it and we think it is a very interesting part of Prime offering and that is why we have been expanding and why you see some of the more recent announcements including some of the stuff included in the earnings release today around original content. So again, it is something that we find very interesting and we are excited about it.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+    Ken Sena, Evercore Partners.
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore Partners - Analyst    [41]
+--------------------------------------------------------------------------------
+
+    I was just hoping you could maybe provide a little bit more color on the unit growth deceleration. And looking back over the last four quarters it seems like about 500 basis points or so each quarter of deceleration. You had about 200 basis points here which is an improvement, but anything you would say just to any signs of maturity in some of the businesses and maybe where that deceleration is specifically coming from? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [42]
+--------------------------------------------------------------------------------
+
+    No, there is not a lot I can add. I think the -- 30% is still a very strong growth rate. Again, it is growing at a faster rate than revenue, revenue at 22%, revenue at a local currency growth of 24% very strong; third-party growth continues to be very strong. Retail growth is strong.
+So again, there's not a lot I can provide you there. But again, keep in mind that we are overlapping 49% growth last year Q1 which is certainly a little bit of a difficult compare. But again, pleased with the 30% growth rate.
+
+--------------------------------------------------------------------------------
+Operator    [43]
+--------------------------------------------------------------------------------
+
+    John Blackledge, Cowen and Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [44]
+--------------------------------------------------------------------------------
+
+    Great, thanks. Just a question on the Amazon advertising platform. Given the immense amount of purchase data you have on Amazon customers, how is that being used as a competitive advantage and maybe just provide an overall view on the direction of the Amazon ad platform over time?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [45]
+--------------------------------------------------------------------------------
+
+    In terms of the platform itself, we think it is a very sizable, very good long-term opportunity for us and it is something that we've been working on for some time and we just think it is very interesting. One thing you will notice on our site, we're being obviously very -- making sure the customer experience is great.
+What we're really trying to do is we are trying to help customers find and discover what they want to buy online. So we are very -- again, it is very customer centric, but it is also from a business standpoint a very good long-term opportunity. We have a great team that is working on the opportunity and we are excited about the long-term potential of it.
+
+--------------------------------------------------------------------------------
+Operator    [46]
+--------------------------------------------------------------------------------
+
+    Anthony DiClemente, Barclays.
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Barclays Capital - Analyst    [47]
+--------------------------------------------------------------------------------
+
+    Thanks. I am just wondering what you are seeing in terms of the attach rate of your transactional video on demand business versus usage of Prime instant video. I am wondering just if your consumers tend to choose between the two when they are making a selection. Or does one sort of drive the other? Does a Prime subscriber have a higher transactional VOD attach rate than a non-Prime? So it would be helpful to hear what you are seeing there in terms of usage.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [48]
+--------------------------------------------------------------------------------
+
+    I think the only thing I can help you with is we see -- I will take Prime customers for example. We certainly see adoption of the service in terms of free content, but those same customers are purchasing content as well. And so there is a good attachment to it which we like.
+And what we see Prime members doing not just within video content, but we see them doing a lot of cross shopping. So it is not surprising; we see them do -- maybe a customer comes and has been traditionally purchasing them pre-Prime in a few categories. We find that they do a lot more cross shopping.
+Same thing with digital content. As they use the service they might start with free content and then they will also continue to view and stream free content, but they will also purchase paid content. So it is a nice effect that we are seeing which is why we like Prime so much.
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+    Youssef Squali, Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [50]
+--------------------------------------------------------------------------------
+
+    Okay, thank you very much. Two quick questions please. Going back to the international question, what it causing international media to decelerate? I think last year Q1 I think it was up 22%, FX adjusted this quarter it was up 7%. Is it all macro or are there any maybe other factors that you can talk about maybe specific to SKUs or something?
+And the other is more of a clarification. I know last quarter you gave the unit growth in aggregate versus the unit growth of 3P. I was wondering if you could give that to us as well.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [51]
+--------------------------------------------------------------------------------
+
+    In terms of the international media growth, this quarter it was 1% on a dollar basis, 7% on a local currency basis. In terms of the overall growth rate, certainly what you are seeing is digital content as part of that is growing very fast, but it is not as large or as penetrated or ecosystem isn't as developed I would say as it is in the US.
+And so, when you compare the two geographies for a second, that is one of the more meaningful differences that you see between the two is you see that both are growing digital content very fast, it's just the ecosystem is more built out in North America.
+But again, certainly we see very positive signs in that given the growth we are experiencing in international; it's just on a lower base. So that is -- again, to be helpful there.
+In terms of the unit growth, we said that our overall unit growth was 30% for the quarter. Our 3P unit growth -- I don't have the overall growth rate but it is growing at a faster rate than the total.
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+    Jordan Rohan, Stifel.
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [53]
+--------------------------------------------------------------------------------
+
+    I was hoping you could comment on the market entry and expansion strategy for Amazon in Brazil. There seemed to be a tremendous amount of press last year about it and it seems to have died down to some degree. I know the Company may already be there with Amazon Web Services and some Kindle offerings, but when do you think that might get a little bit broader?
+And secondly, there have been some stories recently about an Internet streaming device box, a set-top box, something of the sort. Can you comment on any new hardware form factors including that plus some sort of a cell phone or handset that might be coming down the pike? Anything to look forward to in the Kindle family or related? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [54]
+--------------------------------------------------------------------------------
+
+    In terms of geographic expansion, there is not a lot I can say specifically about Brazil. We think we are in the right geographies right now. We have expanded into a number of geographies over the past few years. That is certainly something we always look at and you should expect us to expand into additional geographies over time.
+In terms of any questions related to our product roadmap -- we have a long-standing practice of not talking about what we might or might not do there. But we are certainly excited about the product roadmap that we have for the future. And again, we have a long-standing practice of not giving details until closer at launch.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+    Jason Helfstein, Oppenheimer & Co.
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [56]
+--------------------------------------------------------------------------------
+
+    Thanks. Can you give us a little more color around customer growth? I mean, that number has been slowing not dramatically, but that is a slowing trend? Are you focused more on higher value customers to drive the business and any color around the quarter would be helpful? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [57]
+--------------------------------------------------------------------------------
+
+    We are actually pleased with the growth from a customer standpoint. We have seen very good growth and we continue to -- we have many, many teams across Amazon that are just heads down focused on trying to improve the customer experience and inventing on behalf of customers. So we couldn't be more pleased with what they are doing, and you see that reflected in our overall growth rate this quarter with revenue up 24% on a local currency basis and units growing at 30% on top of a strong growth quarter last year Q1.
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [58]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [59]
+--------------------------------------------------------------------------------
+
+    Great. Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
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exam/original-files/Problem_1_Sample/2013-Jan-17-BAC.N-137118030967-Transcript.txt

@@ -0,0 +1,834 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2012 Bank of America Corporation Earnings Conference Call
+01/17/2013 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Moynihan
+   Bank of America Corporation - CEO
+ * Bruce Thompson
+   Bank of America Corporation - CFO
+ * Kevin Stitt
+   Bank of America Corporation - IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * John McDonald
+   Sanford Bernstein - Analyst
+ * Paul Miller
+   FBR & Co. - Analyst
+ * Nancy Bush
+   NAB Research - Analyst
+ * Mike Mayo
+   CLSA - Analyst
+ * Glenn Schorr
+   Nomura Asset Management - Analyst
+ * Guy Moszkowski
+   Autonomous Research - Analyst
+ * Matt O'Connor
+   Deutsche Bank - Analyst
+ * Ed Najarian
+   ISI Group - Analyst
+ * Brennan Hawken
+   UBS - Analyst
+ * Betsy Graseck
+   Morgan Stanley - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Welcome to today's program. At this time, all participants are in listen-only mode. (Operator Instructions). Please note today's call is being recorded. It is now my pleasure to introduce Kevin Stitt. Please begin, sir.
+
+--------------------------------------------------------------------------------
+Kevin Stitt,  Bank of America Corporation - IR    [2]
+--------------------------------------------------------------------------------
+
+          Good morning. Before Brian Moynihan and Bruce Thompson begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. For additional factors, please see our press release and SEC documents. And with that, let me turn it over to Brian.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thank you, Kevin and thank all of you for joining us on a busy day. In 2012, we laid out our four focus areas for the year -- capital, managing our risk, reducing costs and driving our core business growth. In each area, we achieved strong results this year and we are carrying that momentum forward as we look to 2013. So let's start on page 4 of our presentation. We positioned our Company with a strong balance sheet this year. The estimated capital ratios now are above current Basel 3 requirements and we have seen improving credit quality. And as you know, we have addressed many legacy issues that Bruce will talk about later. As a result, the [coring] power of the Company, the coring power that our team has been driving all year can now shine through more clearly as we look forward.
+We've positioned our Company to driving our core customer relationship strategy. That strategy continues to accelerate our growth by simply helping those people we serve with their financial lives. We've positioned our Company by reducing costs, making our operations leaner and more efficient and investing in our growth initiatives at the same time. We continue to streamline all our businesses. We focus it on those three customer groups that we talk about on each call -- people, companies, institutional investors. And on page 5, we highlight some of the progress we have made in the last quarter and last year.
+On the consumer side, our deposits continue to grow. Our retail mortgage production has increased by an average of 10% per quarter over the past three quarters. The pipeline today remains as strong as it was at the end of the third quarter. As you know, we continue to optimize our service network, our branch network as online and mobile banking numbers continue to increase. We are now averaging about 10,000 new mobile subscribers a day.
+In our Preferred client area, the growth this year has been strong. The evidence of that is our brokerage assets in Merrill Edge are up 14% from a year ago. Moving to our wealth management businesses, US Trust and Merrill Lynch, those businesses had strong loan, strong deposit, strong revenue growth this year and earnings and pretax margin were also at record levels.
+As we think about the companies, the corporations and middle market companies we serve across the country and around the world, our loan growth continues to expand, particularly in the second half of 2012. Global Banking ended with loans of $288 billion, up from $265 billion at the end of June. Investment banking fees for these clients are strong and we maintained our number two market position. In the fourth quarter, we had a leadership position in debt underwriting.
+As we move to our Global Markets business, and it serves the institutional investors, our research capabilities continue to be recognized as the best in the world for the second straight year. As we look at 2012, sales and trading revenue did well in a relatively difficult environment. In 2012, our trading revenues were up 20% from 2011, excluding the impacts of DVA and we did that while we reduced cost in this business by over 10%.
+So thinking about it, looking across every customer group we serve, you can see our strategy we put in place continues to drive results. We continue to fine-tune this strong core franchise focusing on those industry-leading capabilities we have to serve our clients and customers in every area.
+But while we are doing that, we continue to work on our expenses. Bruce is going to take you through the highlights in a few pages. But if you think about it from the top, we reduced our delinquent mortgage count, which allowed us to reduce our LAS expenses. We have reduced our employee count in each quarter in the last five and we have done that while we continue to invest in our targeted growth areas.
+Our strategy continues to work. We are seeing growth across all the core businesses. We are seeing that momentum continue to accelerate, so as we look forward to 2013, we are going to continue to drive this strategy and drive the earnings power of our Company. Thank you and I will turn it over to Bruce to take you through the results in detail.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Brian and good morning, everyone. I'm going to start on slide 6. As you all saw this morning, we reported net income for the quarter of $732 million, or $0.03 a share for the quarter. I am going to spend a moment on the previously announced items in the geography on the income statement so that you can better understand the quarter.
+Reported revenues net of interest expense were $18.9 billion during the quarter. If you look in the bottom left-hand corner of this slide, you can see our revenues were negatively impacted by five items totaling approximately $3.7 billion. Those items included a $2.5 billion charge for reps and warranties with respect to the Fannie Mae settlement; approximately $0.5 billion related to the clarification of our obligations under mortgage rescissions; negative DVA and FVO of approximately $700 million relating to the significant tightening of our credit spreads that we saw during the quarter and then a positive $700 million between the change in the MSR valuation related to the servicing sales, as well as our sale in our Japan joint venture.
+If we move to the right on the expense side, our expenses were negatively impacted by approximately $2.3 billion due to our previously announced independent foreclosure review acceleration agreement, as well as approximately $900 million of litigation expense and $300 million of compensatory fees. In addition, during the quarter, we did have a positive net tax adjustment primarily related to tax credits that are associated with certain non-US subsidiaries.
+If we turn to slide 7, a lot of numbers. I would like to draw your attention to three line items. The first, deposits were up $42 billion, or 4%, from the end of the third quarter to the end of the fourth quarter. During the fourth quarter, we reduced our long-term debt footprint by approximately $11 billion, but more significantly, during all of 2012, our debt footprint came down by almost $100 billion, or 26%. We accomplished that reduction in our debt footprint while our overall liquidity sources remained in the range of $370 billion to $380 billion.
+Turning to slide 8, and looking at Basel 1 capital, Basel 1 capital declined during the quarter to a still very strong 11.06%. The decline was the result of our pretax loss, as well as approximately $500 million of common and preferred stock dividends. In addition, during the quarter, our risk-weighted assets grew by approximately $10 billion as the strong growth that we saw in the investment and corporate bank more than offset the reductions in the consumer business.
+If we turn to slide 9, I'd like to spend a few minutes on Basel 3 capital. We estimate that our Tier 1 common capital under Basel 3 on a fully phased-in basis would have been 9.25% at the end of the year. Our estimate once again assumes approval of all models with the exception of the change in the comprehensive risk measure for CRM after one year under the US Basel 3 NPRs. This 9.25% is a 28 basis point improvement over our estimate of 8.97% at the end of the third quarter of this year.
+While our Tier 1 common capital declined as a result of the pretax loss, lower OCI and higher threshold deductions, this was more than offset by a reduction in our risk-weighted assets. Driving the RW decline during the quarter were lower exposures, particularly in consumer real estate and market risk, improved credit quality and updates of our recent loss experience in our models. We estimate that our Tier 1 common capital at the end of the quarter was $128.6 billion while our risk-weighted assets were approximately $1.4 trillion under Basel 3. And as you all know, Basel 3 ratios are more sensitive to changes in credit quality, portfolio composition, interest rates, as well as earnings performance.
+If we turn to slide 10 and look at funding and liquidity, our global excess liquidity sources were at $372 billion at the end of the fourth quarter, down $8 billion from the prior quarter driven by a reduction of our long-term debt footprint of approximately $11 billion during the quarter. During the fourth quarter, we redeemed $5.3 billion of TruPS and other long-term debt.
+You may have seen last week, we raised approximately $6 billion in the aggregate for 3, 5 and 10-year notes to take advantage of strong investor demand. As we look forward though, we do expect to continue to see long-term debt decline, primarily through maturities consistent with our overall goal of optimizing the cost associated with both our debt and capital. As we do so, we expect that our time to required funding will consistently remain above two years coverage and that metric at the end of 2012 was at 33 months.
+On slide 11, net interest income, we reported an increase in net interest income from $10.2 billion in the third quarter to $10.6 billion in the fourth and an improvement in our net interest margin of about 3 basis points to 2.35%. As we consider that number, we benefited during the quarter from less negative impact of market-related premium amortization expense. We continued to benefit from the shrinkage in our long-term debt footprint, as well as improved trading-related net interest income. Partially offsetting those benefits were lower asset yields, as well as lower consumer loan balances.
+If you adjust for the market-related items that I just referred to, we are in line with the estimated range of net interest income of $10.5 billion before market-related impacts we have discussed during our past earnings announcements. Given [long end] rate levels at the end of December, we estimate that quarterly net interest income may come in around a base of $10.5 billion plus or minus for FAS 91 and day count for the next several quarters. The impact of our liability management actions and long-term debt maturities are expected to help offset headwinds from continued pressure on consumer loan balances, as well as the overall low rate environment.
+On slide 12, we highlight the results of our Consumer & Business Banking. Earnings were $1.4 billion for the quarter, an increase of $143 million, or 11% from the third quarter, driven by higher revenue more than offsetting higher non-interest expense. Service charges were lower due in part to our actions that we took around Hurricane Sandy to further support our customers in the region. Average deposits increased more than $6 billion, or 1.3% from the third quarter.
+On the slide 13, we list some of the key indicators for our Consumer & Business Banking for the quarter. In our deposits business, the average rate paid on deposits declined 3 basis points -- 3 basis points during the quarter to 17 basis points. Our mobile banking customer base reached 12 million, which is an 8% increase from the prior quarter and up 31% from a year ago. We reduced banking centers as we continue to optimize the delivery network around customer behaviors. Credit card purchase volumes per active account increased 7% from the fourth quarter of 2011. The US credit card loss rate is at its lowest level since 2006 while the 30 plus day delinquency rate is at a historic low.
+On slide 14, and before we get into Legacy Assets & Servicing, we summarize the specific mortgage items that we announced on January 7, including our settlements with Fannie Mae, sales of mortgage servicing rights and the acceleration agreement on the IFR. During the quarter, these items had a negative pretax income on fourth-quarter LAS revenue of $2.6 billion and in the expense category of $2 million resulting in an aggregate net income impact of $2.9 billion in LAS within our Consumer Real Estate Services segment.
+If we turn to slide 15 now, we break out the two businesses within CRES -- Home Loans and LAS. Home Loans reported an increase in net income to $281 million while LAS reported a net loss of $4 billion, including the approximately $2.9 billion of items I just highlighted. As you all are aware, the Home Loans business is responsible for first lien and home equity originations within CRES.
+First mortgage retail originations of $21.5 billion were up 6% from the third quarter driven by refinancings and up 42% compared with retail originations of approximately $15 billion in the prior year-ago quarter. You can see this same type of trend in our core production income, which is up from the third quarter and almost double results from a year ago. As you know, we exited the correspondent business in late 2011, so correspondent originations are non-existent versus volumes of approximately $6.5 billion a year ago.
+The MSR asset within LAS ended the quarter at $5.7 billion, up $629 million from the end of the third quarter, due in part to the valuation adjustments previously discussed related to the sale of MSRs. MSR hedge results during the quarter were positive and we ended the period with the MSR rate at 55 basis points versus 45 basis points in the third quarter and 54 basis points one year ago.
+If we turn to slide 16, we show some comparisons of certain metrics in Legacy Assets & Servicing on a linked quarter basis, as well as compared to fourth quarter a year ago to reflect the work done to reduce delinquent loans and find homeowner solutions. As you recall, Legacy Assets & Servicing reflects all of our servicing operations and the results of our MSR activities.
+Total staffing in the quarter, including contractors and offshore, decreased approximately 9,000 from the third quarter. The number of first lien loans serviced dropped 7% in the quarter while the number of 60 plus day delinquent loans dropped 17% to 773,000 units. We expect this drop in 60-day plus delinquencies should have a positive impact on our staffing levels and servicing costs going forward as we were fully staffed in the second half of last year to handle the various new programs and regulations.
+We have referenced our January 7 announcement of agreements to sell MSRs totaling $306 billion aggregate unpaid principal balance. This represents 2 million loans of which 232,000 are 60 plus day delinquent. The transfers of these servicing rights are scheduled to occur in stages over the course of 2013 with the delinquent loans scheduled to be transferred after the current loans. Currently, we recognize approximately $200 million in servicing fees per quarter associated with these loans, which is expected to decrease throughout the year as we actually transfer the servicing. However, the impact on earnings from lower revenue is expected to be negligible for the year as we expect expenses to also decrease as we transfer the servicing, especially the 60 plus day delinquent loans.
+We believe our serviced 60 plus day delinquent loans at the end of 2013 may be around 400,000 units versus 773,000 units at the end of 2012, a decrease of approximately 50%. That implies an additional decrease of 150,000 units beyond the 232,000 units that are expected to go with the scheduled transfers.
+Given the projected declines in 60 plus day delinquent loans and notwithstanding their being a one to two-quarter lag between delinquent loan transfers and expense decrease, we believe we can get expenses in the fourth quarter of 2013 down by more than $1 billion from the $3.1 billion in the fourth quarter of 2012, excluding the impact of IFR and litigation.
+On slide 17, we show outstanding claims at the end of December, but, as you know, a significant portion of GSE claims has been addressed in our settlement with Fannie Mae. If we exclude the rep and warrant amounts addressed in the settlement of $12.2 billion from GSE outstanding claims of $13.5 billion, pro forma outstanding GSE claims would have been $1.3 billion at the end of the year. Total outstanding claims on a pro forma basis would then be $16.1 million. Remember that the table reflects unpaid principal amounts versus the actual losses projected on the loans.
+Outstanding claims in the quarter from private-label counterparties increased approximately $1.7 billion from the end of September. And an anticipated increase in our aggregate non-GSE claims was taken into consideration when we developed our reserves at the time of the BNY settlement and we continue to review our assumptions on a quarterly basis. Unresolved claims with monolines remains static as much of our activity with the monolines revolves around litigation issues.
+Reserves for representation warranties at the end of the quarter increased to $19 billion of which $8.5 billion is associated with the BNY settlement and approximately $6 billion is associated with the GSEs. We currently estimate that the range of possible loss for both GSE and non-GSE representations and warranties exposures could be up to $4 billion over accruals at December 31 compared to up to $6 billion over accruals at September 30. This decrease is the result of our settlement with Fannie Mae in the range of possible loss now principally covers non-GSE exposures.
+On slide 18, in Global Wealth & Investment Management, earnings for the quarter of $578 billion -- excuse me -- $578 million were up slightly from record results in the third quarter. The pretax margin was 21%. This quarter, we did move two businesses that we agreed to sell, International Wealth Management and our brokerage joint venture in Japan, to the All Other segment, including the results in past quarters for comparability.
+Overall, client activity in the Wealth Management business in the quarter across all categories was quite robust and was aided by client actions due to the fiscal cliff. Period-end deposit growth of approximately $23 billion and period-end loan growth of $3.5 billion helped offset the impact of the continued low rate environment. Ending loan balances were at record levels and long-term AUM flows of $9.1 billion were the second-highest quarterly amount since the Merrill merger and the 14th consecutive positive quarter.
+Net income of $1.4 billion in Global Banking on slide 19 is an increase of more than 10% from the third quarter and reflects higher revenue and lower expenses. Average loans and leases increased $10.8 billion, or 4% from the third quarter, with growth across C&I, as well as commercial real estate. Average deposit balances increased $15.8 billion, or 6% from the third quarter, to $268 billion as our customer base continued to be very liquid. Asset quality continued to improve from prior quarters as we have seen over the last year. NPAs dropped 20% to $2.1 billion and reservable utilized criticized exposure declined 11%.
+On slide 20, we outline our investment banking fees for the quarter. You can see that our debt underwriting area was up $213 million from the third quarter to $1.078 billion in revenues and our advisory business was up approximately $80 million to $301 million for the quarter. Corporation-wide investment banking fees were up 20% from the third quarter and 58% from the year-ago period. Debt underwriting fees were a record for the quarter and we believe number one on a global basis during the quarter. From an overall investment banking fee perspective, we maintained our number two global ranking in net investment banking fees during 2012 based on Dealogic data.
+Switching to Global Markets on slide 21, earnings, excluding DVA, were $326 million. Excluding DVA and the UK corporate tax charge in the third quarter, net income decreased compared to the third quarter driven by lower sales and trading revenue reflecting a seasonally slower fourth quarter. Sales and trading revenue, excluding DVA, was down 23% from the third quarter, but improved substantially from levels a year ago. Within our FICC area, excluding DVA, revenues of $1.8 billion decreased from $2.5 billion in the third quarter primarily as a result of lower volumes and reduced client activity, but were up $1.3 billion, or 37% from a year ago.
+In equities, excluding DVA, results were flat with the third quarter as lower volatility and continuing lack of investor appetite for equity products kept volume suppressed. Expenses declined from both the third quarter and the prior year primarily driven by lower personnel expense.
+On slide 22, we show you the results of All Other, which includes our Global Principal Investments business, the non-US consumer card business, our discretionary portfolio associated with interest rate risk management, the international wealth management business we agreed to sell, insurance, as well as our discontinued real estate portfolio. The revenue improvement in All Other from the third quarter was mainly due to a lower negative valuation adjustment on structured liabilities under fair value option of $442 million compared to a negative $1.3 billion in the third quarter and higher equity investment income as a result of the sale of our brokerage joint venture in Japan.
+Non-interest expense declined compared to the third quarter due to lower litigation costs as the third quarter included the Merrill Lynch class-action settlement. Also contributing to net income in the quarter was the foreign tax credit benefit that I mentioned at the beginning of the presentation.
+As you can see on slide 23, total expenses increased compared to the third quarter, but were down from a year ago. Excluding LAS expenses, the independent foreclosure review and litigation, expenses in the quarter were $13.3 billion versus $12.9 billion in the third quarter and $14.7 billion a year ago. The $400 million increase from the third quarter reflects the normal seasonal trend and represented non-personnel costs. FTE at the end of the quarter was down approximately 5,000 from the third quarter and 15,000 from a year ago.
+An important driver behind the reduction of $1.4 billion in expenses from fourth quarter a year ago is New BAC, which we have discussed with you several times. If you remember, total annual cost savings targeted with New BAC are $8 billion per year, or $2 billion on a quarterly basis, which we said we would hit sometime in mid-2015. In the fourth quarter, we achieved approximately $900 million of the $2 billion, which is 45% of our target. As a reminder, the first quarter every year includes the annual retirement eligible stock compensation, which was $900 million in the first quarter of 2012 and this year, we expect will be a similar amount plus or minus.
+While we are talking about expenses, let me comment on taxes. Tax expense for the quarter was a benefit of $2.6 billion consisting of the expected tax benefit of the pretax loss, our recurring tax preference items and the $1.3 billion primarily related to the non-US restructurings. For 2013, we estimate the effective tax rate to be somewhere around 30%, including $800 million or so for another expected 2% UK tax rate reduction, which we would expect in the third quarter.
+If we switch to overall credit quality on slide 24, provision was $2.2 billion versus $1.8 billion in the third quarter as lower charge-offs were more than offset by lower release. Overall credit quality trends continue to be positive even when we normalize for the events in the third quarter. If you'll recall, regulators provided new guidance to the industry in the third quarter of this year around loans discharged as part of a Chapter 7 bankruptcy, which resulted in increased net charge-offs of $478 million in the third quarter.
+In addition, we incurred charge-offs of $435 million in the third quarter in connection with the National Mortgage settlement. We did not have impacts to net charge-offs of a similar magnitude in the fourth quarter, but did have $73 million related to the completion of the implementation of the regulatory guidance. Excluding these items, net charge-offs were down $178 million, or 6%.
+We believe most portfolios are close to stabilization and overall reserve reductions are expected to continue but at reduced levels. Given our outlook for a slow growth but healthy economy, we believe provision expense in 2013 will range between $1.8 billion and $2.2 billion per quarter, the levels experienced between the second and fourth quarters of 2012. Excluding the fully insured portfolio, 30 plus day performing delinquencies continue to drop. NPAs were down $1.4 billion from the third quarter and $4.2 billion from a year ago. On the commercial side, reservable criticized levels showed a decline of 8% from the third quarter and 42% from a year ago.
+Before we open up for questions, let me say and reiterate Brian's comments that we feel very good about our accomplishments in 2012. We improved the balance sheet, we managed risk and we addressed significant legacy issues and were successful in reducing certain of our exposures. We have stepped up our focus on growing the business and some of that focus is evident this quarter when you look at deposit growth across the franchise, loan growth in the Global Bank, solid Investment Banking results and in GWIM, strong deposit AUM and loan flows.
+We enter 2013 all about moving the ball forward and winning in the marketplace with what we think is the best banking franchise in the world. And with that, let me go ahead and open it up for questions.
+
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions). Matt O'Connor, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Good morning. A couple of follow-ups. I guess starting on the expenses, I appreciate the outlook on the legacy costs. As we think about kind of the All Other expenses that you pointed to of $13.3 billion, with some seasonal stuff this quarter, maybe you could just frame what we can expect for that level or for that bucket for 2013.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [3]
+--------------------------------------------------------------------------------
+
+    You're saying expenses, not including LAS and the litigation?
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [4]
+--------------------------------------------------------------------------------
+
+    Exactly. The $13.3 billion that you pointed to in the fourth quarter.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [5]
+--------------------------------------------------------------------------------
+
+    I think as you look at that number, and if we keep LAS out of this, obviously, the big new savings bucket that we have is New BAC. We have indicated that we are, on a quarterly basis, at $900 million a quarter as we leave 2012. We expect that our New BAC cost savings when we get to the fourth quarter of '13 will be at $1.5 billion per quarter. So you can expect to see, on a core basis with New BAC, about a $600 million increase from where we leave 2012 to where we leave 2013.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [6]
+--------------------------------------------------------------------------------
+
+    Okay. So as we think about that $13.3 billion, I guess we could take out $600 million for New BAC, but was there other bulk or how much I guess of the seasonal stuff is there that maybe we should adjust for?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [7]
+--------------------------------------------------------------------------------
+
+    The seasonal stuff, if you are going Q4 to Q4, you would expect the seasonal stuff to be there, but, as we indicated, we looked at and for this quarter relative to the third quarter, there was $300 million to $400 million of stuff that we would characterize as seasonal.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [8]
+--------------------------------------------------------------------------------
+
+    Okay. And then just in terms of like underlying, call it, inflation or just normal investments, if we take that $13.3 billion 4Q to 4Q, would you expect that to be down, so you have kind of minus $600 million from additional BAC savings and there is always some offsets from inflation or investments? Do you think that net number will be down?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [9]
+--------------------------------------------------------------------------------
+
+    We would expect -- and the one thing that we are being very cognizant of is that while we are investing in the business, we are not going to let inflation outrun the progress that we are working on New BAC. So I think on a net basis thinking about that $600 million number from New BAC is a good assumption.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [10]
+--------------------------------------------------------------------------------
+
+    Okay. And then just separately, if we look at the FICC revenue, a little bit weaker than maybe we have seen so far; although it is still early in the earnings process here. And I guess I noticed that the asset level in the trading book went up, the VAR doubles quarter-to-quarter and just wondering if there was anything unusual in terms of positioning that you would point to.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [11]
+--------------------------------------------------------------------------------
+
+    Sure. I think it is important when you look at the FICC business to go back and look at the progress that we have made during 2012. If you look at FICC revenues 2012 compared to 2011 pre-DVA, they were up 36% year-over-year. If you go back and look at each of our quarterly releases in 2012, in each quarter in 2012 pre-DVA, revenues were higher than 2011 at the same time that we were taking cost out.
+The third thing I would say is that you have to realize that we run the FICC and overall debt underwriting business and look at that as one consolidated business and from a debt underwriting perspective at over $1 billion of revenue, we believe that was, as I indicated earlier, more than anyone else did this quarter on a global basis. And so we feel very good about that. Your point on the VAR is a fair one and we did see VAR increase during the fourth quarter and we would expect to see the benefits of that VAR flow through during the first quarter this year.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [12]
+--------------------------------------------------------------------------------
+
+    Sorry, benefits meaning higher revenue?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [13]
+--------------------------------------------------------------------------------
+
+    That is correct.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [14]
+--------------------------------------------------------------------------------
+
+    Okay, all right. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [15]
+--------------------------------------------------------------------------------
+
+    John McDonald, Sanford Bernstein.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford Bernstein - Analyst    [16]
+--------------------------------------------------------------------------------
+
+    Hi, Bruce, does the goal of reducing the delinquents in LAS, the 150,000, does that include additional planned MSR sales that you might have in mind?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [17]
+--------------------------------------------------------------------------------
+
+    It does not, John, because I think the one thing when we announced these sales that you have to realize is that it is very important that the transition of the loans that are being sold work through a process and go in a way that is as consumer-friendly as we can do it. So there is a lot of work that goes through that. So as we look at the servicing business, that does not include in any meaningful way incremental sales. There may be some small ones over and above that and at the same time, somebody could come and look to do something as well, but, at this point, I would consider that 150,000 to be more organic reduction.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford Bernstein - Analyst    [18]
+--------------------------------------------------------------------------------
+
+    Okay. And what kind of pace throughout the year would you expect for reducing that $3.1 billion LAS expense by your goal of $1 billion by the fourth quarter? Kind of steady throughout the year or is it lumpy?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [19]
+--------------------------------------------------------------------------------
+
+    I would assume that you should generally expect it to come out throughout the year. It is not something you're going to have to wait for the fourth quarter to see.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford Bernstein - Analyst    [20]
+--------------------------------------------------------------------------------
+
+    Okay. And then getting to Matt's question earlier, if we -- just a lot of moving parts on your expenses. If we look top of the house, trying to think about a jumping-off point for total BAC expenses that you start in the first quarter, it seems like you might be in the $17 billion ballpark with the stock option expense. Does that feel like the right area?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [21]
+--------------------------------------------------------------------------------
+
+    Yes, I am hesitant, John, to give you specific numbers in the quarter. What I would say is that we gave you guidance as to how much of the fourth quarter was seasonal that we obviously wouldn't expect in the first quarter. You have got the $900 million of stock compensation expense that will come through. Expect to see a little bit of benefit in the first quarter as we continue to implement New BAC and probably the biggest variable that you can see in the first quarter that I didn't mention is really compensation expense that varies based on actual business performance. But I think if you think and look at those different metrics, you will get pretty close.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford Bernstein - Analyst    [22]
+--------------------------------------------------------------------------------
+
+    Okay. And with the Fannie settlement this quarter, how should we think about the rep and warrant provisioning going forward here? Will you need to add on a quarterly basis to the rep and warrant provision?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [23]
+--------------------------------------------------------------------------------
+
+    If you look back over the course of 2012, absent any settlements or any unusual activity, you had a run rate throughout the quarter of around $300 million per quarter in 2012. And with the Fannie settlements, as well as obviously the fact that Freddie was settled at Countrywide, you would expect that number to be $150 million or so going forward.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford Bernstein - Analyst    [24]
+--------------------------------------------------------------------------------
+
+    Okay. And then one last thing on NII. Was that a pretty clean number? Was there any impact from hedging or premium amortization in the NII number this quarter?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [25]
+--------------------------------------------------------------------------------
+
+    There was a less than $100 million to the negative.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford Bernstein - Analyst    [26]
+--------------------------------------------------------------------------------
+
+    Okay. And your guidance of the kind of $10.5 billion is the run rate you think for the next couple quarters and that is excluding any of that, right?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [27]
+--------------------------------------------------------------------------------
+
+    Excluding any of that and realize that we have got a couple less days in the first quarter of this year.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford Bernstein - Analyst    [28]
+--------------------------------------------------------------------------------
+
+    Okay. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+    Paul Miller, FBR Capital Markets.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [30]
+--------------------------------------------------------------------------------
+
+    Thank you very much. Hey, guys, on your guidance for NII, which was really good, you talked about a steady -- I mean you can maintain that net interest margin at current levels. What about average earning assets? Do you think you can maintain your average earning assets at these levels or grow them?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [31]
+--------------------------------------------------------------------------------
+
+    Well, I think the average earning asset levels are probably at a level that you are not going to see an enormous amount of growth. What we do hope that happens though is that the composition of those earning assets change so that we can look at, and particularly in the institutional business as I mentioned, as well as in GWIM, there was very strong loan growth during the fourth quarter. We are focused on continuing to drive that forward and that obviously reduces the need to invest in securities and other things, and we think ultimately has a positive impact on NII and is also quite frankly consistent with managing OCI risk going forward.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [32]
+--------------------------------------------------------------------------------
+
+    Okay. And then I have to ask one mortgage question. I asked the same question in the third quarter, but I think, Brian, you have been out in a lot of interviews talking about how much you like mortgage banking. But you still really are just going to be focused on retail. Am I correct? And on retail, are you focusing just on your own customers or will you be focusing on customers outside of your deposit mix or your customer base?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [33]
+--------------------------------------------------------------------------------
+
+    Well, Paul, focusing on the customers and our customer base is not real restrictive since you are one and two households, so there is plenty of marketshare to go. Our penetration of the product in our Preferred segment and our Wealth Management segment is still relatively low, so there is tremendous growth.
+But as you think about shaping the mortgage business, we are kind of -- this quarter kind of moves us -- starts moving [announcements] as we close these servicing sales to where we end up with maybe 5 million serviced loans going forward producing $20 billion and growing a quarter direct to retail. And that is kind of what we want with a marketshare that steadily grows and that is kind of the equilibrium and the team has to go.
+So the next challenge ahead is obviously replacing the HARP volumes over the next year. This year, we had to replace the correspondent volumes. Next year, we have to replace the HARP volumes and the team is working diligently on that, but it is really focused on the core customers. And if you think about the cost of servicing mortgages and stuff, we need to really focus on people that we are very comfortable with the credit and keep the delinquencies down and stay away from the stray products and just chase some volume.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [34]
+--------------------------------------------------------------------------------
+
+    Guys, thank you very much.
+
+--------------------------------------------------------------------------------
+Operator    [35]
+--------------------------------------------------------------------------------
+
+    Glenn Schorr, Nomura.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Nomura Asset Management - Analyst    [36]
+--------------------------------------------------------------------------------
+
+    Good morning. First one is a question on risk-weighted assets. On one of your slides, you show Basel 1 assets going actually up a little in the quarter, Basel 3 coming down. It is all in the net change in credit and other risk-weighted assets. And I am just curious what do you see on the credit side that drives that model enhancement? And the reason why I ask is it makes sense. Intuitively, it is just different to the tune of half, the Basel 1 to Basel 3 jump. It is different versus all the other big banks.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [37]
+--------------------------------------------------------------------------------
+
+    It's a good question, Glenn. When you look at -- and let's just first spend a minute on Basel 1. As I think you know that the majority of regular way loans in Basel 1 are 100% risk-weighted so that as you look at our $10 million increase in risk-weighted assets under Basel 1, it is generally speaking the net increase in our loan book.
+If you go to Basel 3, and I think you are referring to slide 9 where we talk about the different reductions, why don't I spend a moment on each of the buckets? The first is that we referenced that we had about $23 billion less through consumer real estate exposures and the way that Basel 3 works is that, as opposed to these general risk-weighted buckets, they look at loan-to-value, delinquency and other type metrics. So during the quarter, the $23 billion benefit we saw, we saw declines in the loan-to-value within our residential mortgage book. The percentage of loans that were 90 plus day delinquencies, each of those went down, which I think in large part is reflective of the changes in the underwriting standards that we have talked about before that we implemented in the fourth quarter of '08 and the first quarter of '09.
+The second thing is if you look at our home equity book, the delinquencies, as well as the loan-to-value continue to improve there, as well as the notional amount outstanding has also gone down. So we benefit there as well.
+And then the third bucket within consumer real estate are our other retail exposures, which generally represent the runoff portfolio that we have talked about, that decreased during the quarter as well. So those three different buckets within the consumer exposure are what drove the $23 billion decline there.
+If you move to the $64 billion number that we referenced largely in market risk, really go through a couple different areas where we have benefits. The first is we did have a pretty significant decline on a net basis of CVA, stressed VAR, as well as our CRM risk-weighted assets during the quarter. Over and above that, you know that some of the securitization products have very high risk-weighted asset content. We were able to fairly significantly decrease some of those securitization exposures. And during the quarter, the industry also got some guidance from a regulatory perspective on risk-weighted assets with certain securitization products that was favorable, so that helped.
+And then the last piece that we had is that there were some indexed tranches and other things within the markets business, which came down pretty significantly as well. So those were really the big items in the $64 billion bucket.
+And then with respect to the $23 billion bucket, I want to spend just a moment on that because the $23 billion reduction is not a function of going in and changing models. The $23 billion is that, each year when you update your models for actual loss experience, it drives changes in risk-weighted assets and given the strength and improvement across the credit portfolios in 2012, we have benefited from that when the models were updated.
+As you look forward, I would just say, looking forward, I think we are generally in a place now where we told you a couple quarters ago the optimization on Basel 1 was largely done and the risk-weighted assets would vary pretty proportionally with the amount of loans. From a pure risk-weighted asset perspective, I think we are largely through those reductions. But keep in mind, from a numerator or common perspective going forward, we will benefit given our deferred tax position in that the pretax number will generally grow capital on a pretax basis and we still do have some threshold deductions we can work down there.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Nomura Asset Management - Analyst    [38]
+--------------------------------------------------------------------------------
+
+    That is super helpful. I think you just said it, but I just want to confirm. This happens on an annual basis. In other words, whether the balances come down on paydown, run-off, charge-off, whatever or credit improves, the models get updated on an annual basis and there is no permission process. In other words, this just happens in real-time?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [39]
+--------------------------------------------------------------------------------
+
+    There is not a permission aspect to it; it is required that we update these on an annual basis, so that is correct.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Nomura Asset Management - Analyst    [40]
+--------------------------------------------------------------------------------
+
+    Okay, really appreciate it.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [41]
+--------------------------------------------------------------------------------
+
+    Hey, Glenn, the balances move every quarter. I think it is the models -- the factors that change on risk.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Nomura Asset Management - Analyst    [42]
+--------------------------------------------------------------------------------
+
+    Yes, that is super helpful. I appreciate all of that. Inside the average balance sheet, the securities yields went up 11 basis points in the quarter. Most banks are trending lower as things run off. This is part of your defending the NIM, so I get it. Just curious, is it just expanding a little bit on the duration curve? Just curious what you are doing on the asset side to help support those yields.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [43]
+--------------------------------------------------------------------------------
+
+    No, it is not extending duration. If you look at our securities portfolio, we continue to run that duration in and around two years. What you have to keep in mind is that we had -- during the third quarter, you had some of the FAS 91 amortization expense. That flows through and hits the yield on the securities portfolio, so we did not see a significant change in the actual yields during the quarter; it was really more FAS 91.
+And I think, as you look at our Company going forward, I think we are a little bit different in that between the fact that the duration of what we have continues to be short, as we look forward, we clearly think the worst of the recouponing of the securities portfolio is behind us based on where rates are today.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Nomura Asset Management - Analyst    [44]
+--------------------------------------------------------------------------------
+
+    Okay, thanks, Bruce. I appreciate it.
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+    Ed Najarian, ISI Group.
+
+--------------------------------------------------------------------------------
+Ed Najarian,  ISI Group - Analyst    [46]
+--------------------------------------------------------------------------------
+
+    Good morning, guys. With the capital ratios up significantly and credit quality getting better, the mortgage repurchase risk getting resolved over time, could you give us any thoughts in terms of how you are thinking about capital return for 2013? We have had a number of the other big banks -- JPMorgan, Wells, USB -- at least give us some insight in terms of how they are thinking about capital return for this year going into the CCAR and wondered if you would be willing to do the same? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [47]
+--------------------------------------------------------------------------------
+
+    I think I'd say, Ed, that we completed our results; we are in a better position this year than last year and we will let you know once we get through the test. I think it is -- the Fed is doing its work, but I think we have been clear with people that the issue for us is not necessarily capital levels, balance sheet cleanup and stuff. The issue is the recurring earnings levels that have been consistent on that and we will let you know once we get there. But Bruce and the team have done a great job on submitting it and we will see what happens.
+
+--------------------------------------------------------------------------------
+Ed Najarian,  ISI Group - Analyst    [48]
+--------------------------------------------------------------------------------
+
+    Well, I mean you are already above the capital ratios that you need to be at, at least according to FSB guidelines. Now that you are generating -- continue to generate excess capital, is that something that you think you would like to return to shareholders over time or is that something that needs to be retained in the near term for safety and soundness reasons or till you get more litigation resolved? Or any thoughts in terms of the excess, above and beyond where you have indicated you sort of intend to run the Company?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [49]
+--------------------------------------------------------------------------------
+
+    If you look at what we did in 2012, we took capital and redeemed preferred instruments and subordinated debt and other things and continuing to do that during the year. We were getting approvals to do so as we went along. So all the -- we have been clear that all the capital we have, now that we are above the levels, we will be in a position when we get the approvals to return to the shareholders. And you know the viewpoints of the relative preferences of the CCAR process in terms of dividends versus stock buybacks and things like that. So we would be no different than anybody else.
+But it is clear; it is either on the balance sheet, tangible book value. It is not needed for the risk of the balance sheet because you can see that with all the risk-weighting and everything, the capital is there and it will all get returned as part of the business proposition. If we retain any to grow, that is actually a good problem, but, so far, we still have optimization left on the balance sheet, as Bruce described, that will allow us to continue to return capital. So our intention is to return it. The question is we have got to get through the processes and then we will do it.
+
+--------------------------------------------------------------------------------
+Ed Najarian,  ISI Group - Analyst    [50]
+--------------------------------------------------------------------------------
+
+    Okay, thanks. And then I guess my second question is just fairly technical. But when I look at what you have outlined in terms of reserve recapture, it looks like about $900 million in terms of loan-loss reserve, a $2.2 billion provision and $3.1 billion of charge-offs. But it looks like the loan-loss reserve itself dropped by about $2 billion from the third quarter. Can you reconcile that for me?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [51]
+--------------------------------------------------------------------------------
+
+    Yes, the reason it dropped by that amount is that, and you saw it in the third, as well as the fourth quarter, that with some of the DOJ/AG settlement modification and other things, that as you dispose, get repaid or write off the purchased credit-impaired portfolio, it reduces your loan-loss reserve.
+
+--------------------------------------------------------------------------------
+Ed Najarian,  ISI Group - Analyst    [52]
+--------------------------------------------------------------------------------
+
+    Okay. And then that is not coming through the charge-off line?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [53]
+--------------------------------------------------------------------------------
+
+    That is correct.
+
+--------------------------------------------------------------------------------
+Ed Najarian,  ISI Group - Analyst    [54]
+--------------------------------------------------------------------------------
+
+    Okay. All right, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+    Brennan Hawken, UBS.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [56]
+--------------------------------------------------------------------------------
+
+    Good morning. Thanks for taking the question. So a quick one following up actually on one of Ed's questions. And it is related to your capital levels and the SIFI buffer. Is there any view from your guys' perspective that you will intend to run with a buffer above the required 8.5% because many of your money center competitors are going to be running at the 9.5% level. So maybe either for funding market reasons or potentially competitive reasons, is it in your mindset or strategic vision that you might run a bit above that 8.5% level or is that the wrong way to think about it?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [57]
+--------------------------------------------------------------------------------
+
+    I would make a couple observations on that. The first is that, at 9.25% today, regardless of required SIFI buffers, we have more on the Basel 3 basis than anyone else.
+The second thing I would say is given the position that we are in and the fact that we do have DTAs going forward, the rate at which we increase capital given it is on a pretax basis, we would expect to be more significant than our peers.
+So I think going forward, we still think we have the opportunity as core earnings rebound to grow capital more quickly than our peers. As it relates to the exact level, we have always looked at it and thought that you want to run at least an extra 50 basis point cushion. Given that these ratios are more sensitive to changes in the market, depending on what the market looks like at the time your ratio is, you may vary that a little bit based on the market.
+But I would say generally if we look at what we saw in the third quarter and what we saw today that we are generally in the range of where you would expect us to run and as we look out at and see how our counterparties from a credit perspective view the Company now and look at our credit spreads, we feel like we are doing the right things right now.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [58]
+--------------------------------------------------------------------------------
+
+    Okay, that's fair. And then thinking about maybe the fact that you guys might be in the market to sell another chunk of MSRs or at least you hear about that through speculation from various sources. Is the idea behind that, we are at a point where that is not really a capital issue for you all anymore, right, because you are below the threshold from that perspective. So is it more about getting an opportunity to further eliminate and push down these legacy costs or is it that you just strategically don't view the business as very attractive and you just want to be out of it altogether? Can you help maybe give some color around that thought process?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [59]
+--------------------------------------------------------------------------------
+
+    So if you go back and look what we did in the beginning of '11 when we split, we split our portfolio into two thought processes, our mortgage servicing portfolio. We split a chunk into what we called the Home Loans at that point and a chunk into what we called LAS and it was about, round numbers, $11 million, $12 million in loans at that time. Half went to LAS and half went to Home Loans. And the criteria which we looked at that was customers, products and loans and stuff that were going to be a go-forward business we think of in the Home Loans business. And the other half was products that were never going to be done again and the way we are going to run the business because frankly you lose a lot of money on them due to the delinquency levels and customer strife, etc.
+So since that time, we have, and if you go back and look, we showed that exact break. Since that time, we have been busily trying to work the $6 million non-core loan book portfolio down. And we got it down around $2.5 million-ish now and with the sales, $2 million, not all of it comes out of that because of combined pools and stuff, but a significant amount, we are really accelerating the ability to get to the end state on the bad mortgage servicing book for lack of a better term. And that is what we are up to.
+We had gotten it to a level from a capital level and all that stuff we were comfortable with and so once we get this out, these are products that we just aren't going to continue with and we have been focusing on rebuilding the business into the core business as I spoke about earlier.
+So if you think about it in that context, think about something that might have taken us all the way into '15 to finish up and think about through the sales of a significant part of the $2.5 million how much -- the question is we are bringing that into '13 and early '14 as we finish up, which then accelerates our reposition of our Company away from products and services, which we didn't plan to continue two years ago.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [60]
+--------------------------------------------------------------------------------
+
+    Cool. Thanks for that. And then last one, the $1 billion decline in mortgage costs, the legacy costs you guys provided from the $3.1 billion to the $2.1 billion by 4Q, just kind of curious about the starting point there. The $3.1 billion, I thought that included $0.3 billion of compensatory fees from this Fannie deal. So why is that the starting point rather than like $2.7 billion? Is there something in that $0.3 billion that is recurring or what is the deal there?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [61]
+--------------------------------------------------------------------------------
+
+    Yes, the number was slightly less than $300 million, rounded to that number, but, in any one quarter in that business, you have some pluses and some minuses that are flowing through. So you are right. The $1 billion though is starting from a $3.1 billion base.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [62]
+--------------------------------------------------------------------------------
+
+    Let's be clear here. We are still working through -- we have signed the sales transaction January 7, working through with the buyers the timing of the movement of the assets and finalizing that, then how fast you can move. There is transition issues that you have got to deal with in terms of people who are in the middle of the modification process and stuff.
+But let me flip to the other thing. This quarter, the total resources you saw on the one slide dedicated to LAS went down by 9,000 between FTEs and contractors dedicated to this team. We will continue to drive that down. There is nothing more important to our Company to get this done as quickly as possible.
+So Bruce has given you the outline and whether it is from this call item or that item, the idea is that we need to get the work out of here and that is what actually is taking the cost and the sales closing, the continued progress on the remaining piece that we have left, but think about, in a single quarter, 9,000 change in headcount and think about -- we are going as fast as we can.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [63]
+--------------------------------------------------------------------------------
+
+    Yes, well, clearly, it has been really tough to try to forecast how this would run down and you guys are clearly not alone in having challenges. Everybody in the industry I think has been struggling with that. So just was kind of curious whether or not there was something in there. Better to understand it. Thanks for giving the color.
+
+--------------------------------------------------------------------------------
+Operator    [64]
+--------------------------------------------------------------------------------
+
+    Betsy Graseck, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [65]
+--------------------------------------------------------------------------------
+
+    Good morning. A couple of other questions on mortgage. One is around the Fannie settlement. So now you will be originating through Fannie as you used to, regular way mortgages for the Home Loan section. I am wondering how fast you think you can get your marketshare back up as a result of that.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [66]
+--------------------------------------------------------------------------------
+
+    Our marketshare overall, when you put the whole thing together, I think has gone up about 2/10 of 1% per quarter as best I have. And remember, we are only competing in the direct-to-consumer part of the market. So I think it has moved from 4.2% to 4.4% to 4.6% type of numbers. And so expect us to keep driving our marketshare up. Now, again, we got the HARP volumes, which is in the $21 billion this quarter, $7 billion to $8 billion type of number, think of that, that we have got to replace. And so that is the team's challenge.
+And on the other hand, we are not closing loans as quickly as we should honestly. And we have been adding significant resources as we have downsized LAS into the home loans business to increase our fulfillment capacity. So you put all that together, our marketshare continues to grow every quarter for the last three or four. We will continue to drive it.
+Where it will settle in at, I am not exactly sure, but as I talked about earlier, if you think about us having about a -- think of an 8% share of servicing, we have got to get our origination share moving towards that direction over the next couple years in order to have sort of equilibrium for lack of a better term.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [67]
+--------------------------------------------------------------------------------
+
+    Right. It is just that when you stopped originating through Fannie, the share came down rather sharply in a short period of time. So I was just wondering if, with higher throughput, you might be able to do more there.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [68]
+--------------------------------------------------------------------------------
+
+    Look, the issue isn't liquidity in the market, but the kinds of loans going through. The issue was -- they happen to correspond to each other, but it really had nothing to do with each other. The issue is we stopped the correspondent business.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [69]
+--------------------------------------------------------------------------------
+
+    Right.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [70]
+--------------------------------------------------------------------------------
+
+    If you thought about our marketshare when it was at its strongest in the high teens, two-thirds of it or more were correspondents. And that is what dropped our share down. The retail marketshare is actually -- from this year, direct-to-retail, excluding even HARP, it is flat year-over-year in terms of production and fell a little bit and has grown every quarter.
+So we are selling to Freddie and we will work it out with Fannie over time, but the point I am really saying is it is not the secondary market liquidity that caused our markets to drop; it was getting out of the correspondent business. And if you just look in this quarter, remember that there was $6.5 billion last year fourth quarter versus this year fourth quarter that was in the correspondent that is a carryover from when we quit it in the third quarter at the same time we announced that we were going to stop with Fannie.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [71]
+--------------------------------------------------------------------------------
+
+    Right. Okay. And then lastly on Home Loans, should we expect -- are you anticipating more reinvestment in the Home Loans group to drive that faster throughput or do you think you are at the investment spend that you want to make in that business?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [72]
+--------------------------------------------------------------------------------
+
+    If the volumes are there, we will continue to invest in the servicing fulfillment teams. We've moved -- Tony Meola has done a great job and Ron Sturzenegger in that business working through LAS has now taken over sort of the good side of production, along with a fellow named Steve Boland, Dean Athanasia in the Retail and the Preferred group under David Darnell drives the production side. We have added mortgage loan officers every single quarter, focused them on the branches and what we are seeing is tremendous uptake when we get them working with our teammates. We are better when we are connected as a company across things and so we have seen it.
+So we are investing both on the front end and on the service and fulfillment, the middle office so to speak and we have moved I think 4,000 people increase this year so far in fulfillment and we will move some -- we will continue to move them because ultimately the retail production side is a good business right now.
+
+--------------------------------------------------------------------------------
+Operator    [73]
+--------------------------------------------------------------------------------
+
+    Nancy Bush, NAB Research LLC.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [74]
+--------------------------------------------------------------------------------
+
+    Good morning, guys. First question, on the credit card business, Brian, could you just give us some color about what is going on right there? I mean your numbers are not robust and I am wondering -- I know you have lost share there. What is being invested into that business?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [75]
+--------------------------------------------------------------------------------
+
+    Well, so if we think about it starting in 2009, we started to reposition that business because it had gotten too far into the broader credit. And after the crisis, just remember, we charged off $60 billion, $70 billion of charge-offs in that business. So we started repositioning it. We have got it about now where we want it. In other words, we have an affinity group of businesses that is very core and we like it a lot and we have the core business. So this quarter, I think we did 840,000 new cards, about 350,000 or more or less through the franchise, another 100,000 some I think online. So we are producing what we need to do.
+Balances grew, point to point, you've got to be careful of the fourth quarter. You get a little kick around Christmas obviously, but if you look at it, as we look across the last few quarters and we will have to wait until everybody gets out this quarter, we are holding around 14%-ish marketshare, which is fine. So now the question is we push a little bit harder on the -- and I use the broad context marketing, not direct mail market, but marketing and driving to the franchise.
+So what we have done is position the credit quality well. It is a much more of a payment business now, 19% plus pay rate, which basically up from 14% probably six, eight quarters ago and so it is a higher quality business. It has drilled the core customer base, the 1-2-3 card and the rewards cards we have that drill off the core platform are working well in our Retail segments and then obviously in the Wealth Management segments, we have a great array of products.
+So I would say that we have got this where we want it now; it is stabilized. The run-off book that we are fighting on a growth basis is down to $3 billion, $3.5 billion, down from $15 billion at the top. So I think they should start to see some growth. But it will take -- it is going to bump around where it is right now for a few quarters, but I would say that there is nothing wrong in the business and we are making a fair amount of money in it right now. The risk-adjusted margin is the highest it has ever been.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [76]
+--------------------------------------------------------------------------------
+
+    Okay. Secondly, Bruce, if you could just speak to the comp ratios in the Investment Bank and how you guys are trying to position yourself relative to your competition?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [77]
+--------------------------------------------------------------------------------
+
+    Yes, I mean I think generally we are in that 40% area from a compensation perspective and obviously, given the performance and where we are, we need to be competitive with where the peers are. But I don't think you have really seen that change materially during the course of 2012.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [78]
+--------------------------------------------------------------------------------
+
+    Great, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [79]
+--------------------------------------------------------------------------------
+
+    Mike Mayo, CLSA.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [80]
+--------------------------------------------------------------------------------
+
+    Hi, first just a follow-up. The FAS 91 amortization expense, what would have been the change in the securities yield and the margin if not for that looking third quarter to fourth quarter?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [81]
+--------------------------------------------------------------------------------
+
+    We will have to get back to you with that exact number. I think I have a gut, but I want to make sure I am right. So why don't we get back to you with that number.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [82]
+--------------------------------------------------------------------------------
+
+    Okay. Do you just know generally I mean because you margin was up; that is good, and the securities yield is up 11 basis points, but do you think it would have been down if not for that?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [83]
+--------------------------------------------------------------------------------
+
+    I want to think, Mike, it was somewhere between 9 and 11 basis points. I just don't have the exact number.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [84]
+--------------------------------------------------------------------------------
+
+    Okay, that's fine. And then going to the mortgage putbacks, so the Fannie settlement, you got that done. It sounds like you are feeling better about the rep and warranty expense. I think I heard you say it might go from $300 million to $150 million per quarter. So I sense you are feeling better.
+I'm trying to reconcile that with what is taking place with the MBIA versus Countrywide court moves and correct my thinking if anything is wrong here, but I think it is an issue of Bank America success or liability or is Bank America responsible for Countrywide? And as of January 9 and 10, the oral arguments were completed, so I understand it is in the hands of Judge Bransten, the New York State Supreme Court and the motion says that Bank America is responsible for Countrywide and if so, I guess that could put the $8.5 billion private-label settlement at risk. So my question is could that $8.5 billion settlement be at risk? Do I understand what is happening in the court correctly? And what happens if the $8.5 billion private-label settlement does not go through?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [85]
+--------------------------------------------------------------------------------
+
+    I think a couple things on that, Mike. First, I think from our perspective, the $8.5 billion Gibbs & Brun settlement is going through the court process. Would likely get wrapped up sometime in the second quarter or early in the third quarter. And that is completely independent from what is going on at MBIA.
+With respect to MBIA in the broader monolines, as we have said before, generally, if you look at geography within the financial statements, the majority of the work that we do and where the monolines are accrued for at this point is within the litigation line item as opposed to within our provision for reps and warranties.
+And the third thing I would say is that, as it relates to kind of the general rep and warrant question, I think the most important thing to go back to is that the large majority of everything that was done with the GSEs at this point between our global settlement with Freddie and Countrywide and our global settlement with both Countrywide and Bank of America with the GSEs just takes away a significant amount of risk relative to where we have been before.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [86]
+--------------------------------------------------------------------------------
+
+    So we are really just talking private label at this point?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [87]
+--------------------------------------------------------------------------------
+
+    As I referenced, you have got the several monolines that we are working through on a litigation perspective and then you are right, you have got the private-label piece. And I think if you go back to the comments that we made about the geography of the representations and warranties, you can see we have a pretty sizable amount set aside to work through the private-label exposures.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [88]
+--------------------------------------------------------------------------------
+
+    So what is the significance of the decision by Judge Bransten and the New York State Supreme Court? There was a Wall Street Journal article on January 11, some other chatter saying that if this motion goes against you and you are deemed responsible for the legal liabilities of Countrywide then that could be a negative event for you. Do you agree with that?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [89]
+--------------------------------------------------------------------------------
+
+    Mike, we could -- I think as we think about it, this litigation goes back and forth and the judge has a lot of decisions to make in a lot of cases and we will play it out here. But we are comfortable with our legal positions across the board.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [90]
+--------------------------------------------------------------------------------
+
+    Okay, but for that, we should, you think we will hear next month as opposed to midyear?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [91]
+--------------------------------------------------------------------------------
+
+    I am not sure the exact timing.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [92]
+--------------------------------------------------------------------------------
+
+    Okay. Just last question on that because I am just trying to -- how do we get our arms around that risk? That is really my question and so if you wanted to just give advice to somebody -- okay, here is the potential hit if things go wrong, what would be your answer to that or just is there no answer?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [93]
+--------------------------------------------------------------------------------
+
+    I think what I would suggest you do, and I am not going to quote somebody else's financial statements, but I think you can go look on MBIA's financial statements and see how much that they believe that we're owed or that they are owed from us. That is disclosed in their financial statements, so you can look at that. And then the corollary is I think you have to keep in mind that there is a significant amount of money that they owe us within our Global Markets business that is very significant that we have marked at cents on the dollar.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [94]
+--------------------------------------------------------------------------------
+
+    Great. All right, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [95]
+--------------------------------------------------------------------------------
+
+    Guy Moszkowski, Autonomous Research.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [96]
+--------------------------------------------------------------------------------
+
+    Good morning. You guys have done a great job countering the net interest margin pressure obviously with managing your long-term debt down. And maybe it is too early to think about this, but obviously under orderly liquidation authority in Dodd-Frank, there is some provision for bail-in debt and I was wondering how you guys are thinking about that and how you might implement it over time.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [97]
+--------------------------------------------------------------------------------
+
+    I think the biggest thing that you have to go back to is that, and you have seen the different reports, that it is that people are looking at these amounts based on not only the amount of debt, but also the amount of equity that you have on the balance sheet. So if you go and look at our ratios, we obviously, as far as the amount of pure common equity and other equity-related instruments on the balance sheet now are more than virtually all of our peers and because of the way -- through the series of mergers that happened, our debt footprint on an absolute basis, as well on a relative basis is higher than our peers.
+So as we look at this and as we talk about going forward, I think we still have a lot of work to do and opportunity to get our interest expense down through shrinking the size of the debt footprint and just bringing it down to where the rest of the industry is. So we can't predict with certainty where this goes, but we know as we look at the different ratios and the different metrics, we still have some opportunity to continue to benefit the interest expense line just to get to where our peers are from an overall debt and equity perspective.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [98]
+--------------------------------------------------------------------------------
+
+    Okay, that's fair. Just one last question regarding expenses. Obviously, you have stuck with your guidance on the New BAC and you told us where you are along the path of getting to those goals and you have updated us on the LAS expense reduction initiatives as well, but you are also talking about reinvesting and specifically around mortgage origination, but I think more broadly as well because obviously you don't want to ignore revenue growth opportunities. How do we reconcile those things and how much reinvestment at this point should we expect to see of the New BAC $8 billion and of the LAS $10 billion?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [99]
+--------------------------------------------------------------------------------
+
+    On the LAS, I don't think you would see it. In the New BAC is net of the cost of achieving the results, which is largely technology implementation costs and if you look at our technology development costs over the last few years, we have gone from about $2 billion and change to $3.6 billion per year. And the investments we are making in New BAC are investments in the franchise. In other words, to get the efficiencies, we are -- embedded in there is the rework of our entire trading platform systems and things like that. But we are investing to get the savings, but investing to also strengthen the franchise at the same time. So it is all netted in there.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [100]
+--------------------------------------------------------------------------------
+
+    Okay, so you would encourage analysts to continue to bring those entire amounts to the bottom line by 2015?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [101]
+--------------------------------------------------------------------------------
+
+    Yes.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [102]
+--------------------------------------------------------------------------------
+
+    Okay, that's great. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [103]
+--------------------------------------------------------------------------------
+
+    And this concludes our Q&A. I will go back to our presenters for any closing remarks.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [104]
+--------------------------------------------------------------------------------
+
+    Thank you for your time and attention. Look forward to next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [105]
+--------------------------------------------------------------------------------
+
+    This will conclude today's program. Have a great day. You may disconnect at this time.
+
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2013-Jan-29-AMZN.OQ-139057386295-Transcript.txt

@@ -0,0 +1,455 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2012 Amazon.com Inc Earnings Conference Call
+01/29/2013 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Sean Boyle
+   Amazon.com, Inc. - VP of IR
+ * Tom Szkutak
+   Amazon.Com Inc - CFO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Gene Munster
+   Piper Jaffray & Co. - Analyst
+ * Rohit Kulkarni
+   Citi - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Ken Sena
+   Evercore Partners - Analyst
+ * Brian Pitz
+   Jefferies & Co. - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Jordan Rohan
+   Stifel Nicolaus - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Brian Nowak
+   Nomura Securities Intl - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Tom Forte
+   Telsey Advisory Group - Analyst
+ * Anthony DiClemente
+   Barclays Capital - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to the Amazon. com fourth-quarter 2012 financial results teleconference. At this time, all participants are in a listen-only mode. After today's presentation, we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Sean Boyle. Please go ahead. 
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q4 2012 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, January 29, 2013, 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 to 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 2011. Now, I'll turn the call over to Tom. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Sean. I'll begin with comments on our fourth quarter financial results. Trailing 12-month operating cash flow increased 7% to $4.18 billion. Trailing 12-month free cash flow decreased 81% to $395 million. Trailing 12-month capital expenditures were $3.79 billion. This amount includes $1.4 billion in purchases of our previously leased corporate office space, as well as property for development of additional corporate office space located in Seattle, Washington, which we purchased in the fourth quarter. 
+The increase in capital expenditures reflects additional investments in support of continued business growth, consisting of investing in technology infrastructure, including Amazon Web Services and additional capacity to support our fulfillment operations. Return on invested capital was 4%, down from 22%. ROIC is TTM free cash flow divided by average of 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 470 million shares compared with 468 million shares one year ago. 
+Worldwide revenue grew 22% to $21.27 billion, or 23% excluding the $178 million unfavorable impact from year-over-year changes in foreign exchange. We're grateful to our customers, who continue to take advantage of our low prices, vast selection, and shipping offers. 
+Media revenue increased to $6.51 billion, up 8%, or 10%, excluding foreign exchange. EGM revenue increased to $13.93 billion, up 28%, or 29%, excluding foreign exchange. Worldwide EGM increased to 65% of worldwide sales, up from 63%. Worldwide paid unit growth was 32%. Active customer accounts exceeded 200 million. Worldwide active seller accounts were more than 2 million. Seller units represented 39% of paid units. 
+Now I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $16.14 billion, or 75.9% of revenue, compared with 79.3%. Fulfillment, marketing, technology and content,  and G&A combined was $4.45 billion, or 20.9% of sales, up approximately 293 basis points year-over-year. Fulfillment was $2.2 billion, or 10.3% of revenue, compared with 9.3%. Tech and content was $1.22 billion, or 5.7% of revenue, compared with 4.5%. Marketing was $833 million, or 3.9% of revenue, compared with 3.3%. 
+Now I'll talk about our segment results and consistent with prior periods, we do not allocate the segments, our stock-based compensation, or other operating expense line item. In the North America segment, revenue grew 23% to $12.17 billion. Media revenue grew 13% to $2.9 billion. EGM revenue grew 24% to $8.5 billion,  representing 70% of North America revenues, up from 69%. North America segment operating income increased 114% to $608 million, a 5% operating margin. 
+In the International segment, revenue grew 21% to $9.09 billion. Adjusting for the $183 million year-over-year unfavorable impact from foreign exchange, revenue growth was 23%. Media revenue grew 5% to $3.61 billion, or 7% excluding foreign exchange. And EGM revenue grew 35% to $5.43 billion, or 37% excluding foreign exchange. EGM now represents 60% of international revenues,  up from 54%. 
+International segment operating income decreased 61% to $70 million, at 0.8% operating margin. Excluding the unfavorable impact from foreign exchange, international segment operating income decreased 56%. CSOI increased 47% to $678 million, or 3.2% of revenue, up approximately 54 basis points year-over-year. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. 
+GAAP operating income increased 56% to $405 million, or 1.9% of net sales. Our income tax expense was $194 million in Q4, resulting in a 58% rate for the quarter, and a 79% rate for the full year 2012. GAAP net income was $97 million, or $0.21 per diluted share, compared with $177 million and $0.38 per diluted share. 
+Now, I'll discuss the full-year results. Revenue grew 27% to $61.09 billion. North America revenue grew 30% to $34.81 billion and international revenue grew 23% to $26.28 billion,  or 27% growth excluding year-over-year changes in foreign exchange. Consolidated  segment operating  income, or CSOI, increased 6% to $1.67 billion, or 7%, excluding the unfavorable year-over-year impact from foreign exchange. Operating margin decreased 54 basis points, 2.7%.  GAAP operating income decreased 22% to  $676 million, or 1.1% of net sales. 
+Turning to the balance sheet, cash and marketable securities increased $1.87 billion year-over-year to $11.45 billion. Inventory increased 21% to $6.03 billion and inventory turns were 9.3, down from 10.3 turns a year ago, as we expanded selection and improved in-stock levels and introduced new product categories. 
+Accounts payable increased 20% to $13.32 billion and  accounts payable  days increased to 76 from 74 in the prior year. In Q4 2012, we issued $3 billion of senior non-convertible unsecured debt and three-, five- and seven-year tranches with proceeds to be used for general corporate purposes. 
+  I'll conclude my portion of today's call with guidance. Incorporated into the guidance are the order trends we've seen to date and what we believe to date  to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy, and consumer spending. It's not possible to accurately predict demand and therefore, our actual results could differ materially from our guidance. 
+As we describe in more detail on our public filings, issues such as settling intercompany balances and foreign currencies amongst our subsidiaries; unfavorable resolution of legal matters; and changes to our effective tax rates can all have a material impact on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, or settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they have been recently. 
+For Q1 2013, we expect net sales of between $15.0 billion and $16.6 billion, or growth between 14% and 26%. This guidance anticipates approximately 122 basis points of unfavorable impact of foreign exchange rates. GAAP operating income or loss to be between  $285 million loss and $65 million positive income compared to $192 million in income in the prior period year. This includes approximately $285 million for stock-based compensation and amortization of intangible assets. 
+We anticipate consolidated segment operating income, which excludes stock-based  compensation and other expense, to be between $0 and $350 million, compared to $398 million income in the prior period. We remain heads-down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks. With that, Sean, let's move to questions. 
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question? 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    Thank you. At this time, we will now open up the call for questions. In the interest of time, we ask that you limit yourself to one question. 
+(Operator Instructions) 
+ Scott Devitt with Morgan Stanley. 
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Tom, it looks to us that you have successfully begun the transition of your logistics cost in the direction of being more of a fixed fulfillment cost, with lower unit base shipping costs, given that the growth rate of up on shipping is now meaningfully below the fulfillment growth rate. So the  question is, is that something that we should expect to continue now on the back of this meaningful fulfillment center expansion ramp? 
+Then separately, but on the same topic, we're also wondering, are there other parts of the business in which you can make this transition to more of a fixed cost in the future? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [3]
+--------------------------------------------------------------------------------
+
+    In terms of fulfillment question, you're right in terms of,  over the past few years, we have expanded our fulfillment network pretty extensively  to the point where we are closer to customers; and  you're seeing that reflected in our transportation costs. 
+You can obviously see the fulfillment expense is certainly not fixed in terms of in absolute terms. But  you can see that we had the 20 fulfillment centers last year and that's reflected in the operating expense that you're seeing. But that is a benefit of adding  to our fulfillment center network. We are closer and closer to customers, with a lot of great selection. You're seeing that reflected in the individual business gross margins, which shows up as benefits of transportation costs. 
+In terms of other opportunities, certainly there are a number of opportunities, as we invest in individual customer experience areas across the business; many of those would be on our website. We have a relatively fixed expense, as we launch those and we're able to amortize those costs over our full customer base. As they grow, they become more effective on a per-unit or per-customer basis. There is a number of opportunities that we have had and will have going forward to do that. 
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth with JPMorgan. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [5]
+--------------------------------------------------------------------------------
+
+    Just wanted to ask about the shift to third-party and in particular, I think last 4Q, you talked about shifting more of the business in the video game space in particular to third-party. Are there certain categories that you would specifically point to in this last 4Q where you made   a similar shift? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [6]
+--------------------------------------------------------------------------------
+
+    We did see  a good expansion,  as you've mentioned,  in 3P. Our third-party units as a percentage of total units  increased some 36% last year, Q4 to 39%, some expansion of approximately 300 basis points. Our overall unit growth rate for the quarter in total was 32% and our third-party growth rate was  in excess of 40%. So, again, nice growth. 
+It is -- you're certainly seeing it in a number of areas. You see it certainly in our EGM business. If you look at our North America growth rates, you can see that our revenue was up 23%, but our third-party -- our total unit growth rate was substantially faster than that and our third-party units were growing very fast there as well. So there's a number of different areas that you're seeing that, but certainly you're seeing it there. 
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+    Brian Pitz with Jefferies. 
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Co. - Analyst    [8]
+--------------------------------------------------------------------------------
+
+    Looks like you're moving more in the direction of same-day shipping. Would you provide any thoughts or insights here? Should we anticipate a significant ramp-up of fulfillment center build-outs, particularly in Q2, Q3?  Maybe you could just comment more generally on your FC build-out plans, US versus international. Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [9]
+--------------------------------------------------------------------------------
+
+    There's not a lot I can comment on in terms of  our plans. Similar to last year, as we progress through the year, we can give you further updates on what we plan to do there. Last year, we  opened up 20 new fulfillment centers and so we saw  very rapid growth and fulfillment capacity last year. Stay tuned and we'll let you know more as the year progresses there. 
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney with RBC Capital Markets. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [11]
+--------------------------------------------------------------------------------
+
+    The paid unit growth deceleration to  32%; there seems a bit of a disconnect versus an active customer growth that didn't decelerate as much on a per-customer basis. Are you seeing some change in overall activity? Is that the impact of newer international markets?  Then just on the investment cycle, the last couple of calls,   you've consistently called out future investments, whether the $1.4 billion for Seattle or distribution center expansion. You didn't do it this quarter. I don't want to over-read into it, but does that mean that we're at the end of a major investment cycle? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [12]
+--------------------------------------------------------------------------------
+
+    In terms of unit growth, there's not a lot more I can add to it. We did see very strong -- we saw a substantially high unit growth and revenue growth in terms of paid unit growth in Q4  which we're seeing very strong third-party growth as well; it was up over 40%. In terms of investment cycle, yes, I wouldn't read into anything related to that.   We will still be adding capacity during 2013. In terms of the levels of how much we'll add,   as I mentioned earlier on the call, I'd just stay tuned and we'll let you know as the year progresses. 
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+     Heath Terry with Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [14]
+--------------------------------------------------------------------------------
+
+    I was wondering if you could give us just a bit of a sense of what you're seeing as you roll out fulfillment centers into new states. Obviously, the sales tax issue has been one that's come up a good bit. But  you've touched on the impact of being closer with faster delivery in those same states. Net-net, what do you see as being the impact on -- I'm not asking you to give us a state-by-state breakdown, but the impact of rolling out the fulfillment center footprint, taking both of those things into account? 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [15]
+--------------------------------------------------------------------------------
+
+    I'm not really sure how best to answer your question. We  certainly have expanded pretty dramatically over the past, coming out of 2009,  so between 2010, '11 and '12, we've rapidly increased our footprint  globally. Your comment was more directed towards the US, but we've also rapidly  increased our footprint in the US. 
+As a result of that,  we're able to carry selection, a much broader selection, closer to customers, just with the,  as you would expect, with  this rapid increase. We've also expanded selection during that time period. So  we continue to be in the  locations we would like to be in and we'll continue to expand our footprint over time and become even closer and closer to customers. Beyond that, there's not a lot I can add. 
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+
+    Gene Munster with Piper Jaffray. 
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [17]
+--------------------------------------------------------------------------------
+
+    From a high level, can you remind us the margin difference between 1P and 3P? I know in the past you've talked about you  being agnostic between the two. But the growth in 3P and what your CSOI margin as  would imply that 3P has a little bit  higher margin. Is that the correct read-through? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [18]
+--------------------------------------------------------------------------------
+
+      There is some variation by business, but certainly that's  -- what we attempt to do is,  from  a pricing standpoint, is to try to be agnostic. That's certainly how we run the business. Again, this is on a third-party versus retail  and then we've always -- also added certainly a lot of other services over the past year in terms of fulfillment. So it really depends upon where we are in the investment cycle, what our utilization is. 
+As you know, certainly as you look at the last few years, we've been  very heavily expanding in terms of fulfillment capacity because of the growth that  we've been experiencing. That certainly would put pressure on our overall cost structure,   certainly as a -- on a per unit basis because we're not getting the productivity. We don't get the full productivity for a number of years after expanding. 
+So depending on what type of customer is,   whether it's a -- excuse me, whether it's a retail unit, a straight third-party unit,  or an FBA unit. But again, we're certainly attempting, at least on a product basis, to be roughly agnostic. 
+
+--------------------------------------------------------------------------------
+Operator    [19]
+--------------------------------------------------------------------------------
+
+     Brian Nowak with Nomura. 
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Nomura Securities Intl - Analyst    [20]
+--------------------------------------------------------------------------------
+
+    On the device strategy, with Kindles and Kindle HDs, can you help us at all with what you're seeing with attach rate trends on digital goods, after people buy the Kindles? Then  generally, do you see a higher overall GMV per customer on Kindle devices than users on Amazon apps through other devices? 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [21]
+--------------------------------------------------------------------------------
+
+    In terms of attach rates, it's not -- we haven't given a lot of detail. But  I think one thing certainly to look at, it doesn't give an attach rate, but  it gives you at least a sense of the health of the business, is the number that was in the release today.   We surely have a multi-billion dollar eBook business, growing approximately 70% year-over-year. That's total year, last year.  That's growing at that rate after a -- really just launching the business approximately five years ago. So  it's a pretty good, healthy growth rate,  five years in. 
+ We're seeing good -- I can't give you specific numbers, but we're seeing very good progress on a number of our other digital media categories. Video, I talked about a little bit earlier. We're seeing Prime customers,   certainly the percentage of Prime customers who were watching free content through Prime Instant Video has gone up dramatically year-over-year. We've also increased Prime membership dramatically year-over-year. They are also purchasing paid content. 
+  Those customers that are using the service, they watch free, but they are also paying for new content, which is great. We've launched a number of new services on the music side, most recently, certainly, our CD with free MP3, which we have on many titles. It's still very early, but we certainly like that service and pleased to offer it to customers. So I can't give you specific for attach rates, but  the business is making good progress on the video content side and again, it's still very early. 
+
+--------------------------------------------------------------------------------
+Operator    [22]
+--------------------------------------------------------------------------------
+
+     Ross Sandler with Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [23]
+--------------------------------------------------------------------------------
+
+    As you guys build out the Prime membership and the SKUs available through FBA, you run into this challenge of increasing your unit volume of tail items.  At the same time, you need to get products to customers in much shorter shipping cycles. So can you talk about how the new fulfillment footprint helps on that front -- is your reliance on air going down as a percent of total items shipped? 
+Then if I remember correctly, you guys reclassified some FBA revenue early in 2012. Can you just remind us how that flows through the shipping revenue line and what would happen as you comp that in the beginning of '13? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [24]
+--------------------------------------------------------------------------------
+
+    Sure. Just in terms of overall selection, as we added to  Prime, what I was talking about earlier in terms of having  a -- just a more expanded footprint is,  there's no question that's helping us add additional selection more economically to Prime.  So  that's both in terms of third-party selection as well as our retail selection.  So that's something that we  continue to have the benefit of as we get  more and more members of Prime and have a bigger and bigger concentration of  two-day shipping in the US for that. 
+So we did add  the shipping portion of the FBA fees in Q1 of 2012 and we see some benefit year-over-year. But we're still seeing leverage in terms of our,   ex the FBA fees,   quite a bit of leverage there. So we don't have the specific number for you there, but  we're still seeing quite a bit of leverage there, ex that reclass that you're referring to. 
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+    Justin Post with Merrill Lynch. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [26]
+--------------------------------------------------------------------------------
+
+    Last year, you reported 4Q in the lower half of revenue range and you were able to call out Taiwan and video games category. Any reasons why revenues were   in the lower half this quarter and then if you look at gross profit growth, it clearly has accelerated to 40% growth, but unit growth decelerated to 32%. Can you describe what's driving that   accelerating gross profit in the face of lower unit growth?  Is it possible maybe you're letting the third-parties handle some of the maybe less profitable categories for Amazon? Could you talk about that at all? Thank you. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [27]
+--------------------------------------------------------------------------------
+
+    If you take a look at our growth rate, we're -- we  think the growth rate for Q4 was solid. It was up 23% on a revenue basis, quite a bit higher than that on a unit growth basis, up 32% year-over-year. In terms of  some of the things that we saw,   we,  again, there's -- we saw solid growth across many different categories and geographies  year-over-year. 
+Certainly, some things to call out in terms of things that may have been a little bit softer.   A few examples would be we did see some of the higher average selling price items,   particularly the items that are greater than $1,000, a little bit softer. A few of the  consumer electronics  sub-categories like  TVs, MP3 players, digital cameras,  to some extent,  were softer. But, again,   with the base that we have in Q4, still very solid growth. 
+Another one,   we certainly were thrilled to have Paperwhite in our lineup.  It's certainly the best eReader that's out there and we're very pleased with it. But we couldn't keep up with demand. We would have had more sales in Q4 if we were able to keep up with the demand.  So the team is  working very hard to make sure we have good in-stock going forward on that product. But  we certainly could have sold more in Q4. 
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+      Tom Forte with Telsey Advisory Group. 
+
+--------------------------------------------------------------------------------
+Tom Forte,  Telsey Advisory Group - Analyst    [29]
+--------------------------------------------------------------------------------
+
+    I wanted to ask you on Amazon Instant Video, how you felt about your current offering and your ability to add exclusive content in a cost-effective manner through Amazon Studios? And  what the relationship is between adding more titles and uses on your hardware such as your Amazon Kindle devices? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [30]
+--------------------------------------------------------------------------------
+
+    We'll continue to look at  -- continue to expand our selection, both in terms of Amazon  Instant Video as well as Prime Instant Video. We'll do that in a number of different ways.  We think we have a very interesting selection right now.  You should expect that we'll be spending more on content as it relates to Prime over time and we'll continue to add selection on Amazon Instant Video. Beyond that, you'll have to stay tuned. 
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+    Ken Sena with Evercore Partners. 
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore Partners - Analyst    [32]
+--------------------------------------------------------------------------------
+
+    Can you talk a little bit about the non-AWS drivers within that line, such as advertising?  As you look out, are there advantages to you in terms of having AWS, as far as offering things like buying, serving analytics through the AWS platform to advertisers? Where are you   in that roll-out phase now? Thank you. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [33]
+--------------------------------------------------------------------------------
+
+    In terms of the AWS business, we've --  the business is growing very fast. We've increased a number of services pretty dramatically over the past several years. The team's doing a fantastic job there and  we'll  continue to innovate on behalf of customers in that space. There's a number of other things that go into that line item, other. Some of the credit card, as well as other marketing  revenue goes in there,  so -- but again, AWS is in that line item. 
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+    Anthony DiClemente with Barclays. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Barclays Capital - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    I wondered if you could comment on the pace of business throughout the fourth quarter. Did you see a particular deceleration in the month of December?  Second question, on international, I'm wondering are there any callouts in terms of specific countries that may have been weighing on profitability, countries where there's outsized dollars of investment going on, or accelerated investment at the current time? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Forte,  Telsey Advisory Group - Analyst    [36]
+--------------------------------------------------------------------------------
+
+    In terms of -- there's not a lot of specifics. We have a long-standing practice of not talking about  trends within the quarter, and -- but  in terms of year-over-year growth or anything like that. Obviously, the  Q4 is very seasonal.   December is, by far,  the largest month  followed by November, but in terms of individual growth rates,   don't have a lot of comments there. 
+In terms of international, yes, there certainly are geographies that we're investing in heavily.   Certainly China would be one. Some of the newer --   some of the European countries, including some of the newer launches we're investing in.  So those are certainly -- you're seeing those represented in those segment results. 
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+      Rohit Kulkarni  with Citi. 
+
+--------------------------------------------------------------------------------
+Rohit Kulkarni,  Citi - Analyst    [38]
+--------------------------------------------------------------------------------
+
+    In terms of your  recent margin profile, that's truly comparing US and International, over the past four quarters, the vast majority improvement of other have been less worse margin continuing of -- seeing have  been  due to US margins improving, whether International was, planning in the range of  300, 350 basis points. 
+In Q4, international declined just 160 basis points, so my question is, should we read this as a big enough of a trend that we saw,  how international -- how domestic margins increased over the last four quarters, whether international should follow the same route over the next foreseeable future? 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [39]
+--------------------------------------------------------------------------------
+
+    Yes, there's not a particular callout that I can make on that. The only thing that I would,   in terms of the change I'm referring to, but in terms of the difference between the two,   keep in mind that a   couple factors, one, mix of business is a little bit different. Our AWS business is in the North America segment. 
+You also have some newer geographies. Our geographies --  I shouldn't say that  are necessarily newer, but geographies  that we're investing in heavily that  have a longer-term horizon for returns, some of the ones I mentioned earlier. So those are  factors as you look at the two different segments. 
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+      Ben Schachter with Macquarie. 
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [41]
+--------------------------------------------------------------------------------
+
+    It looks like the first-party gross margin is actually  up fairly meaningfully year-over-year. I wonder if you can  talk about that within the context of how  Amazon Kindle hardware is impacting the  gross margin. Then separately, just any view on how video game sales  impacted  the year-over-year growth rates for the quarter? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [42]
+--------------------------------------------------------------------------------
+
+    Yes, I apologize. We're not -- we  haven't broken out the  first-party versus third-party.   It's not something we've done  for -- not something I'm doing today or we've done in previous calls, so there's not a lot I can help you with there. 
+
+--------------------------------------------------------------------------------
+Operator    [43]
+--------------------------------------------------------------------------------
+
+      Jordan Rohan with Stifel Nicolaus. 
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [44]
+--------------------------------------------------------------------------------
+
+    The content cost for Prime Instant Video flow into the cost of goods line, even though there's no direct revenue associated with it, not into the tech and content line, right?  Is that right? 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [45]
+--------------------------------------------------------------------------------
+
+    That's correct. 
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [46]
+--------------------------------------------------------------------------------
+
+    Okay. So gross margins would have been even higher if  those costs were included elsewhere or broken out separately. Do you have any   common or -- to reduce the carrying value in your investment in LivingSocial, do you have a feel  on a broad strategic level as to whether the local deals business through Amazon Local or through LivingSocial is something that you care to keep investing in? Thanks. 
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.Com Inc - CFO    [47]
+--------------------------------------------------------------------------------
+
+    There's not a lot I can specifically talk about as it relates to LivingSocial beyond what's in our results today and what we'll have in our 10-K, which will be filed  soon.  So I would encourage you to take a look at our full disclosures related to that. But in terms of Local, there certainly is still a very interesting opportunity there. We do have a couple -- we have an investment in LivingSocial. 
+We also have a local business ourselves.  So  those are -- it's an interesting opportunity. It's a long-term opportunity and we'll continue to work on that -- for customers to make that experience even better.  You should think about it not unlike a lot of the other businesses that we invest in, with it [budding] over  long-term horizon and it's very early there. 
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [48]
+--------------------------------------------------------------------------------
+
+    Okay. Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2013-Jan-30-FB.OQ-140751793850-Transcript.txt

@@ -0,0 +1,531 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2012 Facebook Earnings Conference Call
+01/30/2013 02:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * David Ebersman
+   Facebook, Inc. - CFO
+ * Deborah Crawford
+   Facebook, Inc. - Director of IR 
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Carlos Kirjner 
+   Sanford C. Bernstein & Co. - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Ben Schachter 
+   Macquarie Research Equities - Analyst
+ * Ken Sena
+   Evercore Partners - Analyst
+ * Brian Pitz
+   Jefferies & Co. - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Jordan Rohan
+   Stifel Nicolaus - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Brian Nowak
+   Nomura Securities International, Inc. - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Neil Doshi
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Steve and I will be your conference Operator today. At this time, I would like to welcome everyone to the Facebook fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.  
+(Operator Instructions) 
+Thank you very much. Ms. Deborah Crawford, Facebook's Director of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR     [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's  fourth-quarter and full year earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and David Ebersman, CFO. 
+Before we get started, I would like to take this opportunity to remind you that, during the course of this call, we will make forward-looking statements regarding the  future events and the future financial performance of the Company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements, in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption risk factors in our quarterly report on Form 10-K, filed with the SEC on October 24, 2012. In addition, please note that the date of this conference call is January 30, 2013 and any forward-looking statements that we make today are based on the assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. 
+During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. this call is being broadcast on the internet, and is available on the Investor Relations section of the Facebook website at investor.FB.com. A rebroadcast of the call will be available after 6.00 PM Pacific Time today. The earnings press release and an accompanying investor presentation are also available on our website. After management's remarks we will host a Q&A session.  
+And now I'd like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, everyone, for joining us. 2012 was a big year for us. We made this big transition where now there are more people using Facebook on mobile every day than on desktops. This was challenging for us to navigate, since we started off the year with Apps that weren't as high quality as we wanted, and no ads in our Apps at all, but now we're coming out of the year with a strong foundation and a lot of momentum. Just last week, comScore put out a report, saying Facebook is now 23% of all time spent on Apps in the US, and one of the next  biggest Apps is Instagram at 3%, so put together, we're now more than a quarter of the time spent in Apps. Today, there is no argument, Facebook is a mobile company. As I've said before, there are three main parts of our strategy, build the best mobile product, build the platform and services that leverage the social graph, and build a really strong monetization engine. 
+I'm going to use our time today the same way I will on most of these calls, to give my assessment of how I think we're doing in each of these big areas. Let's start with mobile. I think more people are starting to understand that mobile is a great opportunity for us. Mobile is the perfect device for Facebook for three reasons -- it allows us to reach more people; we have more engagement from the people who we reach; and I think we'll also be able to make more money for each minute people spend with us on their mobile devices. But mobile isn't just driving greater engagement on Facebook. Mobile enables many new experiences, and is growing overall share and across all Apps. This creates a very dynamic ecosystem, and one where there's a lot of room for us to create even more sharing through Facebook. 
+Often, doing a good job is just about focusing on basic issues like performance and stability. In December, we released a completely rewritten version of Facebook for Android. This was the Android version of the iOS rewrite we did earlier last year. Neither of these rewrites added big new features, but simply by improving speed and stability, we've made a much better user experience, enabling people to share even more. It's a good example of how early we are in the market that these changes made such a difference. 
+Photos and Instagram are doing really well too. We had our best day ever on New Year's Day with more than 600 million photos uploaded to Facebook. Instagram has continued growing very quickly, and hopefully we'll have some new milestones to share with you all soon. A lot of what we had to do last year was simply to improve our mobile development process. Now we're there. 
+We move fast and ship new versions of our Apps on a regular monthly cycle. You have a good version of all of the Facebook features you know and want on your phone. So now, the next thing we're going to do is get really good at building new mobile first experiences. That's going to be a big theme for us this year. If we do this well, we should be able to bring even more relevant content and connections to more people, and continue to deepen their engagement. 
+Next I want to talk about platform and building new services, using the social graph. Normally I'll use this section to talk about what's going on in the ecosystem outside of our Company, but this quarter, I think we built the most interesting new service using the social graph, Graph Search. This is an early beta product, but I'm really excited about it, because it's an entirely new kind of search. It's not web search, it's structured search over the whole graph of content that people have mapped out on Facebook. It's good for lots of things you wouldn't use a traditional search engine for; seeing where your friends have eaten or traveled to, browsing photos and content your friends have posted, finding new people to meet or recruit for a job, and many other things. 
+Some of these are big areas, where we think there's room for much better product. Down the line, if we do this well, this could potentially turn into a meaningful business for us. For now, we're going to continue working to refine the product and roll it out to everyone. Still, I think the way the Graph Search is different from normal web search is a good example of how there's going to be this market for a whole new crop of social services, in existing markets today that weren't designed with the principles of real identity and social connections, et cetera. 
+One platform development that I am really excited by is seeing how well our App install advertising product is doing. Developers are finding that Facebook is a great service for connecting with the right people who want to use their Apps, and getting a lot of installs. On mobile, our platform already enables developers to help you bring your friends to a developers App. We also want to be one of the primary ways that developers get new people to their Apps in the first place, and with App install ads, we're off to a good, if early, start in achieving that. 
+Now I want to talk a bit about monetization. Last year was a big year for us here. We started off the year with no ads at all in mobile, and we ended up with approximately 23% of our ads revenue coming from mobile in the fourth quarter. That's a pretty amazing change. One of the big drivers of this, has been that as we rolled out ads to News Feed, we found that it barely affected the level of engagement on Facebook. We thought that we could make this work over time without a big impact if we spent a long time tuning the ads, but the numbers turned out even better than we thought without much tuning, so this has enabled us to show people  a few ads in News Feed each day. 
+So that means that now we have this News Feed ad business that we have barely tuned, and there's a big opportunity in front of us to make every ad that we're showing a lot better. The biggest ways that we're going to this are by improving targeting and relevance so we can show everyone content that they care more about, and by designing better ad products that aren't just about links and text and images.  For  targeting, I'm most excited about the work we're doing on Custom Audiences, our tool that lets advertisers upload their customer list and target against that, and information that is already on Facebook at the same time, perfectly. Say, my customers are in some age range and live in some states, you may not know which states your customers live in, but if they shared it on Facebook it's possible to create these kinds of experiences. 
+For new ad experiences, I'm looking forward to doing more with different kinds of media. As our News Feed design evolves to show richer kinds of stories, that opens up new opportunities to offer different kinds of ads as well. Aside from ads, I do want to temper near-term expectations a little bit on revenue items coming from other areas, like Gifts or Graph Search. I think these can be big opportunities for us long term, but for the foreseeable future, the most important thing for us is to continue building out great consumer experiences around these products. We're going to invest in these, but for the next year at least, our work around ads will have by far the biggest impact on our business. 
+Now, before I hand it off to Sheryl, there's one more thing I want to discuss. We're at an interesting point in our evolution, where there are lots of areas we need to invest in. We need to build the best mobile experiences, we need to build our platforms, and we need to build a really strong monetization engine. We can easily invest our entire engineering team just in building out the nuts and bolts of these areas today, but we also feel like there's an imperative to start planting seeds for tomorrow's businesses as well. 
+Products like Graph Search, that are in beta today, but will hopefully grow up to be pillars of the Facebook service and businesses, are things that we want to invest in aggressively, and things we feel like it's the right thing for our business over the long term to invest in aggressively. Based on this, we made the decision to continue to grow our headcount quickly in 2013, particularly in Product Development. This will likely cause our expenses to grow at a faster rate than we expect to grow our revenue this year, which means  that  aren't operating to maximize our profit this year, but we're doing what we think will build the best service and business over the long term. 
+Finally, I just want to take a minute to thank everyone who works at Facebook. Last year really was an amazing year for us, on many levels. We connected one billion people, we navigated the transition to becoming a mobile company, and we laid the foundation for some great new products I'm excited to show the world this year. And this is all because we have this unique culture, filled with some of the most talented people in the world, who are still mission-driven, who want to make the world a better place, and who work so hard to make the world that place. Thank you, all. Thanks to everyone who's on this call for taking the time to be with us today. I look forward to be able to report on all the progress we will make next quarter.  
+And now I'll hand the podium over to Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark. So our ad business continued its positive trajectory in the fourth quarter. Total fourth-quarter revenue was $1.585 billion, with $1.329 billion coming from ads. This represents a 41% increase for advertising revenue. Ad revenue from News Feed increased across both desktop and mobile, and in Q4, approximately 23% of our ad revenue came from mobile, up from approximately 14% in Q3. 
+Our focus in the fourth quarter was to continue improving and scaling the products we launched in 2012. We know that our advertising products are delivering results for marketers, and one of the best indicators of this came over the holiday season, where more businesses, from big brands to small retailers, used us as a core part of their holiday outreach. Perhaps the biggest highlight in the fourth quarter was the increasing importance of mobile, not just to Facebook but also to our clients. Marketers are realizing more and more that Facebook is one of the best places to reach their customers on mobile, because of our unique ability to reach specific target audiences at scale. Another highlight is the traction our offers and Promoted Post products, which are really easy to use, have given us at local businesses. 
+As I described last quarter, our strategies focus on three priorities. One, building products and tools that create value for every type of marketer. Two,  proving that value to marketers.  And three, taking advantage of the unique opportunity we have in mobile. Starting with the first. We build products that create value for every type of marketer. We continue our focus on four key customer segments; brand marketers, direct marketers, local businesses, and developers. For brand marketers, we combine access to the largest community of real people in the world, with some of the industry's best targeting capabilities. We now work with every one of the Ad Age Global 100 Advertisers and overall revenue from these clients is growing through consistently with our ad revenue in 2012, which means it significantly out paced the estimates for our overall ad spend from the industry. 
+In the fourth quarter, we launched a new way for advertisers to buy guaranteed ad impressions, with the goal of helping them reach massive audiences on mobile. Wal-Mart used this target block over the important Thanksgiving weekend to deliver 50 million mobile ads to their existing and potential customers. We think this is a really important step in the evolution of mobile advertising, as these numbers rival the appeal of broader web and TV campaigns. Increasingly, companies use Facebook as the exclusive channel to launch new products. To share one example, Michael Kors used Facebook to launch a line of new sneakers. Many of the sneakers sold out online and in stores, and they achieved a 16 point increase in awareness of the sneaker among the 36 million people that the campaign reached on Facebook. That's the equivalent of 5.8 million new people in the brand's target audience, who are now aware of the new line of shoes. 
+For direct marketers, the products we launched in the third quarter continued to gain traction in Q4 as well. Since we launched our office products at the end of September, we have seen stronger advertiser adoption and user engagement, with nearly 42 million unique users claiming an offer. Cost per redemption compare favorably to those from e-mail, newspaper, paid search and display media, based on data from the Direct marketing Association. Discounts and promotions are often an important tactic for direct marketers and we think our Offers product is well-placed to compete in these media budgets. 
+As Mark said, one of the products we're most excited about is Custom Audiences, which lets marketers show their ads to exactly the right people, by coupling our rich targeting capabilities with their own customer data, or data from a third party. A large retailer, for example, can send one set of ads to customers who typically buy sporting goods, and a different set of ads to those who would purchase TV products. This results in some of the best targeting available on or off line today. 
+To share one example, [Jax Rags], an online shopping site for men, used Custom Audiences to target specific segments of its customer database, and target them with ads for products that the Company knew were most relevant to them, such as sneakers. As a result, the Company achieved a 30% lower cost per acquisition than other platforms, and saw a 6-times return on advertising spend. It's important to understand that Custom Audiences is not a separate standalone ad product, but rather a targeting capability that can be used with many of our ad products to drive greater accuracy and efficiency. For example, when Custom Audiences is used with Offers, marketers can customize discounts for exactly the right kind of customer. 
+The Facebook exchange or FBX allows businesses to bid on specific ad impressions in realtime, and it continues to gain momentum and drive solid results for advertisers. Despite only becoming available to all marketers in September, by December, FBX served nearly one billion impressions daily, and supported over 1,300 advertisers each day. Large and small advertisers alike are seeing higher click-through rates, lower costs for conversion and strong incremental reaches in FBX. 
+Revenue from local businesses was particularly strong in the fourth quarter. We're pleased that the number of local business pages that advertised and Facebook nearly doubled since the beginning of 2012. This is due in no small part to our Promoted Post product, which makes it easier for businesses to create and purchase ads directly from their Facebook page. Almost 500,000 pages have used Promoted Posts. About 30% of these are new advertisers to Facebook, and more than 70% have become repeat customers. 
+Finally, for developers, we continue to gain traction with our new mobile App install ads. Since their launch in October, they are already being used by 20% of the Top 100 grossing iOS Apps to accelerate growth. According to research conducted by comScore in December, Facebook is the top driver of awareness of new mobile App downloads, and among people who learn about new Apps on Facebook, 48% click directly from the Facebook App to download new mobile Apps. 
+Cie Games used this product to drive installs of its new game, Car Town 2. As a result, it broke into the Top 10 games list on iOS in many countries, while achieving a 40% lower cost per installation compared to their other advertising. In addition to games, we believe this will be a very useful product to help companies and industries like retail, travel and financial services shift their businesses to mobile. 
+Next, I want to focus on our commitment to proving value -- proving Facebook value to marketers. We designed all of our products to deliver a strong return on investment. Given that we are still a relatively new marketing platform, proving that our ads are effective remains an important and ongoing priority for us. We work with research companies like Nielsen, Aggregate Knowledge and Datalogix, to demonstrate how our ads drive sales and help inform our product development. For example, research from Aggregate Knowledge shows that Facebook is an increasingly powerful tool to help marketers reach more people and drive sales. 
+In a study of fourth-quarter marketing campaigns, they found that media plans that included Facebook reached people who would not have seen the campaigns otherwise. In fact, 45% of those reached were reached exclusively through Facebook. The study also found that Facebook had a 68% lower cost per acquisition, and drove 24% more new sales than other online channels. We also worked with clients directly to integrate with their own measurement systems, so they can better understand the ROI Facebook delivers. For example, we built a deep relationship with PepsiCo, where we worked with its Lays brand to drive significant sales ahead of plan, and a 5X return on ad spend, for their Do Us a Flavor campaign on Facebook. In the fourth quarter, we also made conversion tracking available in beta. Conversion tracking allows marketers of all sizes to more easily measure the impact of their Facebook advertising, whether the Facebook ad is the first ad or the last ad the person sees before taking an action. 
+Finally, I want to discuss how we are continuing to take advantage of the significant opportunity we have in mobile. As mentioned before, approximately 23% of our advertising revenue now comes from mobile. In addition, 65% of our advertisers are now using ads in News Feed, which run on both desktop and mobile, up from 50% at the end of the third quarter. Marketers are recognizing that our News Feed is the most efficient and effective place to reach their customers, due in large part to the fact that ads in News Feed see a higher click-through rate and ultimately a lower cost for conversion than ads on the right hand side of our site. By working with Datalogix, we have shown that ads in News Feed also drives more than 8 times the incremental off line sales than ads on the right hand side. Clients also recognize that, because our users share their real identities on Facebook, and because they are logged in when they use Facebook on mobile, we have a unique ability to serve advertising that people find relevant. This is an important competitive advantage for us, relative to other mobile platforms, and one we think we are very unique in. 
+Overall, we continue to make real progress advancing our advertising strategy. Our revenue and key metrics are growing nicely, and as we look ahead to 2013, we're very confident in the direction of our ad business. Over one billion people are on Facebook, and we are enabling businesses to engage with them directly wherever they are. Our massive scale, accurate targeting, strength in mobile, and new advertising products are driving measurable results for all types of businesses, and transforming the way people and businesses connect. We look forward to making even more progress in these areas in the year ahead. 
+Now, I'll hand it over to David. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. We're pleased with the progress we have made in Q4 against our key financial priorities, growing revenue, investing aggressively  in areas critical to our future performance, and positioning the Company to maximize long-term financial returns. We ended the year with 1.06 billion people using Facebook, up 25% from a year ago. In December, 618 million people accessed Facebook each day on average, up 28% from last year, and we grew monthly and daily users across all geographic regions. Mobile continues to drive our growth. 680 million people accessed Facebook from Mobile Devices in December, up 57% versus last year, and the numbers I just mentioned do not include Instagram, which continues to grow at an impressive rate. We ended 2012 with strong engagement across our products, and this engagement remains a foundation for everything we're trying to build. 
+Turning to revenue, in Q4, revenue was up 40% year-over-year, or 42% when adjusted for constant exchange rates. Q4 year-over-year growth would have been 34%, if adjusted to exclude the additional month of Payments transactions we recognized as planned. Ad revenue in Q4 was up 41% or 43%, when adjusted for constant exchange rates. Year-over-year advertising growth in Q4 was the strongest of any quarter in 2012, and we view this as a validation of our recent investments in mobile News Feed ads, growing our advertiser base, and launching new ad products. 
+In the fourth quarter, ad impressions were up 46%, and average price per ad was down 4% compared to last year. These trends were driven by significantly faster impression growth in developing markets such as Asia and Latin America, which have relatively lower pricing and thereby brought down our average price overall. The faster impression growth in developing markets in Q4 was significantly affected by product changes, primarily our decision to lower the market reserve price, or the floor price we accept in our auction, which increased the number of ads shown in these markets. We continue to see positive trends in price per ad in key developed markets, including an 18% increase in average price in the US and Canada in Q4. 
+Payments and other revenue was $256 million in Q4. As planned, in Q4, we recognized revenue from four months of payments transactions, for accounting reasons detailed in our last 10-Q. Adjusting for the extra month, Payments' revenues from games was essentially flat with the fourth quarter of 2011. This past quarter, Payments and other revenue also included around $5 million from sources outside of games, primarily user-Promoted Posts, and to a lesser extent, from our new Gifts product. 
+Shifting now to expenses. In Q4, our total GAAP expenses were $1.06 billion. Excluding the impact of stock compensation, total expenses increased 67% to $849 million, driven primarily by headcount and infrastructure. We ended 2012 with just over 4,600 employees, a 44% increase from last year, driven by hiring in our technical groups. We were recently ranked the number one place to work by Glass Door, which we view as a testament to how strong our culture remains, through this period of significant headcount growth. 
+In Q4, our GAAP operating income was $523 million. Excluding stock comp, our non-GAAP operating income was $736 million, representing a 46% operating margin. Our GAAP tax rate for Q4 was 87%, and our non-GAAP tax rate was 41%. For 2013, we expect our non-GAAP tax rate to be a few percentage points higher than the rate in Q4. Additionally, we ended the year with approximately $5.8 billion in NOL tax loss carryforwards, created by stock compensation. GAAP net income and EPS for the fourth quarter was $64 million or $0.03 per share, non-GAAP net income and EPS was $426 million or $0.17 per share, compared to $0.15 in Q4 last year. We ended Q4 with $9.6 billion in cash and investments, giving us great flexibility and risk protection. 
+Looking forward now, we believe we've built a solid foundation for continued growth in 2013 and beyond. In our ads business, we believe we have good momentum and plan to continue investing to grow advertiser demand and improve the quality, engagement and value of our ads, particularly in News Feed. In terms of 2013 expectations for Payments, our games ecosystem continues to show healthy signs of diversification, with new kinds of games growing engagement and monetization in Q4. However, we continue to face an offsetting headwind from declining desktop usage in developed markets, since our games payments revenue is essentially all from desktop computers. In terms of non-games payments revenue, while we remain excited about the long-term potential of commerce on Facebook, current revenue from user-Promoted Posts and Gifts is very small, and we expect 2013 contributions from these initiatives to remain very small, given current run rates. 
+In terms of infrastructure, we expect CapEx spend in 2013 will be in the neighborhood of $1.8 billion, as we continue to invest in servers, new data centers, and network infrastructure to enable us to bring Facebook speedily and reliably to everyone around the world. We're pleased that planned 2013 CapEx spend is up relatively modestly compared to 2012, which came in under forecast at a shade under $1.6 billion, as our investments in software and hardware efficiency are paying off nicely. As Mark noted, 2013 will be a year of significant investment in areas we believe are critical to drive long-term engagement and monetization, and we plan to continue to hire aggressively to accelerate product development, and deliver new products for users and advertisers. 
+As a result of our hiring and investment plans, we expect that our total expenses, excluding stock comp, will likely grow by somewhere around 50% in 2013, though actual growth will depend on hiring and project decisions we make through the year. We believe this level of near-term investment is the right strategic decision, to enable long-term value creation. We're excited about the potential returns from investing in our product. We continue to feel there's operating leverage inherent in our business, and we're committed to building a highly-profitable cash-generating business over the long term. 
+In summary, we believe we're entering 2013 in a strong position. We're working in very large markets that offer us great opportunities for growth. We have uniquely-valuable assets in terms of the size, identity, and engagement of the people who use Facebook, and we have a fantastic group of employees who have big aspirations to build on our financial performance from 2012. 
+Now, let's open the call for questions.  
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions) 
+Your first question comes from the line of Douglas Anmuth from JPMorgan. Your line is open. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Just wanted to ask two things. First, can you help us understand the mobile trajectory through Q4, just given the commentary you gave about exiting Q3 at a $270 million run rate, and doing more than $300 million in the fourth quarter? Did you open up more additional inventory in Q4 from the late Q3 levels, and did you see any notable change in pricing? And then can you also just comment on how you feel about the volume of ad load in the News Feed right now on both desktop and mobile, and perhaps in terms of baseball innings, where you think you are in terms of penetration? Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+    I'll take the first half. We think the most important thing is we think mobile can be a huge opportunity for us and we're really pleased with the progress we made in the fourth quarter. If you compare the averages Q3 versus Q4, well if you compare the overall revenue, our mobile revenue doubled from Q3 to Q4, and we continue to make progress also, in terms of the quality and the relevance of the mobile ads that we show. I think the most important thing here is we're still really early. A couple quarters ago, mobile revenues were 0% of our ads revenue, and now we're up to 23% and believe there's a lot more we can do, and a lot of growth ahead of us. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [4]
+--------------------------------------------------------------------------------
+
+    I'll speak to the quality piece. So one of the things that we measure for News Feed quality is the amount of feedback that we get, so likes and comments and things like that, and just to give a sense of the magnitude of these things, the ranking improvements and things that we did over the course of last year improved the amount of feedback in News Feed, on the order of about 50%. I don't know if it was quite exactly 50%, but it was on that order. And we measure very closely, when we take into account advertising and spend, in order to rank ads into News Feed, we're inherently not showing what would have organically shown up in that slot, so we want to make sure we're not decreasing quality by a big amount. So what we found was that when we did the tests to take out the ads, we were -- inserting the ads had about a 2% reduction in the amount of likes and comments. So over the period of last year, we had on the order of a 50% increase and a very marginal offset of 2% for putting ads in, which just makes us feel really confident that we're continuing to very strongly net improve the experience of Feed. And that's one of the things that I mentioned in my script before. We weren't that, we're confident we could get this to a good place over time in terms of being a good experience, but the amount of the improvements we've done have just dwarfed the quantitative feedback hit that anything that we've seen on the ads is very promising to us, in terms of what we're going to be able to do, going forward. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Ben Schachter with Macquarie. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Ben Schachter ,  Macquarie Research Equities - Analyst    [6]
+--------------------------------------------------------------------------------
+
+    Mark, in the comments you said you're looking at different types of media for ads. I was wondering at a high level, if you could talk about how that would potentially change the overall Facebook experience, and if you could give real examples for how these different types of ad units would come into play. And also, just separately, engagement. I was wondering if you could give us any update on how you're viewing engagement, or any change to how you measure it, and any views on how that's going through the quarter? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [7]
+--------------------------------------------------------------------------------
+
+    Sure. So one of the product design principles that we've always had is, we want the organic content to be of the same basic types of formats as paid content, right? So historically, advertisers want really rich things like big pictures or videos, and we haven't provided those things historically, but one of the things we've done in the last year, is you've seen the organic News Feed product that consumers use, moving towards bigger pictures, richer media, and I think you'll continue to see it go in that direction. And I think a lot of the success of products like Instagram is because of that, it's very immersive,  even on a small screen, it's a wonderful photo product. And when you have those form factors for the content, that gives you the ability to offer those form factors for advertising as well, so I think you see the trend there in terms of where it's going, and that's naturally going to make it so we can deliver much more engaging advertising experiences than we were traditionally able to do when we didn't have those types of content in the system. David can speak to some of the stats you were asking about. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [8]
+--------------------------------------------------------------------------------
+
+    In terms of engagement, overall, everything continues to go very well. We passed a billion users, and in the fourth quarter, 59% of them used Facebook on an average day in December, which is up a couple percent from where we started the year, so just pretty remarkable how, as we continue to grow the user base, that number continues to grow and really speaks to the value of the service and the importance of mobile, which is really driving that. There's another metric we track which measures the number of people who have come to the site, in at least six of the last seven days, so it shows the audience for whom Facebook is a daily experience, and that, we ended the year with record highs on that metric as well. So everything continues to go well, and our job is to make Facebook a better, more useful product so we can continue to drive new kinds of engagement in the future. 
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Heather Bellini with Goldman Sachs. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [10]
+--------------------------------------------------------------------------------
+
+    I had a question for  Sheryl and then a question for Mark. Sheryl, I was wondering if you could share with us what you've seen from FBX. I know it's still early, but what milestones you're looking to hit with this business in 2013? And then, Mark, just wondering where you think we are in terms of the social ad revolution, and when you look out over the next 12 months, what do you think could surprise you the most in terms of revenue opportunities that are ahead of you when you look out for 2013? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [11]
+--------------------------------------------------------------------------------
+
+    So on FBX, as everyone knows, it's realtime bidding for specific instructions, we're very encouraged by what we see, both in terms of marketing demand and ad performance. And the numbers, as I said in my opening remarks, are getting higher. We see good data from our clients and customers that it's driving more conversions, we have data from one of our clients, Triggit, that FBX drives 36% more conversions than we target anywhere else, Shutterfly had a 4X higher return on ad spend than other platforms, and we have a bunch of other examples like that. I would say the importance of FBX is not just the product itself, but really what it represents, and the other opportunities around making the ads more targeted. So FBX is one way of making the ads better targeted and more useful to users, which makes a higher return from advertisers. Custom Audiences is another, but I think what you're seeing from us is a really big push to make our ads higher quality, better for users, higher return for advertisers, and FBX is just one of many ways we're working on doing that. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [12]
+--------------------------------------------------------------------------------
+
+    Yes, and I'll just add to that a little bit but you mostly covered it. I think we're really early, but what we really expected was to not be able to necessarily show everyone an ad every day because we weren't sure that we had the quality up front, and that was some of the engagement metrics I was talking about before. So we've been positively surprised that the quality has been naturally high, and there's been basically no engagement hit at all that's very meaningful. So what that means is that now, previously we thought we were going to have to spend 6 to 12 months just tuning in order to be able to get it to a quality level to incrementally rollout ads, whereas now we've had them rolled out. Now we can go straight into doing the same types of things to improve targeting, and improve the quality of the ad format, which obviously, when they're fully deployed has much more leverage to those changes than if we had to wait until we hit different quality thresholds to roll it out more, so I think we're pretty early. It's not that it's going in a completely different direction, it's mostly the two things that we talked about so far, good targeting and good ad formats, and there's just a lot of room to grow in both. 
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Carlos Kirjner from Sanford Bernstein. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Carlos Kirjner ,  Sanford C. Bernstein & Co. - Analyst    [14]
+--------------------------------------------------------------------------------
+
+    Thank you. I have two questions. Can you help us understand why ad ARPU in the US grew 27%, while it grew only 7% in Europe? Is Facebook that sensitive to macro? And on the platform, can you help me understand what metric you track to evaluate the progress and adoption of the Facebook platform outside Facebook.com? Is that the number of pages or objects tagged with Open Graph, and are you in a race with Google's Knowledge Graph to be the basis of the semantic web, or can both co-exist? Thank you. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [15]
+--------------------------------------------------------------------------------
+
+    Carlos, I'll take the first one. So I think that when you compare the disclosure we make about the US and Canada to Europe, one of the notable differences is in Europe, as we continue to penetrate that market, we're getting into some of the lower monetizing countries in Europe, so there's sort of an inter-Europe lower price dynamic going on where the ads, the places that are growing more rapidly are starting at a lower price point and bringing down the average, either on a CPM basis or an ARPU basis, so I do think there are macro things that matter in Europe as well, but that's the bigger point. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [16]
+--------------------------------------------------------------------------------
+
+    Yes, and in terms of the point on structured data there's Open Graph in order to help developers and people map out all of the different connections between things outside of Facebook, but one of the things that we talked about when we rolled out Graph Search is there are more than a trillion connections between people and things in Facebook today, and that's the basis for Graph Search. I think a lot of the goal of having the utility like Graph Search is also to give people a reason to map out more of these structured connections themselves. You mentioned the Google comparison, I think we're just coming from a completely different place. Our whole product is people and structured connections to other people, and content, and things that they like, whereas traditional web search is the exact opposite, it's completely unstructured. Google and others may be trying to put in some of the structured foundation, but we just have years of having built that up and I think that we're just in a completely different place on that.  
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Youssef Squali from Cantor Fitzgerald. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [18]
+--------------------------------------------------------------------------------
+
+    Two questions, please. First, starting with David. First, thank you for helping quantify the increase in operating expenses next year. I was wondering if you can help us with the trajectory of that spend throughout the year, how long do you think this investment cycle is going to be? Is it mostly 2013, or is this a multi-year cycle? Then maybe, Mark, maybe can you talk just about the video opportunity for Facebook, video in the News Feed that is. Where are you in that process, will that be something that organically you can do or would that require you to maybe acquire? Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+    So Youssef, we think we've got some really big and important opportunities right in front of us now, and that's driving our decision-making around the level of investment we're making, which is important to us in 2013. That will moderate over time but I wouldn't want to make a firm commitment to exactly what it's going to look like in the future, because particularly the R&D part of it is going to depend on what the opportunities are, and how excited we are about the returns we can get from them. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [20]
+--------------------------------------------------------------------------------
+
+    Video ads? 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR     [21]
+--------------------------------------------------------------------------------
+
+    Not just ads though. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [22]
+--------------------------------------------------------------------------------
+
+    Yes, I mean I think I touched on some of this earlier in terms of making it that News Feed is richer just enables more opportunity for this, and there are already the ability for pages to post videos in different content into the systems. We actually have a very large volume of this. Another thing we have the ability to support is people posting links on other services, so for video advertising, it's not necessarily critical that we host the video. We want to be the distribution platform for a lot of the stuff, but I think there's definitely an opportunity and over time, we'll have more to talk about. 
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Scott Devitt from Morgan Stanley. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [24]
+--------------------------------------------------------------------------------
+
+    I had a different question on that regional ARPU slide, which is I guess wondering the pace or maybe where we are now from a Sponsored Story rollout, and relative ad load in the US relative to Europe and Asia? And then secondly, it looks like the absolute additions of mobile users and mobile-only users was quite strong in the quarter. It was up 25% in terms of mobile ads, and 30% in terms of mobile-only ads versus the third quarter, and Mark mentioned a few areas. I was just wondering if there's any one or two things that stand out in terms of driving that acceleration? Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [25]
+--------------------------------------------------------------------------------
+
+    Okay, in terms of the ARPU by geography, I don't know that I have a lot more color to offer. In terms of the mobile News Feed rollout, as you would expect with a new advertising product, really in the end of the second quarter and the third quarter it took off first in the US, and Europe followed and I think the growth was much more notable for that product area, in Asia and the rest of world in the fourth quarter, as compared to the third, and that's just sort of the natural progression of how roll-outs tend to go for us. In terms of your second question about the increase in mobile users and mobile-only users, which we agree is really important and impressive, I don't know that we would point to any one thing that drove that, just as much as continued penetration of smartphones and around the world in many markets, and our ability to make our products better, so that people are more inclined to use them. 
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Mark Mahaney from RBC. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [27]
+--------------------------------------------------------------------------------
+
+    Great, thanks. I know it's very early stages, the rollout of the Graph Search, but any early signs of the impact that has had on engagement? And then, Mark, you mentioned just early on about the new products, maybe some mobile-specific products and features, any hint as to what those could be? Thanks a lot. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [28]
+--------------------------------------------------------------------------------
+
+    Unfortunately, I don't think there's that much that I can share with you on either of those. On Graph Search, it's still early. This is one of the products that I'm the most excited about that we've built. It is a completely new pillar of our ecosystem, and I think it's going to be an important utility that people use. Right now, the whole strategy around this is, it's a beta product, and we are primarily rolling it out in order to get more data, so that we can incorporate the data of how people use it to make ranking better before we do a full rollout. So right now it's rolled out to the order of tens or hundreds of thousands of people, not extremely widely, and I mean so we have data, but I don't think anything that is really relevant to share beyond that. 
+In terms of the new experiences, I think the big theme that we're just going to push on mobile is, people keep on asking if we're going to build a phone, and we aren't going to build a phone, because it's not the right strategy for us to build one integrated system, where so, let's say we sold 10 million units, that would be 1% of users. Who cares for us? But the big thing for us is we have a billion people using our products and we need to make Facebook really good across all of the devices that they use, and we're going to keep on pushing to get more integrated with the system. When Facebook is a product that people are spending almost 20% of their time or more on phones using, it really should be, and I think people want it to be very integrated into all of the different devices that they have, and that's what we're going to focus on. So rather than just building an App, that's a version of the functionality that you have today, making it so that we can go deeper and deeper, I think will be a big focus for us. 
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Ross Sandler from Deutsche Bank. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [30]
+--------------------------------------------------------------------------------
+
+    Great, just one question for David, on the right hand rail revenue. So based on our math, the overall News Feed business may have been around $500 million-ish in the fourth quarter, which would imply about a 10% decline for right hand rail revenue. Does that make sense directionally? And if so, can you just talk about how you think right hand rail is likely to trend in 2013 and can the new ad tools like Custom Audiences help offset the desktop traffic decline that you're seeing in markets like US and Europe? Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [31]
+--------------------------------------------------------------------------------
+
+    Yes, thanks for your question, Ross. For us, the most important metric is that the overall ad revenue increased 41%. I think that the way we think about things, it's hard to really separate out the mobile and desktop or Feed in right hand column as separate and distinct businesses, because for most of our ads, marketers will tell us what ad they want to show and to what audience they want us to show the ad, and we choose where it goes. It's not true for 100% of the ads, but it's certainly true in the majority case. So our job is to find the place to put the ads that will create the most value for the user and the marketer. So the overall ad revenue number really provides a sort of just a better sense of how much advertising demand there is in the system that we're able to service, and over time, we'll continue to experiment with how to optimize that. In general, you can see from the user numbers that the growth in usage is coming from mobile, particularly in developed markets that desktop usage continues to be flat or declining, so that's obviously the macro trend that will affect what the future of the right hand column revenues are. 
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Neil Doshi with Citi. 
+
+--------------------------------------------------------------------------------
+Neil Doshi,  Citigroup - Analyst    [33]
+--------------------------------------------------------------------------------
+
+    Mark, could you maybe tell us how far along you are in terms of developing tools, and providing more data metrics to large agencies and advertisers? And then, David, in terms of the gaming declines that we're seeing on Facebook desktop, is there an opportunity for Facebook to help monetize or to monetize games that are played on Facebook on the mobile site? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [34]
+--------------------------------------------------------------------------------
+
+    Yes. These are important. Sheryl has more details on this, so I think she should take the first one. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [35]
+--------------------------------------------------------------------------------
+
+    Yes, measurement is really important for us and it's one of the challenges we face. I remember, through the years I've worked on this, when search happened, people weren't able to measure it and then they figured out how to measure search, and more a new thing, and people need to think about measurement differently. One of the most important things we need to do in the market is help educate people that the click is not really the most important metric for us. In fact, now that we've been able to work with companies to look at in-store sales data, we find that of the people who saw a Facebook ad and then purchased a product in the store, 99% of them never clicked on an ad, so reeducating the market, what the metrics are that are right for us. 
+I would say in terms of our measurement capabilities, we're really early. We weren't able to tie into sales data at all until pretty late in 2012. In order to do those studies we have to work very deeply with retail providers and each client. A lot of our big clients have their own departments that do this measurement and we work with them individually, so we're pretty early. We're happy with the progress we've made. We launched conversion measurements in just mid-December, and that's broadly available on the system, but I think we have a lot of opportunity to do a lot more measurement, a lot more rapidly. We're particularly excited about our ability to do this on mobile. With customers who are using their data in a privacy protected way, we can now measure all the way from seeing a Facebook ad in a mobile device through to a purchase in a store, and that's a pretty exciting capability, we think is pretty unique in the market. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+
+    Neil, your second question was about mobile gaming and it's an interesting question as well. So while we're seeing now is really strong growth in adoption of our platform in games on both iOS and Android, and we want Facebook to be the default social infrastructure for mobile games, and feel like we're making progress in that direction, and convincing developers that they will get more users, more engaged users, and better monetizing users, if the users are able to connect with their friends and bring their Facebook identity with them. At this point, we don't have any payments integrations with these mobile games, but our belief is that if we can help game developers to grow users' engagement and monetization, it puts us in an interesting position to consider future financial relationships. And the only other thing I would add is that we really launched or ramped up the mobile App install ads in the fourth quarter, and are already seeing that's a pretty promising way for developers to try and get better distribution for what they've built, including games developers, and that's sort of a nice first step for us in trying to participate in the mobile gaming ecosystem. 
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Brian Nowak with Nomura. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Nomura Securities International, Inc. - Analyst    [38]
+--------------------------------------------------------------------------------
+
+     I have two questions. First one, could you talk at all to some of the engagement trends you're seeing within the demos? Specifically what are you seeing in the younger post college demos? Are their engagement trends per user still rising, or are they starting to show signs of leveling off? And then the second one is, when you look at your biggest categories of branded advertisers and where you're at this point, what do you see as still the biggest near-term opportunities where Facebook and social budget share is still low and pretty underpenetrated relative to your larger categories? Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [39]
+--------------------------------------------------------------------------------
+
+    In terms of engagement, as we said, the overall engagement patterns remain really strong for us. We don't break out engagement metrics by self-reported demographics like age. I think that one thing we can say is that our view is that the overall marketplace is expanding really rapidly here, in terms of just the amount of time people, college-age, post-college are spending, connected, sharing with their friends, et cetera, and we think that's great for Facebook and our long term position, because we're a leader in such a rapidly-expanding market. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [40]
+--------------------------------------------------------------------------------
+
+    And taking the second part we think we have really big opportunities across-the-board with the large brand spenders. If you just look at mobile, what you see, and [Merrymaker] just put out a report on this, mobile gets 1% of ad revenue and 10% of time consumed, so right there, you see a big gap. Our opportunities there are to ramp with the large advertisers, build more deeply into their measurement systems so we can measure, help them use the Custom Audiences and other targeting we offer because right now a lot of our advertisers aren't using that targeting so they are sending more generic ads to our whole system. And that's great, we have the scale to do that, but a better ad experience will take advantage of the targeting we offer. 
+We think in mobile, we think we're particularly really uniquely positioned. It's not just that we have unprecedented scale and huge engagement, that Mark talked about in his opening statement. We have a natural ad format, one of the big successes of 2012 was putting ads into News Feed and having them work, both for our clients on the marketing side, but also for our users, the engagement Mark talked about. On mobile, because we have real identity and people are logged in, we have a really unique ability to serve relevant ads, and so I think particularly in the mobile area, we are positioned in a very strong way, compared to anyone else. 
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Justin Post with Bank of America Merrill Lynch. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [42]
+--------------------------------------------------------------------------------
+
+    I have a couple questions. It definitely seems the mobile ramp slowed as the quarter progressed. Obviously, good numbers versus last quarter. Did you make an effort to maybe pull back some of the ad loads, or is there still a lot of opportunity to add more inventory in the mobile News Feeds, as we look forward? And then secondly, maybe you could just comment on the health of the Payments business. It looks like the US was up quarter-over-quarter, even if we back out the extra month, so was that some of the other new initiatives, or did the gaming business get a little bit better in Q4? Thank you. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [43]
+--------------------------------------------------------------------------------
+
+    On the mobile side, I think it's just really important to recognize we're very early in this. Of course we're still making changes in terms of what ads we show, how we select them, how many we show to different users, and under different circumstances, so this is still very early in the process of us trying to learn how to optimize that business as we develop it. Our perspective is that we're still we have a lot of opportunity there. In terms of Payments what you said is generally true. Note that this year as opposed to last year, we do have a little bit of revenue from non-game sources as I said, so you've got to  neutralize or back that out of you want to compare games to games year-over-year. But having said that, if you make the year-over-year comparison, we do as I said, we see as I said earlier, we see a nice diversification happening in games, and it's a very interesting business to try and think about projecting going forward because some of the trends are really quite positive, but you have to be mindful of the macro trend, that we're not growing the sort of the essence of this user base in the developed markets right now. 
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Jordan Rohan with Stifel Nicolaus. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [45]
+--------------------------------------------------------------------------------
+
+    Thanks, a couple of questions. Any chance you can clarify more than just the impression volume metrics that you gave on FBX? Importantly, when do you anticipate mobile News Feed will be accessible through that platform? Separately, and given the promise of Gifts and e-commerce, why does it seem to be a business that you characterize as very small in the near term? What are the impediments to future growth so that you can call it big enough to matter or an important part of 2013 revenue mix? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [46]
+--------------------------------------------------------------------------------
+
+    On the first one, on FBX, when it's available, we have nothing to share at this point. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [47]
+--------------------------------------------------------------------------------
+
+    So second question on Gifts. I think that I really can just reiterate what Mark said earlier, which is that the focus for right now is trying to figure out what the right product is. We think Gifts is, if done well can be a very natural and positive part of the Facebook experience, so for example, when you're wishing someone a Happy Birthday the ability to send a gift along with that and just figuring out how the product needs to work, what the interfaces are, what the selection of products is, how the payment process works, all of that stuff is what we're going to have to optimize, to make the product grow as you're asking. And we're going to try to do that. That will be something we work on in 2013. 
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+    Your next question comes from the line of Brian Pitz with Jefferies. Your line is now open. 
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Co. - Analyst    [49]
+--------------------------------------------------------------------------------
+
+    Two questions. Mark, could you give us some examples of the kind of mobile first experiences you're working on that you mentioned at the beginning of the call? And also any comments on how integration with iOS 6 is benefiting your overall mobile strategy? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [50]
+--------------------------------------------------------------------------------
+
+    I don't really think I can say anymore about things that we're developing, then directionally what I've already said. On iOS, I mean there are two really big platforms out there. Sorry, there are three. Android, iOS, and mobile web, and where we basically are, the strategy through each of those are a bit different. So mobile web, there's a limit to how the depths of how deep you can get into the system but we can go as deep as anyone else, so we feel pretty good about that, and we think our mobile web experience is really good, and has on the same order of magnitude of users as our App, so that's actually really good. 
+For Android, and then I'll get to iOS last, Android is a very dynamic and open platform, as long as Google keeps it that way. And even though our relationship with Google isn't one where the companies really talk, we are able to do a bunch of things, because they have an open platform that lets us get fairly deep into the system and build some really great experiences, which I think will be, which we're excited on about and we're working on. An example that we have already that I can talk about is for Messenger. On Android, you build an messaging app that can actually do SMS on the phone. You can't do that on iOS, because on iOS, iOS controls SMS on the phone. But on Android you can build something that does that, and our Messenger App does that. So that's a good example on what you can do on Android. 
+On iOS, because it's a more locked down system, the way that you can do deeper integration is by working directly with Apple. They've been a great partner for us so far, and we're really excited about doing more there, and people enjoy the integration that we have with them today, to be able to share photos and share web pages from anywhere across the experience, when you're on your iPhone or iPad, and we're really happy with it. So I don't think there's any meaningful numbers to share there, but qualitatively it's a really good experience and I'm really happy with the partnership we have with them. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR     [51]
+--------------------------------------------------------------------------------
+
+    Operator, we have time for one last question. 
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+    So your last question comes from the line of Ken Sena with Evercore Partners. 
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore Partners - Analyst    [53]
+--------------------------------------------------------------------------------
+
+    Thank you. Can you maybe give some color behind your decision to lower the price, the pricing floor, on the Marketplace? And also can I get just a clarification on FBX? Are you doing about a billion impressions per day? And then also within the 22% mobile number, is there any FBX within that? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [54]
+--------------------------------------------------------------------------------
+
+    On the last you're correct, we're doing a billion impressions per day and FBX is not available now on mobile. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [55]
+--------------------------------------------------------------------------------
+
+    On the reserve price, we're always iterating and experimenting to optimize what we show for the user experience, and for our business performance. The price floor has been something we've had in place. It's way below the average prices, and the purpose of it has been to both support higher prices and omit poor quality ads. Over time, we've developed other tools to help us achieve those objectives, so the floor has become less important for us. And interestingly there's non-intuitive benefits also that we've been realizing, which is that small businesses as you can imagine, often create some of the highest quality and most highly-engaging ads on Facebook. It makes sense because your local coffee shop feels like part of the community you live in and seeing an ad from them fits naturally into the experience that you want on Facebook, and small businesses are often the lowest bidders in our auction. So by lowering the floor, if we can bring in more small businesses into our network, get them comfortable advertising with us, and hopefully ramp them up over time, that should be a good thing. As I said, for the changes we happen to make this quarter, the impact was really primarily in international markets, because the price floor really wasn't coming into play in most of the developed markets anyway. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR     [56]
+--------------------------------------------------------------------------------
+
+    That's it. Thank you for joining us today. We really appreciate your time, and we look forward to speaking with you again next quarter. 
+
+--------------------------------------------------------------------------------
+Operator    [57]
+--------------------------------------------------------------------------------
+
+    Ladies and gentlemen, this concludes today's conference call. You may now disconnect. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2013-Jul-24-FB.OQ-140049061003-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2013 Facebook Earnings Conference Call
+07/24/2013 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * David Ebersman
+   Facebook, Inc. - CFO
+ * Deborah Crawford
+   Facebook, Inc. - Director of IR
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Justin Post
+   Merrill Lynch - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald Securities - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Briain Pitz
+   Jefferies & Co. - Analyst
+ * Laura Martin
+   Needham & Company - Analyst
+ * Ben Schachter
+   Macquarie Research Equities - Analyst
+ * Ken Sena
+   Evercore Partners - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Jordan Rohan
+   Stifel Nicolaus - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Anthony DiClelmente
+   Barclays Capital - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Rory Maher
+   Hillside Partners - Analyst
+ * Douglas Anmuth
+   JPMorgan Securities - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Jay and I will be your conference operator today. At this time I would like to welcome everyone to the Facebook second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. 
+(Operator Instructions) 
+Thank you very much. Ms. Deborah Crawford, Facebook's Director of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's second-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO, Sheryl Sandberg, COO, and David Ebersman, CFO. 
+Before we get started, I would like to take this opportunity to remind you that during the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the Company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release, and are more fully detailed under the caption Risk Factors in our quarterly report on Form 10-Q filed with the SEC on May 2, 2013. In addition, please note that the date of this conference call is July 24, 2013, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events. 
+During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. This call is being broadcast on the Internet, and is available on the Investor Relations section of the Facebook website at investor.fb.com. A rebroadcast of the call will be available after 6.00 PM Pacific time today. The earnings press release and an accompanying investor presentation are also available on our web site. I'd also like to mention that we recently launched our Facebook IR page at facebook.com/facebookinvestorrelations. While we don't currently intend to use the page as an exclusive vehicle for corporate disclosure, the IR page is designed as a curated resource for anyone interested in getting better acquainted with the Company. 
+Now I'd like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah. And thanks, everyone, for joining us today. We made some really good progress this quarter with the growth and engagement of our community, the release of new products like Instagram video, and advertising growth, especially on mobile. When it comes to mobile, I'm very pleased with the results. We now have more daily actives on mobile than on desktop. Nearly 0.5 billion people use Facebook on their phones every day. And soon we'll have more revenue on mobile than on desktop, as well. This progress is the result of investments we started making more than a year ago and in some cases years ago. I appreciate the patience and trust of our team, our community, and our investors have given us. And we're looking forward to seeing our other long-term investments achieve great results, as well. 
+One of the questions I frequently get asked are what are the big changes we want to make in the world over the next five or ten years. Now that we've connected 1 billion people, what are the next big ambitions? There are three main goals I'd like us to achieve. Connect everyone, understand the world, and help build the knowledge economy. Connecting everyone is about growing our community to reach the next 5 billion people. Our mission is to give all people the power to share and make the world more open and connected. And that means everyone, not just people in developed countries. Most people in the world don't yet have smartphones or data access, but we know they want to be connected. We're focused on making this possible while also strengthening engagement within our existing community. 
+Understanding the world is about helping people share not just day-to-day updates, like text messages and photos, but also building up long-term knowledge about the world, like what people are interested in, which restaurants are good, which hotels your friends have stayed at, and so on. We should be able to build intelligent services that help you use your network to answer lots of questions for you that no other service can. And we want to lead our community to create a graph of all that understanding to power this intelligence. 
+Building the knowledge economy is about helping people create companies and jobs using information. The way I see our advertising products, we aren't just building a strong monetization engine for our Company. We're creating tools to enable new growth to jobs and businesses through our platform, and to support a larger economic shift in the world based on knowledge and information. I'm proud of the work we're doing here to help developers create apps to help local businesses find customers, to help great brands tell their stories. And this is a core part of our mission. 
+Now let's talk about the progress we've made in each of these areas, starting with connecting everyone. The Facebook community has grown steadily this quarter, adding 45 million new monthly actives. And the number of monthly actives is steady or increasing across demographics and countries. One thing that's surprised me as we've grown is I've always expected our ratio of daily actives to monthly actives would decrease as later technology adaptors used our service. The opposite has actually been true. And now 61% of monthly actives are daily actives. And that ratio has just continued to include. In our most penetrated markets like the US, more than 70% of our monthly actives use our services daily. And, now, more than 700 million people worldwide use Facebook daily as of today. 
+As more social services get created, one question is how it affects the sharing and time that people spend on Facebook. You could naively assume that more new services means people spend less time on Facebook, but that isn't happening. In fact, people on average are spending more time on Facebook than ever before. It's possible that, because the market is expanding due to mobile, even as time spent per person increases on Facebook, maybe our market share could decrease. But that doesn't seem to be happening either. According to third-party metrics like ComScore and Nielsen, Facebook's share of time spent in the US is either steady or increasing. And we believe it's either steady or increasing everywhere else, as well. This makes sense to me because Facebook helps you maintain your real identity in relationships, which are universal needs. We believe that if we execute well, we have a good shot at growing the amount of time that people spend using Facebook, while also maintaining or increasing our overall share of time spent. 
+One specific demographic I want to address is US teens. There's been a lot of speculation reporting that fewer teens are using Facebook. But based on our data that just isn't true. It's difficult to measure this perfectly, since some young people lie about their age. But, based on the best date we have, we believe that we have close to fully penetrated in the US teen demographic for a while. And the number of teens using Facebook on both a daily and monthly basis has been steady over the past year and a half. Teens also remain really highly engaged using Facebook. It's also worth mentioning that these stats are for Facebook only. Instagram is growing quickly, as well. So, if you combine the two services together, we believe our engagement and share of time spent are likely  growing quickly throughout the world. 
+Next, let's talk about building more useful services on the path to understanding the world. The newest product I'm most excited about from our last quarter is Instagram video. Adding video fits really naturally with the Instagram mission of capturing and sharing the world's moments. And it's off to a great start. People are already uploading hours of video to Instagram every minute. I'm really proud of the team, and I think they did a great job with this product. When I first talked to Kevin about this he had a really smart insight. Instagram has always been about helping people capture moments in a way they are proud of. Filters were necessary for photos because when Instagram started most cameras weren't good enough to take high-quality photos. But lack of filters isn't what's holding back videos from being great. It's that they're shaky and feel unprofessional. Kevin realized that if we could deliver a product that helped people produce stable videos that would really change the landscape. And I think it already is. 
+Now, some products like video fit into the flow of what people are doing, and they take off quickly. Others, like Graph Search and Home, are completely new kinds of products, and they're just going to take longer to develop. I think it's the right strategy to have a balance of long-term foundational new products and ones that fit an immediate demand. We're committed to building all of these into market-leading products. 
+Finally, let's talk about building the knowledge economy and what that means for our core business. This quarter has been a strong period for us. A lot of new businesses have signed up to advertise with us. And we now have more than 1 million active advertisers. Our newsfeed ads products are working well for them. One of the things I watch most closely is the quality of our ads and people's sentiment around them. Right now ads, on average, make up about 5% or 1 in 20 stories in newsfeed. We haven't measured a meaningful drop in satisfaction when we ask people about their experience with Facebook. We're comparing that to the result we get when we ask the same question to people using a version of Facebook with no feed ads at all. 
+Now, that said, in recent studies people have told us that they notice the ads more. So we're going to invest more in improving the quality. Our top priority is to expand the number of marketers and overall demand in our system rather than just increasing the number of ads that we show. We believe that this will help us improve the quality of the ads that we show by creating a more competitive auction. And this will create the best experience for people who use our products, the best returns for more marketers, and the best results for us. 
+That's my update for this quarter. We made a lot of progress in the last three months on growing our community engagement, releasing a successful major product, and generating strong financial results. This quarter also marks the end of our first year as a public company. And I think we've created a good foundation for the future. I want to take a moment to thank everyone who works at Facebook, and everyone who's a part of this great community. You are all helping to connect the world and push it forward. I'm grateful to have the chance to work with all of you on this. So, thank you, and thanks to everyone on this call for joining us today. I'm look forward to having more to share next quarter. 
+And now, Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark. Our advertising business gained significant momentum this quarter, growing 61% year over year to $1.6 billion. Our mobile ad revenue grew significantly, as well, and was approximately 41% of total ad revenue, up from about 30% in Q1. This growth was robust across all regions. And each of our four marketing segments increased spending with us this quarter. We believe this is because our ad products are delivering impressive ROI for each of these types of marketers. 
+Direct response marketers, including eCommerce companies, increased their spend significantly. Year-over-year ad revenue from eCommerce companies doubled in the second quarter. Direct response marketers are taking advantage of our high click-through rates and competitive CTCs to grow their businesses. These marketers are typically very measurement-focused. And they quickly increase their budgets as we deliver compelling ROI. 
+Revenue from mobile app install ads also continues to accelerate. The ad market is relatively new but is already large and growing very rapidly. We believe that Facebook is one of the most effective ways for developers to acquire new customers at competitive rates. We're increasing our share and helping to grow this market. 
+Local businesses also grew spend significantly. We surpassed 1 million active advertisers this quarter, more than double the number we had only a year ago. We believe that this rapid growth is being driven by our unique ability to target ads, and the simpler ad products we rolled out in the past year. We're all really excited that we can help local businesses grow around the world. One of my favorite local examples is right in our backyard, Artisan State, a San Francisco business that prints photos books. The owner told us that running newsfeed ads gained them so many customers so quickly that they had to pause their campaigns to let their manufacturing catch up. Nearly 18 million local businesses now have Facebook pages. While we are excited to hit 1 million active advertisers, we know that this is just a small fraction of the local businesses on Facebook. So this remains a large growth opportunity for us. 
+And, finally, brand marketers also continue to grow spend. We have a massive and engaged audience around the world that brands can use to grow awareness and drive scale. Every night 88 to 100 million people are actively using Facebook during prime time TV hours in the United States alone. One recent example is from Reckitt Benckiser, a global CPG company. Their campaign for Lysol targeted moms and drove a 2 times return on ad spend for their brand. Their campaign for Air Wick was even better, driving a 5 extra turn on ad spend. As they have seen these results, they have more than doubled their ad spend with us over the last year. 
+Newsfeed ads are performing very well. In an analysis by Datalogix of 55 ad campaigns on Facebook over the past six months, marketers saw a median return on ad sales of 3 times for campaigns that did not include ad in newsfeed, which is very solid performance. For campaigns that included newsfeed ads, the median return on ad sales was nearly double at 5.9X. During the second quarter we increased the number and type of ads in newsfeeds. At the same time, our click-through rates and cost per click metrics for newsfeed ads remained strong during the quarter, providing a good indicator of healthy and growing advertiser demand, and continued user interest in these ads. 
+Custom Audiences is another key product that continues to gain momentum. This product enables our clients to enhance their ad targeting by marrying their data with ours in a privacy-protective way. In Q2 the number of marketers using Custom Audiences more than doubled relative to Q1. 
+We also continue to innovate around our mobile ad products. In April, we launched ad targeting for future friends. This helps marketers, everyone from multi-nationals to local businesses, reach people in emerging markets who they could not easily reach before. While these ad markets are not especially large today, they'll become increasingly important in the years to come. 
+In summary, we believe we're making strong progress executing our strategy. As I have mentioned in previous quarters, we are investing in mobile, measurement and product innovation. The results we're reporting today demonstrate the early returns on these investments. Looking ahead, we're enthusiastic about the long-term prospects for our business. The time people are spending on mobile devices is increasing dramatically, yet mobile represents just 2% of ad spend globally and 3% in the US. We have a massive and growing mobile user base. We have an impressive share of mobile time spent. And we have one of, if not the, most effective mobile ad products. Together, this positions us well to lead the mobile ad market. 
+We believe that over time marketers will increasingly rely on Facebook, not just to reach people wherever they are but to fundamentally transform the way they build their businesses. As Facebook delivers personalized experiences to over 1.1 billion people, we also have a unique opportunity to deliver a more personalized advertising experience. As I meet with marketers all around the world, I find more and more that they are understanding the benefits of this opportunity. As a result, Facebook is poised to play a central role in the evolution of marketing. We know we still have a lot of hard work to do, but we're excited about this quarter and the opportunity in front of us. 
+Now David. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. Today I'd like to update you on our progress in Q2 against our key financial objectives -- increasing revenue, investing to drive our future growth, and positioning the Company to maximize long-term returns for our shareholders. It was a great quarter across the board as we continue to benefit from and effectively navigate the transition to mobile. 
+Let's start with our network. Usage and engagement on Facebook remain extremely strong, as evidenced by the following. On an average day in June, 699 million people used Facebook, up 27% from last year. This represents 61% of the 1.15 billion people who accessed Facebook at any point during the month of June. Additionally, time spent per person on Facebook continues to increase. In aggregate across everyone in our network, time spent on Facebook exceeded 20 billion minutes each day in June. Separately, Instagram continues to grow rapidly with impressive engagement. And we announced last month we had over 130 million actives using the service. Overall, we're really pleased by the unprecedented growth and engagement of our community at this scale. 
+Now let's turn to the financials. In Q2, total revenue was $1.81 billion, up 53%, or 54% when adjusted for constant exchange rates. Ad revenue was $1.6 billion, up 61% in the quarter, or 63% when adjusted for constant exchange rates. This was our strongest quarter in terms of advertising revenue growth since the third quarter of 2011. The performance was strong throughout the world, with ad revenue in each of our geographic regions growing by greater than 50%. Growth in advertising revenue was driven by an increase in the number of marketers, overall advertising demand, and the strong performance of newsfeed ads. Newsfeed ads work. They've been remarkably effective at delivering high levels of engagement, a significant increase in click-through rates and overall number of clicks. And marketers have increased budgets meaningfully in response. 
+Overall ad impressions were up 43%. And the average price per ad was up 13% compared to last year. Ad impressions are up due to more people using our service worldwide, combined with the impact of reducing the price floor late in 2012, which resulted in more ads being shown, particularly in developing markets. In the US and Canada, where the price floor changes had a smaller impact, ad volume increased 6%. And average price per ad increased over 40% year over year, driven by the growth of higher performing newsfeed ads. Total payments and other fees revenue was $214 million in Q2, an increase of 11% versus last year. Payments revenue from gains specifically was up 7%. But we believe 11% represents the best apples-to-apples comparison if we adjust for items such as the change in revenue recognition timing we made late last year. 
+We were pleased to see King's continued rapid growth on our games platform in Q2. King's strategy of launching games, like Candy Crush Saga, on Facebook, and subsequently launching on mobile, has proved to be an effective approach that enables people to seamlessly play games across desktop and mobile. And we expect other game developers to pursue a similar strategy. We believe Facebook continues to offer a compelling platform for developers to build great games and businesses. 
+Overall RPU increased 25% compared to last year, to $1.60 per user for the quarter, including a 35% increase in the United States and Canada, as well as 30%-plus gains in all our other regions. 
+Turning now to expenses, in Q2 our GAAP total expenses were $1.25 billion. Excluding stock compensation, non-GAAP total expenses increased 52% to $1.02 billion, primarily driven by head count and infrastructure. We ended the quarter just shy of 5,300 employees, up 33% from last year. And we continue to be pleased with our success in attracting talent. Our Q2 GAAP operating income was $562 million, representing a 31% operating margin. Excluding stock comp, our non-GAAP operating income was $794 million, a 44% non-GAAP operating margin. 
+Our GAAP tax rate for Q2 was 39%. And our non-GAAP tax rate was 37%. GAAP net income was $333 million, or $0.13 per share. And non-GAAP income was $488 million, or $0.19 per share. We spent $268 million on CapEx in Q2 as we continued to invest in our data centers and facilities. While the relatively lower spend on CapEx in Q2 is partially the result of timing of purchases, it also reflects the returns from a significant effort by employees throughout the Company to make our software and hardware more efficient. CapEx will remain one of our primary areas of spend, since we need a powerful infrastructure to provide content-rich and personalized information to all the people who use our service around the world. But projects like Open Compute, and many others, are providing great returns for us. And helping ensure we're able to invest our resources in a disciplined and official manner. 
+Of note, free cash flow in Q2 was over $1 billion. This is much higher than we expect in coming quarters, as Q2 free cash flow benefited from a $419 million tax refund and light quarterly spend on CapEx. But, still, $1 billion in free cash flow is a nice milestone for us against an important financial metric. In Q2, similar to prior quarters, upon the vesting of employee RFUs, we withheld shares and paid the associated income taxes for our employees. Which provides an outcome similar to Facebook having repurchased approximately $153 million worth of shares in the quarter. We ended Q2 with $10.3 billion in cash and investments. 
+Now I want to conclude by sharing some thoughts about the second half of 2013. We expect newsfeed ads to remain the main driver of revenue growth in the second half of the year. And we believe we have a great opportunity to continue to drive long-term growth by improving the quality and relevance of these ads. However, remember that newsfeed ads really began to contribute to our revenue in the third and fourth quarters last year, which will make for more difficult year-over-year comparisons in Q3 and Q4 relative to Q2. Looking at expenses, consistent with what we've said previously, we plan to invest in our business. And continue to expect that our total non-GAAP expenses, including cost of revenue but excluding stock comp, will likely grow in the neighborhood of 50% for the full year 2013 compared to 2012. We also continue to expect that this over full-year expense growth rate will be faster than our year-over-year revenue growth rate for the full year 2013 compared to 2012. 
+In terms of our tax rate, we expect that our Q3 and full-year non-GAAP tax rate will be a few percentage points higher than our Q2 rate. And, finally, we expect 2013 CapEx to be in the neighborhood of $1.6 billion. This is down from our prior estimate of $1.8 billion due to a combination of efficiency gains and changes in timing of purchases. Overall Q2 was a very strong quarter for us. We believe we're executing well, in particular with regard to the mobile transition, the investments we've been making over the past year are paying off, the business is growing rapidly, and we're excited about the opportunities ahead of us. 
+Now let's open the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions) 
+Douglas Anmuth with JPMorgan. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan Securities - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Great, thanks for taking the question. Just wanted to drill down a little bit more on the ad revenue growth here in the quarter. And it was very helpful to get the four segments broken down. But can you just help us understand a little more, Sheryl, your comment on the increased number, and then the type of ads in the newsfeed in 2Q? I'm trying to understand if this is more specific product-driven or if this is just the combination of all the efforts that have been going into newsfeed ads essentially over the last year. Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [3]
+--------------------------------------------------------------------------------
+
+    Over the past year on these calls we've been talking about our three priorities in growing our ads business -- mobile, measurement and product innovation. I think what you're seeing here is all three of these are paying off. Obviously the transition to mobile is a really big one. We had almost no mobile ads a year ago. We're up to 41% this quarter. We've done a lot on measurement. And product innovation newsfeed ads has been the most important thing we've done there. We've done other things, as well. In terms of the marketer segment, all four marketer segments are growing and contributing to our growth. So, we're seeing both the increased supply that we talked about with newsfeed ads, but also the increase in demand that all four of these marketer segments represent. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan Securities - Analyst    [4]
+--------------------------------------------------------------------------------
+
+    And just as a follow up, can you help us understand how impactful or how big mobile app install ads are within the mix? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [5]
+--------------------------------------------------------------------------------
+
+    We don't break out by segment, the four market segments. But, again, all four are growing. Mobile app install ads, they're small but they're important and they're growing rapidly. It's basically a totally new market. People who are selling either mobile apps as their revenue, or things that are bought through mobile apps, are looking for a way to find new customers. And we represent one of the only ways and a very effective way to do that. So, we're growing quickly and I think we're helping to grow this market. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan Securities - Analyst    [6]
+--------------------------------------------------------------------------------
+
+    Thank you. 
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+    Heather Bellini with Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [8]
+--------------------------------------------------------------------------------
+
+    Great. Thank you very much and congratulations. I was wondering, you talked about before improved targeting and relevance of newsfeed ads that lies ahead. I was just wondering if you could share with us the progress you think you've made on this initiative and what's to come. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [9]
+--------------------------------------------------------------------------------
+
+    Targeting is really important because what takes an ad and makes it a good ad is whether it's relevant to you. When I see something on Facebook or anywhere that I'm interested in, that's a great experience. When I see something that I'm not interested in, that's not. So we've done a lot of work around targeting. The most important work we've done over the past years, and I think you're seeing its results in this, is around Custom Audiences, which allows people to use their data in a privacy-protective way with us. It enables them to show different ads to people who are current customers versus new customers who are interested in different things. And I think we're really pleased with the adoption. The number of marketers using Custom Audiences more than double doubled in Q2. And we're now up to the 50 Ad Age 100 who have already started using the product. We also think there's room to improve. We can do more, and we will continue to do more to improve the targeting, the relevance of our ads. 
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney with RBC Capital Markets. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [11]
+--------------------------------------------------------------------------------
+
+    Great, thanks. Two questions, please. Could you talk about thoughts on monetization on Instagram. And maybe just potentially how you think about the ability to monetize that versus your core Facebook asset. And then, secondly, Sheryl, could you talk about, on a vertical basis, where you think the biggest white space opportunities are for advertising revenue for Facebook Are there particular industries that you look at that, say, are materially under-represented on Facebook where you could have the greatest growth going forward? Thanks a lot. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [12]
+--------------------------------------------------------------------------------
+
+    Sure, I'll answer the Instagram question. Kevin has always been clear that we're building Instagram to be a business. And that we expect that over time we're going to generate a lot of profit from it, and probably through advertising. Now, that all said, right now it's just growing so quickly. The number that we just said was 130 million monthly actives. The video product is growing really quickly. There are so many directions to expand this in, that we think that the right focus for now is to continue just focusing on increasing the footprint of Instagram. And when the right time comes, then we'll think about doing advertising, as well. And I think that's going to be a really big opportunity. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [13]
+--------------------------------------------------------------------------------
+
+    In terms of growth opportunities, I think in terms of vertical categories we have big growth opportunities across the board. There are certainly verticals where we're stronger than others. We're very strong, for example, in CPG. But even though we've grown spend significantly, we're still a tiny portion of the spend of CPG advertisers. So, even in the verticals where I think we've done very well starting to penetrate, there's a lot of room for growth. I think as you think about different industries using the power of online marketing, we see different levels of adoption. But I'm a believer that over time this is where people are spending their time. And any marketer who's trying to reach people is going to spend their resources here, as well. 
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+    Jordan Rohan with Stifel Nicolaus. 
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [15]
+--------------------------------------------------------------------------------
+
+    Thanks so much. I think it's fairly easy, when talking to advertisers, to assess that there's been this latent demand for advertising on Facebook. But when you look across the globe it's a little bit harder to address the advertising community. Can you talk about the growth of the ad sales force and the ad ops, and all the people required to really bring that outside of the major US and Western European markets. And, specifically, is there a chance that you believe that Asia Pacific and rest of world markets can see a meaningful continued and sustainable shift higher in RPU than where we are today? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [16]
+--------------------------------------------------------------------------------
+
+    Yes, I'm a big believer that there are revenue opportunities that exist all over the world. And our growth was very strong across regions, including outside of the US for this time. We're up to over 40 offices, so we have sales teams on the ground in over 40 offices. And we're seeing really good adoption and really good growth across. You mentioned Asia. I was actually in Japan and Korea meeting with advertisers just a few weeks ago. And we are seeing companies that really weren't doing much with us a year ago increasingly adopt us as part of a core part of their spend. So I remain very optimistic about our growth across Asia and the rest of the world. 
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+    Youssef Squali with Cantor Fitzgerald. 
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald Securities - Analyst    [18]
+--------------------------------------------------------------------------------
+
+    Thank you very much. Two questions, please. Maybe, can you talk about the mix of growth in direct selling versus programmatic selling for you guys? And where do you see that going forward? And in terms of just on the cost side, looking at the investment -- and, by the way, David, thanks for the color about operating expenses guidance for the second half. But as you look at longer term, how far can you see that 50% increase in operating expenses still being sustained as you -- just looking at 2014, I know you're not guiding through 2014 right now, but just as we look at the model going forward, how far do you think you can sustain growth and operating expenses faster than growth in revenues? Thank you. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+    Thanks for your question. Your first question about direct selling versus programmatic, the mechanism that most people buy ads from, from  Facebook, is through the option that we offer. But that doesn't mean that we don't have a sales force that's out calling on clients. Sheryl can expand on that, if she wants. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [20]
+--------------------------------------------------------------------------------
+
+    Yes. We sell both directly through our own sales team, both in person and online -- what I think you mean by programmatic, which is through third parties, such as DSPs and others. One thing worth noting is that FBX, which is part of that programmatic selling, is actually a very small part of our business. And I think sometimes people don't understand that. That piece is quite small. We are expanding both our direct selling efforts, both the sales teams and online, as well as the third parties we work with. And we think having a healthy and growing ecosystem on both sides is really good for the development of our business. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [21]
+--------------------------------------------------------------------------------
+
+    And you asked about investments looking forward to next year. I think philosophically is the easiest way to answer that, which is, we still think we're early in the journey of building the service that we want Facebook to be. And there's lots of work ahead of us to do and lots of things to build. And our plan will be to continue to invest aggressively in the areas that we think are important to improve our strategic positioning, and to drive our ability to grow revenues and profits over the long run. We also know that to be the great company that we want to be, we have to be disciplined in everything that we do, and focus our spend on the areas that are really most important. So, the challenge for us, just like any company, is finding that right balance. I really can't comment on 2014 yet, honestly, just because I don't know what 2014 is going to look like. We tend to plan in six-month blocks, and I think have our act together pretty well for what we're going to try to do in the second half of this year. But haven't begun the conversation about next year yet. 
+
+--------------------------------------------------------------------------------
+Operator    [22]
+--------------------------------------------------------------------------------
+
+    Anthony DiClemente with Barclays. 
+
+--------------------------------------------------------------------------------
+Anthony DiClelmente,  Barclays Capital - Analyst    [23]
+--------------------------------------------------------------------------------
+
+    Thanks a lot. I have one for Sheryl and one for David. Sheryl, I'd be interested in hearing a little bit about the relative progress of impression-based selling versus performance-based. I know you mentioned the e-commerce -- the doubling from e-commerce from direct response. And I just wanted to know if you've increased the amount of inventory that you're selling on an impression basis versus performance. And then, David, I had a follow up on the CapEx. It just seems like an interesting time for CapEx to be coming in when video usage and video uploads could be growing --. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [24]
+--------------------------------------------------------------------------------
+
+    I think we may have lost the question, but I'll take the first half while we wait for the second piece to come back. On the first piece, our system works that you can buy by CPM or CPC, and we let advertisers choose. I think both parts of our business are healthy and growing. I think when people talk about impression-based purchasing or buying, what they're really trying to get at is brand. And brand is a very important one of our four segments, and one that's growing. When you think about what brand spenders are doing, they're trying to get discovery. And I think we've made a lot of progress there. We now work with every one of the global Ad Age 100 over the past year. Now that said, people are in different parts of that spectrum. We have brand advertisers who are looking for discovery, who have advertised with us for a long time, proven the value, and are really expanding. And we have others that are newer, that are experimenting, that aren't as convinced yet. And it's our job to get there and convince them. 
+I think what people are increasingly seeing is we have a big brand opportunity. We have a massive and engaged audience, 88 to 100 million people in the US during prime time hours on Facebook. We offer discovery. And we have a unique opportunity to take people all the way through the funnel. In one example, a recent one that I really like, T-Mobile did an ad campaign with us to attract people to sell new phones. They used our offer ads to do it. 9% of the people who claimed the offer converted to T-Mobile within 10 days. And they had over a 20 times return on their ad spend, which is just incredibly strong in the industry. And I think that shows the power of what we can do with impressions, taking people all the way through the funnel. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [25]
+--------------------------------------------------------------------------------
+
+    And, Anthony, I'll try and answer your question about CapEx, as best I could. You got cut off, as you probably know. So I only got -- well, I don't know how much of it I got. But I got enough to give it a shot. And, really, the best way I can think to answer it is to describe for you the variables that influence what CapEx requirements are for the Company. So, clearly, the number of users is near the top of the list. And also the time at which the users use the service. So, adding users who are off peak, the Facebook peak, provides less of a burden for our infrastructure than people who are using it at the same time as our peak hours, because we can leverage what we've built to peak. 
+A second thing is definitely the level of engagement of those users. And that seemed to be where you were going with your question about vide. That is and will continue to be, we hope, something that drives up requirements for our infrastructure, because it means people are really engaging and finding new ways to use the service. What has helped us, I think, is the two variables that come next. One is just the cost of the equipment itself in the data centers. And over time Moore's Law and other things, and competition in the market, have helped us to really be able to bring down the cost for each unit of equipment we use. 
+And then the next variable which I mentioned in my remarks, which I think is a really important one, is just the efficiency of what we build. So, over time, I think Facebook has impressively succeeded at making the hardware we use more efficient, and the software that we run on it more efficient in terms of how much compute power that it needs. The last variable, of course probably the hardest to predict, is product development. It's just what we build and how that influences what the compute requirements are. So, clearly, the variable you emphasized, which was engaging with higher content things, is one of the things that will influence CapEx over time. But it's a pretty complicated equation that I think right now we're managing well. I think we're pleased with how 2013 is coming together in that regard. 
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+
+    Justin Post with Merrill Lynch. 
+
+--------------------------------------------------------------------------------
+Justin Post,  Merrill Lynch - Analyst    [27]
+--------------------------------------------------------------------------------
+
+    As we look back at this mobile ramp, back in 3Q last year, it's been pretty lumpy, and it bounces around quarter over quarter. But it looks like a pretty big inflection this quarter. Can you help us understand why it has been so lumpy, so we can think about going forward? And maybe what caused the inflection this quarter. And then I really appreciated the time spent metric. I think you said 20 billion minutes per day. Can you tell us how that compares to, say, a quarter ago or a year ago? Thank you. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [28]
+--------------------------------------------------------------------------------
+
+    In terms of the progression of mobile, we're really pleased overall that newsfeed ads, in general and on mobile in particular, are working so well in terms of the performance they're providing to marketers, and how users are engaging with them. For a new product like this, I don't think we should be that surprised that the quarter-to-quarter progression is going to be harder to predict than it would be for a more mature product. I think one of the things that happened in the second quarter is that, as the investments we've made started to really come together, we had a lot more demand in our system that met the quality bar that we set for feed. So, we were able to place that demand intelligently in a manner where it performed well, and didn't have a meaningful impact on the user experience. So I think that more feed-eligible demand was a big part of the story. 
+And I think one of the really good pieces of news for us is how well the price held up as we did that, as we increased the number of ads we showed in feed. For many of our ads, as you know, marketers are bidding for clicks in an auction, and the auction determines the price where supply equals demand -- the cost per click price. And in the second quarter -- and this statistic I'm going to give you is relative to the first quarter of this year because it's hard to do a year-over-year for mobile and for newsfeed because it just didn't really exist a year ago -- so Q2 relative to Q1, the number of clicks in our system went up a lot. And we might have assumed that price would decline as click number increased, because we're basically pushing out the supply curve and changing the point where supply would meet demand. And that's not what happened. Cost per clicks for feed ads increased, and really demonstrating to us that demand was growing rapidly, as well, as we were increasing the supply of ads we were showing. It's not a perfect comparison because Q2 is seasonally stronger than Q1, but I don't think the seasonality explains the trend I just provided. And I think that's a really encouraging metric for us. 
+Your second question was -- I wrote it down. Hold on. Oh, time spent. Unfortunately, we don't have a lot of longitudinal data for time spent. It's not something that we had instrumented well going back more deeply in time because it's hard. It's hard on every interface and it's particularly hard on mobile. We feel pretty good about where we are now in terms of the quality of the instrumentation. It is up on a per user basis. As you would imagine, quarter-over-quarter sequentially on a per user basis it will be growing slowly. On an aggregate basis, of course, it's benefited from the fact that we have such a nice and consistent increase in the number of daily users of this service. 
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+    Ross Sandler with Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [30]
+--------------------------------------------------------------------------------
+
+    Great. Thanks, guys. David, just a continuation of what you were just talking about. On the mobile newsfeed ads, is the 5% number -- 5% of stories being ads -- the right number? And is that consistent across geos? And then is the growth a function of -- you just said price is going up sequentially. Obviously your mobile DAUs are going up, or MAUs are going up sequentially. And you're probably also seeing improving click-through rates. So, of those three variables -- users, click-through rate, and price -- which is driving the sequential increase the most in mobile? Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [31]
+--------------------------------------------------------------------------------
+
+    In terms of the 5% number, again, what we know is where we are now, and we're pleased that things are going as well as they are at the current level. The number was zero a year ago. It's increased steadily over the past year. And the 5% number is an average number globally. It does differ by geography and it also differs by person. It will be higher for people for whom we have a lot more ads that are targeted towards them and are relevant for them. What we're trying to do is find the right balance ideally for each user, where we're balancing their experience with Facebook and the performance of the ads. And continually tweaking the product, learning from our experience, to try and do that as well as we can. Going forward, I think we've been consistent in saying the biggest opportunity for us is to improve the quality of the ads so that we can show ads that are engaging and relevant for the users involved. 
+Your question about what drove the increase, I think everything contributed. I think that's one of the things that's encouraging about where we are, is we do have more users, we have more demand that enabled us to show more newsfeed ads. We're really pleased with how click-through rates have held up. And I mentioned what was happening in terms of cost per click increasing sequentially. So it's a nice balanced contribution from the variables that determine what our revenue performance is. 
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+    Brian Pitz with Jefferies. 
+
+--------------------------------------------------------------------------------
+Briain Pitz,  Jefferies & Co. - Analyst    [33]
+--------------------------------------------------------------------------------
+
+    I'm wondering if you could give us a sense for what the major hurdles are to overcome before deploying a major video ad product on the core site. As you're out talking to potential clients, can you help us understand what demand looks like for that product? And then maybe separately, just a sense for what you're seeing in Europe from a macro perspective, just given some of the mixed views we've heard on the economy over there. Thanks so much. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [34]
+--------------------------------------------------------------------------------
+
+    On video ads, we have a current video ad product because marketers can embed a video in a page post. And we see a lot of marketers using that product and seeing good results. So the demand to do more on video on Facebook is there. And we're exploring how we can expand that, but we don't have anything new to announce today. In terms of Europe, we hear the same things, and obviously on the macro environment. But our growth has been very strong. We had a new head of our European operations, as well, Nicola Mendelsohn, who just started. We're excited to have her. And we are experiencing strong growth. 
+
+--------------------------------------------------------------------------------
+Operator    [35]
+--------------------------------------------------------------------------------
+
+    Ben Schachter with Macquarie. 
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research Equities - Analyst    [36]
+--------------------------------------------------------------------------------
+
+    Congratulations on a really outstanding quarter. Mark, I want to ask about the platform strategy. Just broadly, how has the strategic vision to allow third parties to provide services to the network evolved over the past year? And what needs to happen to have more of a contribution from non-advertising-based businesses? And then, David, just quickly, for modeling, the mobile ad revenue, can you talk about how that progressed through the quarter? Did it exit June much stronger than it was earlier in the quarter? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [37]
+--------------------------------------------------------------------------------
+
+    Yes, I can take the platform question. The strategy for that, we've shifted a bit to focus on building more business tools for developers. A lot of what we're seeing is folks have shifted towards using products like mobile app installs. Originally we had a little bit of skepticism about how happy developers would be with a system where they would pay to get more distribution. But what we've actually found is that the NPS is really high for this because it's just a lot more stable than anything else that they've had in the past. And it's the most stable way they have to grow their apps. What we're basically focused on doing now is we think about advertisers in terms of these use cases that folks have. There's local businesses, there are great brands, there are developers who are building apps, there's eCommerce. And we're really focused on building out the platform to be one of those big verticals to be a big part of the business. There's also the games part of the platform, which is the first piece of platform that we launched. And that is just continuing to grow at a slower but steady rate. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [38]
+--------------------------------------------------------------------------------
+
+    Your second question was about progress through the quarter. Nothing notable to report there. It was really a strong quarter from the beginning to the end. 
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+    Scott Devitt with Morgan Stanley. 
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [40]
+--------------------------------------------------------------------------------
+
+    Thanks. I had a bigger picture question for Mark. I was hoping you could give a score card one year in relative to your founder letter. I know it's been only 14 months, and that's a short period of time. But it'd be interesting to hear your views on the Company's performance against the longer-term aspirations and core values that you put in the letter. Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [41]
+--------------------------------------------------------------------------------
+
+    I think we're early. One of the interesting things over the past six months or so is reaching 1 billion people was this big rallying cry for the Company for a long period of time. And I think as we've passed that, we've seen the ambition that the Company has, grow. Reaching 1 billion users was a great first thing to focus on because no one had ever built a service that had 1 billion active people who are signed in, had a real identity before. But, in a way, it's actually just an abstract. There's nothing magical about 1 billion. The real goal is to connect everyone in the world, and help people map out everything that there is. What I think what we're seeing as some of the products succeed is just the ambition increase to be able to do more of these, and taking on more longer-term things. 
+At the same time, I think what you have is, we weren't happy with the quality of our mobile experiences, rewinding 18 months. So we had just a lot of foundational work to do. And I think coming into this year we could tell internally that we were turning a corner on that. We were in good shape and could start to play a bit more offense. But, as I think the numbers from this quarter suggest, I think we're really starting to see the up side of some of the investments that we've been making over the last period. 
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+
+    Mark May with Citigroup. 
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [43]
+--------------------------------------------------------------------------------
+
+    Thanks for taking my question. I had two. One of the things that stood out in your prepared remarks was I think you mentioned a 40% year-on-year increase in average price for ad in North America in Q2. I was hoping you could remind us how that compared to, say, Q1. And given that I think you contributed that to higher-performing ads, if maybe you could call out specifically what one or two either ad units or ad targeting enhancements were the key contributors to that growth. And then, secondly, David, I think you called out the more challenging comps as you enter into the second half of the year. Are you suggesting that it's unreasonable for us to look at the sequential growth that you saw in the second half of 2012 and assume that that rate of growth is repeatable this year? 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [44]
+--------------------------------------------------------------------------------
+
+    Okay. In terms of pricing, we were pleased with the pricing growth in the first quarter, too. The net across the world was a 3% average in the first quarter. But that was much higher in the US and Canada because, again, for the same reason it wasn't impacted by the price floor change. It was above 25% in the US and Canada, and was even stronger in the second quarter. And, similarly, in other territories, I think pricing's just going really well. And would be stronger than the results show if not for the impact of the price floor. We'd probably have numbers that are similar to the US and Canada, if not stronger, in our other regions, as well. 
+In terms of the comps, I don't think there's anything particularly complicated to what I was saying. It's just if you're looking at the percentage growth rates for Q2, you're comparing to a quarter last year that really didn't have much mobile revenue or newsfeed revenue in it at all. And that really started to ramp up in the third quarter and the fourth quarter. So it's there in one side of the comparison going forward. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [45]
+--------------------------------------------------------------------------------
+
+    In terms of where the growth is coming from, in terms of ad units, in terms of our market segments, direct response marketers were a very big contributor to the growth. It's why I started with them in the remarks and in the Q&A. ECommerce doubled year over year, and they're doing that by using a bunch of our different ad products. Everything from posts to offers to other things. But it's really about looking for those contributions. We've also seen a lot of growth, as I said, in mobile app install ads. Small market but growing rapidly. And it's a market where we offer a product that there's almost nowhere else to get the kinds of return and opportunity we offer. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [46]
+--------------------------------------------------------------------------------
+
+    I'm just going to add one more thing just in case I, in any way, created any confusion. I have no evidence that I did yet. But the price per ad that I was talking about in this question reflects not the same thing as the cost per click that I answered in a question earlier, because price per ad will also incorporate the click-through rate as well as the class per click for a click-based ad. And also includes ads that are purchased on an impression basis. So, most of the pricing metrics we provide are per ad, inclusive of click-through rates and impression-based ads. The CPC metric I gave earlier was just, I think, a specific and useful metric in understanding how much strong demand contributed in the second quarter. 
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+
+    Ken Sena with Evercore Partners. 
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore Partners - Analyst    [48]
+--------------------------------------------------------------------------------
+
+    Just maybe if we could drill into the comment around eCommerce spending doubling. It seems as though FDX and third-party effort is growing fast, but it's small. And the same with the app install effort. But can you talk a little bit about what drove that doubling year on year? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [49]
+--------------------------------------------------------------------------------
+
+    I think direct response marketers have had more opportunities to use our system, use our product. And we've also made a very major investment in helping them measure returns, and helping them connect what's happening both online and, as well, as throughout the system. So, direct response marketers tend to be buyers, they have an ROI metric. They're looking for that ROI metric, and their budgets are flexible around those ROIs. So, as they've invested with us, and hit their ROI metrics, their budgets go up and they make those adjustments very quickly. That's why, when they start using the products and see the value they create, they're able to grow very quickly, even within a quarter or within a week or within a month, because they adjust to their budgets. 
+
+--------------------------------------------------------------------------------
+Operator    [50]
+--------------------------------------------------------------------------------
+
+    Rory Maher with Hillside Partners. 
+
+--------------------------------------------------------------------------------
+Rory Maher,  Hillside Partners - Analyst    [51]
+--------------------------------------------------------------------------------
+
+    A couple quick questions. First, on hiring, there's been a lot of discussion in the press about tech companies' need for more highly skilled workers. And I'm curious if you're feeling pressure to find that kind of highly skilled talent. And what areas you find hardest to fill. And maybe some successful ways that you're finding good engineering talent. And then, secondly, on the advertiser mix, have you guys discussed your mix of brand advertisers by category, like auto, retail, telecom, that kind of category mix? And are there any that have grown particularly well the past year? 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [52]
+--------------------------------------------------------------------------------
+
+    Yes, I can take this. Hiring great people, especially engineers, is one of the biggest challenges that any technology company has. We're doing really well against the hiring goals that we have. But there's a systemic issue where our country doesn't produce the volume of engineers that the companies would want to hire. And I think that that's a lot of what you hear these companies talking about. We're doing really well competitively right now. We have a really strong program on colleges where we can continue to attract a lot of the best people who are graduating. We do really well at hiring senior engineers from across the valley, as well. But it's just something that we invest a huge amount of time in. It's really important. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [53]
+--------------------------------------------------------------------------------
+
+    In terms of where we're growing by category, I've mentioned CPG, gaming, retail. These are vertical categories where we're very strong. But, again, we're growing. You're watching people really experiment. One of the things that's been really fun to see, even though it's not a paid product, is GE's Instagram work. GE is doing super interesting photos on Instagram, which show us that other industries are also going to adapt to the social environment and to some of the new ways to reach customers globally. 
+
+--------------------------------------------------------------------------------
+Operator    [54]
+--------------------------------------------------------------------------------
+
+    Laura Martin with Needham & Company. 
+
+--------------------------------------------------------------------------------
+Laura Martin,  Needham & Company - Analyst    [55]
+--------------------------------------------------------------------------------
+
+    Great numbers, guys. Congratulations. Two questions. One on, could you guys quantify the custom advertising bucket? I know you said it was up 100% quarter over quarter. And a lot of the brands are talking about this as a key growth area. So I'm real interested in how big it's starting for you guys. And then my second question is, we're also talking to a lot of companies that target your metrics using your UPI integrations. And that creates an arbitrage. I'm wondering if over time you foresee that being a stable ecosystem. Or are you guys going to try to ease those guys out over time and grab some of that upside that these arbitragers that are using your platform are garnering today? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [56]
+--------------------------------------------------------------------------------
+
+    On the first, Custom Audiences is small but growing in importance. We doubled -- what I said was we doubled the number of marketers using the product Q2 over Q1. And that also has included getting us to 50 of the Ad Age 100. As I've talked about, the large brand advertisers, the Ad Age 100, have a long sales cycle, and it takes a lot of work to get them to adopt products. So, seeing adoption this quickly of something, we think, shows how powerful that targeting is. In terms of some of the more programmatic ways people buy, we think it's really healthy for us to have multiple sales channels. We like having a direct sales channel, which we have in our over 40 offices. We like having online and robust sales because that means that, even in countries where we don't have offices, we have the ability to sell into those markets. We also like having an ecosystem of what we call PMDs -- third-party sellers who can work with our clients to provide some of the features that we don't have, or some of the capabilities that they may not have in-house. And so for us we'd like to see all of those sales channels continue to grow and thrive. 
+
+--------------------------------------------------------------------------------
+Operator    [57]
+--------------------------------------------------------------------------------
+
+    Eric Sheridan from UBS. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [58]
+--------------------------------------------------------------------------------
+
+    Thanks, guys. Congratulations on the numbers. Mark, a longer-term question focused on your initial comments. How have some of the recent products that are consumer-facing that you guys have launched, like Graph Search and Facebook Home, taught you what the consumer acceptance is for certain things, learnings about how the platform can be developed and evolved over time? I would love to get your take-aways on that. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [59]
+--------------------------------------------------------------------------------
+
+    I think that there are a bunch of different kinds of products that you can ship. Every day we ship a lot of tweaks to the products, or small changes to existing products. Then there are going to be products like Instagram video which is really doing well. And it fits very naturally into the current flow of how people use Instagram to capture moments that they're proud of. So that makes sense, and I think the team did a really good job there. Things like Home and Graph Search are really new use cases. In the case of Home, it's a new category of products that's different from anything that exists out there. And I think of it more of a seed that we're planting, that is going to create a completely new pillar of the ecosystem, rather than drafting off of behavior that people already have in the system today. So, I definitely think that we just have to look at this over the long term. And when we're building models for the Company, we basically think that this is going to be something that we will invest in for years. And we expect these to become market-leading products. And they're doing things that no one else really has the strategic position or content to be able to build these products. So we're excited about them. They're just going to be longer-term bets. But I think you want to look at the different things we're doing in terms of how naturally they fit into the flow of a person's day-to-day life today, to get a sense of how quickly it's going to ramp up over time. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR    [60]
+--------------------------------------------------------------------------------
+
+    Great. Thank you for joining us today. We appreciate your time. And we look forward to speaking with you again next quarter. 
+
+--------------------------------------------------------------------------------
+Operator    [61]
+--------------------------------------------------------------------------------
+
+    This concludes today's conference call. You may now disconnect. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2013-Jul-25-AMZN.OQ-137712068210-Transcript.txt

@@ -0,0 +1,552 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2013 Amazon.com Inc Earnings Conference Call
+07/25/2013 02:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Tom Szkutak
+   Amazon.com, Inc. - SVP and CFO
+ * Sean Boyle
+   Amazon.com, Inc. - VP IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Ken Sena
+   Evercore Partners - Analyst
+ * Jordan Rohan
+   Stifel Nicolaus - Analyst
+ * Stephen Ju
+   Credit Suisse - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Ron Josey
+   JMP Securities - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Mark Miller
+   William Blair & Company - Analyst
+ * Matt Nemer
+   Wells Fargo Securities, LLC - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Anthony DiClemente
+   Barclays Capital - Analyst
+ * Mark May
+   Citi - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Thank you for standing by. Good day, everyone, and welcome to the Amazon.com second quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's call is being recorded.
+For opening remarks, I'd like to turn the call over to Vice President of Investor Relations, Mr. Sean Boyle. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q2 2013 financial results conference call. Joining us today is Tom Szkutak, our CFO, who 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 25, 2013, 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'll 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 2012.
+Now I will turn the call over to Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Sean. I will begin with comments on our second-quarter financial results.
+Trailing 12-month operating cash flow increased 41% to $4.53 billion. Trailing 12-month free cash flow decreased 76% to $265 million.
+Trailing 12-month capital expenditures were $4.27 billion. This amount includes $1.4 billion in purchases of our previously leased corporate office space as well as property for development of additional corporate office space located in Seattle, Washington, which we purchased in the fourth quarter 2012. The increase in capital expenditures reflects additional investments in support of continued business growth, consistent of investments in technology infrastructure, including Amazon Web Services, and additional capacity to support our fulfillment operations.
+Return on invested capital was 2%, down from 11%. ROIC is TTM free cash flow divided by average total assets minus current facilities excluding the current portion of long-term debt over five quarter ends. The combination of common stock and stock-based awards outstanding was 474 million shares compared with 468 million shares.
+Worldwide revenue grew 22% to $15.7 billion or 25% excluding the $392 million unfavorable impact from year-over-year changes in foreign exchange rates. We are grateful to our customers who continue to take advantage of our low prices, vast selection and shipping offers.
+Media revenue increased to $4.4 billion, up 7% or 11% excluding foreign-exchange. EGM revenue increased to $10.42 billion, up 28% or 30% excluding foreign exchange. Worldwide EGM increased to 66% of worldwide sales, up from 64%.
+Worldwide paid unit growth was 29%. Active customer accounts exceeded $215 million. Worldwide active seller accounts were more than 2 million. Seller units represented 40% of paid units.
+Now I will discuss operating expenses excluding stock-based compensation. Cost of sales was $11.2 billion, or 71.4% of revenue, compared with 73.9%. Fulfillment, marketing, tech and content and G&A combined was $4.09 billion or 26% of sales, up approximately 275 basis points year over year. Fulfillment was $1.76 billion or 11.2% of revenue compared with 10.1%. Tech and content was $1.43 billion or 9.1% of revenue compared with 7.6%. Marketing was $651 million or 4.1% of revenue, consistent with the prior period.
+Now I will talk about our segment results, and consistent with prior periods we do not allocate the segments, our stock-based compensation or other operating expense line items. In the North America segment, revenue grew 30% to $9.49 billion. Media revenue grew 16% to $2.17 billion. EGM revenue grew 31% to $6.48 billion, representing 68% of North America revenues, up from 67%. North America segment operating income increased 19% to $409 million, a 4.3% operating margin.
+In the International segment, revenue grew 13% to $6.21 billion. Adjusting for the $391 million year-over-year unfavorable foreign-exchange impact, revenue growth was 20%.
+Media revenue decreased 1% to $2.22 billion or grew 7% excluding foreign exchange. In EGM, revenue grew 22% to $3.94 billion, or 29% excluding foreign-exchange. EGM now represents 63% of International revenues, up from 59%.
+International segment operating income was zero, down from $16 million in the prior-year period. Excluding the unfavorable impact from foreign exchange, International segment operating income increased 11%.
+CSOI increased 14% to $409 million or 2.6% of revenue, down approximately 20 basis points year over year. Excluding the unfavorable impact from foreign exchange, CSOI increased 19%.
+Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 26% to $79 million, or 0.5% of net sales.
+Our income tax expense was $13 million. GAAP net loss was $7 million or $0.02 per diluted share compared with net income of $7 million and $0.01 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $2.49 billion year over year to $7.46 billion. Inventory increased 24% to $5.42 billion and inventory turns were 9.4, down from 10.1 turns a year ago as we expanded selection, improved in-stock levels and introduced new product categories.
+Accounts payable increased 27% to $8.99 billion and accounts payable days increased to 73 from 68 in the prior year.
+I will conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending. It's not possible to accurately predict demand and, therefore, our actual results could differ materially from our guidance. As we've described in more detail in our public filings, issues such as settling inter-company balances and foreign currencies among our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rate can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements; record any further revisions of stock-based compensation estimates; and that foreign-exchange rates remain approximately where they have been recently.
+For Q3 2013, we expect net sales of between $15.45 billion and $17.15 billion, a growth between 12% and 24%. This guidance anticipates approximately 300 basis points of unfavorable impact from foreign exchange rates. GAAP operating loss to be between $440 million and $65 million compared to $28 million in third quarter 2012. This includes approximately $340 million of stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income or loss, which excludes stock-based compensation and other operating expense, to be between a $100 million loss and $275 million in income compared to $232 million of income in third quarter 2012.
+We remain heads-down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.
+Thanks, and with that, Sean, let's move to questions.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP IR    [4]
+--------------------------------------------------------------------------------
+
+          Great, thanks, Tom. Let's move onto the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator instructions) Ross Sandler, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Thanks guys, I just had one question on shipping. It looks like the unit efficiency in shipping continues to improve. What are you guys doing to drive the cost of shipping each unit lower? Are there more costs that can be taken out on a per-unit basis?
+And then, as you start looking at same-day delivery in some of these markets, including the new grocery program, what incremental costs do you see around doing same-day fulfillment? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [3]
+--------------------------------------------------------------------------------
+
+    In terms of the economics, we have a great operations team that's working on how do we serve customers reliably and faster. So, certainly, that is reflected in our transportation costs. Also, from a productivity standpoint, we're just -- as we add capacity, we're just getting closer and closer to customers with larger selection, which is certainly helpful from a productivity standpoint.
+So those are some of the dynamics that you need to think about when you think about our transportation cost. The team has done a great job over the years of becoming even more reliable and faster and more productive. And, again, they will be working on ways to make that even better over time.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [5]
+--------------------------------------------------------------------------------
+
+    Great, thanks for taking the question. I was hoping you could talk a little bit more just on the profitability of the grocery business and how you will know when it's the right time to expand to more markets beyond Seattle and L.A.
+And then also, if you could comment on the European macro environment, just given the growth that you saw in the International business just decelerating a little bit from last quarter. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [6]
+--------------------------------------------------------------------------------
+
+    In terms of the fresh business, we started doing a pilot several years ago in Seattle. We did a number of -- the team has done a great job inventing on behalf of customers. It's a very good customer experience. The challenge that we've had over the past several years is how to make it economically viable. And so that's -- the team has done a lot of different experiments and invented well on behalf of customers to see what works. And we took a lot of that knowledge, which enabled us to launch fresh in L.A. And it's very early there; we're still in the trial period. It's a good customer experience and we like what we see so far, but it's very, very early.
+So it's something that we will continue to work on, both from a customer experience and from an economic standpoint. There's not much more I can add to that right now, so you'll have to stay tuned and see where that ends up.
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+    Mark Miller, William Blair.
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair & Company - Analyst    [8]
+--------------------------------------------------------------------------------
+
+    Hi good afternoon.  Could you help us understand the third-party unit growth? I think this is the first quarter in about three years that third-party unit penetration hasn't increased.
+And then, additionally, I'm wondering if you could comment at all on potential to expand Prime membership options potentially to something like a super-Prime offering for expanded video content and fulfillment options.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [9]
+--------------------------------------------------------------------------------
+
+    In terms of the third-party unit growth, it was 40% this quarter, which compares to the 40% last year in Q2. So, again, it is flat as a percentage of total units.
+One thing to keep in mind, though, is our digital units are growing at a faster rate than physical, and those digital units are primarily first-party units. So if you take out -- digital units out in both periods, we are actually up approximately 300 basis points. So our physical seller business is growing very nicely. It's growing at a faster rate than retail and it's doing very well. And so very pleased to see that.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+    Brian Pitz, Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [11]
+--------------------------------------------------------------------------------
+
+    Great, thanks. Quick question on fulfillment centers -- any color on your current plan for the year in terms of locations, US versus International, timing, etc.? And then, separately, any comments on the weaker growth in International media?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [12]
+--------------------------------------------------------------------------------
+
+    In terms of FCs, we have announced to date five net new facilities in the US. We've also announced some in International. It's still early, as we did in prior -- last few years. We gave you updates as we went along, and so we can update you a little bit later in the year to see how that progresses, but we certainly are adding new capacity and that's reflected in the guidance that you see in Q3 as we get ready for our Q4 seasonal quarter.
+In terms of growth in International media, what you are seeing there is, on a local currency growth basis, you see a 7% growth that's consistent with what you've seen in the last couple of quarters. We are at the very early stages. We are excited about what we are seeing so far in digital, but we are in that early stage of transformation from physical to digital within International. And so you see from the release that we have launched a lot of new things related to digital over the past 90 days and even prior to that. So we are very excited about those launches and excited about the transformation.
+We are also excited, if you look at our total International business, we've got a lot of opportunities to invest in. I talked about the conversion from physical to digital. We also have selection still to add within existing categories, new categories, new geographies. So we are very excited about the opportunity that we have there.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [13]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+    Scott Devitt, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [15]
+--------------------------------------------------------------------------------
+
+    Hi, thanks. I guess the International topic again, but it has been asked a few times. So maybe specifically in China, Tom, in terms of what the Company hypothesis is in terms of the way that market plays out over time and how you think about investment spend in that market.
+And then secondly, as it relates to AWS, it's nice, the event, the annual event and the quarterly events that happened. I was wondering when you think it makes sense to start talking more about it in releases and on calls. Is it just the 10% revenue threshold or something else that would lead to more discussions like that on calls like this? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [16]
+--------------------------------------------------------------------------------
+
+    In terms of China, we are investing heavily in China, and we have been for some number of years. We have a good customer experience there. We continue to look at ways to make that even better. We are adding selection across many categories right now. It's a very interesting geography.
+And so we will continue to work on that experience for customers. You should expect to see us to be in investment mode for some time, but it's a very sizable segment, very interesting long-term growth opportunity, and we will continue to work on making that better for customers and for investors over time.
+In terms of AWS, the business is growing very, very strongly. We've got a great team that's innovating on behalf of customers, launching new services, becoming more productive, which allows us to be able to lower prices. We've had many price reductions since we started with AWS, and we share that very visibly. And so we are very excited about that business. Even though we are off to a very good start, it's a very big opportunity and we continue to invest in that business and we are very excited to do it. We think it's a great long-term opportunity and we have a great team working on it.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney, RBC.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [18]
+--------------------------------------------------------------------------------
+
+    Great, thanks. Tom, just one question related to consumer packaged goods. Any comments there on whether you are seeing broader purchases by the Amazon customers of more traditional consumer staples than you've seen in the past, and is that something you are trying to promote? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [19]
+--------------------------------------------------------------------------------
+
+    Yes, just to make sure I have your question, we are seeing -- when you look at our, for example, our North America growth, particularly EGM, we are seeing very good growth across many different categories. But a few callouts -- we are seeing very good growth in apparel, specifically, and also consumables.
+And so the team has done a very nice job. Both teams have done a very nice job from a customer experience standpoint and been growing very nicely, and that is something that we are seeing and it does help with frequency to the site as well.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+    Mark May, Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citi - Analyst    [21]
+--------------------------------------------------------------------------------
+
+    Thanks for taking my question -- another one on International in the media segment there. I believe that you now have a more comprehensive localized international strategy for the Kindle. I wonder if you could talk about what, if any, impact that you think that that might have over the next few quarters in terms of its impact on the International media segment.
+And also on international, the AWS, I think one of the contributors of growth and, we suspect, margins in the US has been the success at AWS here. I wonder if you could talk about any plans for AWS outside the US.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [22]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of Kindle, you are right. We now have Kindle stores, if you will, established in all of the Amazon domains that we have around the world. And recently we announced Kindle Fire HD; it's available to customers in over 170 countries. We introduced Kindle Paperwhite and Kindle Fire HD in China. That's both online on our website, and also in a number of off-line retail locations.
+So, again, there's a lot of advancement in terms of the Kindle. But again, it's very early. I'm very encouraged by the opportunity that we have there for customers and our ability to try to capitalize on that from a digital content standpoint.
+In terms of AWS, the business is expanding and it's an incredible opportunity globally. We recognize that. The team recognizes that, and we will continue to work on that on behalf of customers.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+    Justin Post, Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [24]
+--------------------------------------------------------------------------------
+
+    Thank you. The Company and the business is going through a lot of transitions with digital media, AWS, obviously Prime and potentially same-day delivery. A long time ago, you used to give us a margin outlook for the Company. As you think about these businesses, do you think that they are better for Amazon in that you can have greater share of retail as these evolutions happen?
+Also, what are the implications on Amazon's long-term margins as you go through these transitions over time? Any help on that could help. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [25]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of the way we are looking at them certainly is based on the free cash flow potential. And we have -- we are in some really interesting great businesses that have a lot of potential from a free cash flow generation standpoint, with good, high ROICs, which is exciting.
+From a margin standpoint, always challenging to predict where that will come out in terms of absolute numbers, but what we will do is we want to make sure that we try to maximize free cash flow. That's something that we've always said.
+So our strategy hasn't changed; our outlook hasn't changed in that regard. Frequently, we would be asked historically, is double-digit operating margins possible? And I still think it's possible. But, also, if it means -- if a good, high-single-digit operating margin gets us to better, higher free cash flow over time, that's fine, too.
+So again, our goal is to -- we don't focus on individual margins. Our goal is to make sure that we generate free cash flow, large amounts of free cash flow, and use that capital efficiently. And so those are goals that we have. And we certainly think that opportunity is there in each of the businesses that we operate in.
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+
+    Ben Schachter, Macquarie.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [27]
+--------------------------------------------------------------------------------
+
+    Two quick questions on revenue recognition. Over the past some quarters, I believe that the -- certain digital media, at least, has moved around between the agency and wholesale model. Can you help us quantify how this has actually impacted the reported media revenue rates? In other words, would 2Q revenue rates have been meaningfully different if the model had been the same?
+And then second question, just quickly -- on Prime, can you remind us how you recognize revenue from the Prime membership fee over the course of the year? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [28]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of Prime, we recognize it over the life of the subscription. And then in terms of third-party versus first-party, certainly we have had some shift within digital media. But again, digital media is primarily a first-party business and happens to be one portion of our business.
+But you are absolutely right. In terms of our third-party business, which from a unit perspective is 40% of our total units this quarter, we recognize the share of that revenue; the rev share, if you will, as revenue, whereas the other parts of our business, largely, we are recognizing that first-party revenue, and so we are recognizing the full amount of revenue in the current period.
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+    Jordan Rohan, Stifel Nicolaus.
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [30]
+--------------------------------------------------------------------------------
+
+    Thank you so much Sean, I'm curious about your expansion efforts in Spain, since it's a relatively new territory for you, how well situated you are and how ready you are for the fourth quarter there.
+And, also, there have been a lot of stories about Amazon heading into Brazil, but I don't believe we have identified any fulfillment centers and things like that. Can you discuss the extent and breadth of your offering in Brazil; whether it's Kindle devices, digital media or something beyond that? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [31]
+--------------------------------------------------------------------------------
+
+    In terms of Spain, we are very excited about what we see. It is growing very fast. We are in investment mode and it's an exciting geography for us. We are very optimistic over time it will be a great geography for us. So we are very happy to serve customers in Spain and we continue to, as we have done in other geographies, that we will continue to serve customers and continue to expand selection and get service levels even better over time. So we are very excited about that.
+In terms of Brazil, we do have a Kindle Store and we have devices at physical retailers. So from a Kindle perspective, that's what we are doing in Brazil.
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+    Ron Josey, JMP Securities.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [33]
+--------------------------------------------------------------------------------
+
+    Great, thank you for taking my question. I'm wondering if you can talk a little bit about North America EGM. Just given the strength you saw in the business and continued re-acceleration, have you seen any sort of impact? I'm assuming no, but from price matching programs, from off-line retailers, and also on sales tax. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [34]
+--------------------------------------------------------------------------------
+
+    In terms of North America total growth, we saw an acceleration from last quarter from 26% to 30%. We saw an acceleration in both North America media as well as North America EGM.
+Within EGM, it was very broad in terms of growth. We saw very strong growth across many different categories, and so I'm very pleased with that. I called out a couple that were notable in terms of apparel, as well as in consumables. Certainly, those are getting larger and still growing very fast, which is why I called those out.
+In terms of competitiveness, it has been very competitive. It is today; it has been since our inception. We have many different competitors online. We have many competitors off-line. As you go to your home or office, you pass our competitors every day. That's an environment where we are used to dealing in. It's something that's not new. It's something that we see in all of our geographies across many different categories.
+
+--------------------------------------------------------------------------------
+Operator    [35]
+--------------------------------------------------------------------------------
+
+    Heath Terry, Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [36]
+--------------------------------------------------------------------------------
+
+    Great, thanks Tom. As you get closer to customers with more FCs and more efficient shipping, what kind of impact is that having on conversion rates within customers in those areas as shipping times shorten or delivery times shorten?
+And then as you look at the early adopters for fresh in L.A., any sense that you can share with us of what kind of cross-shopping you are seeing among new fresh customers? Are they bundling media and EGM in those other orders, or to any degree are these new-to-Amazon customers that have been brought in purely because of fresh?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [37]
+--------------------------------------------------------------------------------
+
+    If you take a look at L.A., it's just, again, very excited and it's very early. So I think on that one, you will just have to stay tuned.
+But in terms of as we get closer and closer to customers with fulfillment, we have seen growth due to that. And it has manifested its way in a few different ways, but most notably you see it in Prime. We have -- because of our fulfillment logistics capability, we have been able to offer Prime broadly, and we just have selection that's just closer and closer to customers. And if you look back over the last several years, there has been different reasons why we have grown the way we've grown in terms of adding new selection and making sure that we have really sharp pricing.
+But certainly, Prime, which includes speeded delivery, has certainly been a notable -- has had a notable impact. And we are very pleased with the Prime program. Customers like it. We see very strong growth in Prime subscribers. We see very good retention of Prime members. So it's a great program for us and certainly, again, delivery speed is certainly impacting that program, our overall growth.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+    Anthony DiClemente, Barclays.
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Barclays Capital - Analyst    [39]
+--------------------------------------------------------------------------------
+
+    Thank you. On the topic of media, just wondering, Tom, if there are any call-outs in terms of categories of strength or weakness within physical or digital media that you could call out. And along those lines, just wondering if you could comment on your media device rollout strategy from here, if there is anything you could tell us.
+And then, quickly, is there any reason Prime Instant Video isn't available for Android devices? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [40]
+--------------------------------------------------------------------------------
+
+    In terms of media growth, not a lot of call-outs, except probably the obvious is digital units growing very fast relative to physical units, and we are excited to see that. And because of where we are, we are further penetrated in North America. You are seeing a bigger impact on our growth rate than you are in International, and we certainly see that. But not a lot of other call-outs there.
+But, again, we are very pleased, and certainly customers are responding to many things, including selection and great prices and everything else within those digital offerings. But, also, they are responding to unique selection that we have. And if you take a look at our release, you will see the specific numbers related to some of the exclusives we have and, certainly, that is having an impact. So there's many, many different things that are working for us in that space as part of our overall ecosystem for digital that we are pleased with.
+In terms of our device plan, we are very pleased with the devices we have to offer customers. We think we have a great offering, both in terms of Kindle and Kindle Fire. In terms of our future roadmap, we have a long-standing practice of not talking about what that will be prior to announcement.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+    Youssef Squali, Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [42]
+--------------------------------------------------------------------------------
+
+    Thank you very much. Two quick questions, please. Tech and content was up to 9% of revenues. I think that's the highest it has ever been. How much of that is actually streaming content-related? How do we look at it going forward? Does it stay at that elevated level?
+And then on fresh, is that business profitable for you in the Seattle area? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [43]
+--------------------------------------------------------------------------------
+
+    In terms of tech and content, we are spending in a number of different areas, but there's a few that I would like to highlight. One is certainly -- keep in mind that the infrastructure related to our very fast-growing Web services business is included in tech and content. So, certainly, as we ramp up that business and it is becoming more sizable and growing very fast, you are seeing that impacting that line item.
+We are also investing very heavily in digital, and that is across many different parts of our digital offerings there. That's also included. Any of the tech teams that are working on customer experience across Amazon as we grow, so as we support both our seller businesses and our retail businesses, they are included in that line item. So certainly, that's what you are seeing there.
+In terms of fresh, we are not breaking out the financials. But keep in mind that fresh was designed as a pilot and, certainly, the economics have improved over time through invention on behalf of the team there as well as operating efficiencies. So again, that was set up as a test, which has enabled us to launch L.A.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+    Colin Sebastian, Robert Baird.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [45]
+--------------------------------------------------------------------------------
+
+    Thanks very much. A quick follow-up on the device strategy. Given the fairly quick pace of innovation in the tablet market overall, I wonder if you can contrast the benefits of that for Amazon, given the popularity of shopping and media apps with the costs and complexity of maintaining your own line of hardware.
+And related to this, it seems as if the pace of new content acquisition and licensing has picked up a bit. So I wonder if that reflects any changes in either the competitive dynamics or pricing or some sort of other strategy shift on your part. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [46]
+--------------------------------------------------------------------------------
+
+    In terms of some of the dynamics, we are very excited about our digital business. We are inventing -- you see a lot of different inventions, both on the hardware side as well as on the software side from a device standpoint. You are also seeing a lot of invention around the content side. And we think, for example, Prime instant video, which combines video and our Prime membership, is very compelling, and we are investing heavily in content. It's still very early there, but we are finding that customers, certainly existing Prime members, are more and more streaming content. We are having new Prime members come to Amazon largely because of video in terms of one segment of that population that's coming from new Prime members; it's because of Prime instant video, and we can see that based on the free trials and the conversion of those free trials related to Prime instant video. So that's certainly one portion of our growth in Prime memberships which we find exciting.
+For us, we will offer exclusive content on the book side; it's very interesting. So again, we are inventing -- across a lot of different areas. And, yes, there are a lot of different dynamics, but we think we are well suited for both device software and content side of those businesses.
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+
+    Matt Nemer, Wells Fargo Securities.
+
+--------------------------------------------------------------------------------
+Matt Nemer,  Wells Fargo Securities, LLC - Analyst    [48]
+--------------------------------------------------------------------------------
+
+    Afternoon, just two questions -- one, given your comments that International will be in investment mode for some time, can you just remind us what the priorities are there from either a geography or product standpoint?
+And then, secondly, following the management changes at Quidsi, we would love an update on the plans for that business and maybe just a sense for how integrated it is to Amazon retail. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [49]
+--------------------------------------------------------------------------------
+
+    In terms of the International piece, what I was referring to was as in investment mode for some time. I was referring to China specifically. We have a lot of opportunity to grow. We'll still continue to invest in International, but my comment was specifically around China.
+And then your question around Quidsi?
+
+--------------------------------------------------------------------------------
+Operator    [50]
+--------------------------------------------------------------------------------
+
+    Stephen Ju, Credit Suisse.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [51]
+--------------------------------------------------------------------------------
+
+    Tom --
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [52]
+--------------------------------------------------------------------------------
+
+    Hello? Just to follow up, the Quidsi question, I think, was around the founders leaving. We will position with them leaving. I missed the last part of that, but we are fortunate to have the founders with us for a number of years. They did a great job while they were here and we have a great team at Quidsi. We are pleased with that business and the retail team works very closely with the Quidsi business and we are excited to have that as part of Amazon team.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [53]
+--------------------------------------------------------------------------------
+
+    Tom, is there anything you can share in terms of the situation in Germany with the workers' strike? Are you able to fulfill from unaffected fulfillment centers, or is it causing some hindrance to your operations there?
+Also if you can update us on what you have been doing with Kiva since you have acquired it. Are you focusing more on internal integration, or are you selling more aggressively to external clients? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [54]
+--------------------------------------------------------------------------------
+
+    In terms of Germany, there's not a lot I can add to there. We are certainly serving customers. Those results are reflected in our overall total results that you see today for Q2 as well as our International results.
+In terms of Kiva, we certainly -- we have a great team there, love the technology. We don't have any announcements in terms of rollouts, but we are ahead of schedule from what we had set out at the time of purchase, which we are happy about. So we'll have to stay tuned on the actual rollout, but we are very encouraged by what we see there.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+    Ken Sena, Evercore Partners.
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore Partners - Analyst    [56]
+--------------------------------------------------------------------------------
+
+    Hi, thank you. Just going back to your comments on unit acceleration, has the shift from agency to wholesale in terms of the DOJ e-book settlement -- has that completed, or are you still working your way through many of the US publishers? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [57]
+--------------------------------------------------------------------------------
+
+    We are working through it. I wouldn't say that that's complete, but we are working through it.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP IR    [58]
+--------------------------------------------------------------------------------
+
+    Thank you for joining us on the call today and for your questions. A replay will be available on our investor relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
+EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
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+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2013-May-01-FB.OQ-140634585149-Transcript.txt

@@ -0,0 +1,557 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2013 Facebook Earnings Conference Call
+05/01/2013 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook, Inc. - Director of IR
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+ * David Ebersman
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Ken Sena
+   Evercore Partners - Analyst
+ * Jordan Rohan
+   Stifel Nicolaus - Analyst
+ * Ben Schachter
+   Macquarie Research Equities - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Brian Wieser
+   Pivotal Research - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Jordan Monahan
+   Morgan Stanley - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Gene Munster
+   Piper Jaffray - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Aaron Kessler
+   Raymond James - Analyst
+ * Daniel Ernst
+   Hudson Square Research - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Anthony DiClemente
+   Barclays Capital - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook first-quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.
+(Operator Instructions)
+Thank you very much. Ms. Deborah Crawford, Facebook's Director of Investor Relations, you may begin.
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's first-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO, and David Ebersman, CFO.
+Before we get started, I would like to take this opportunity to remind you that during the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the Company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in our annual report on Form 10-K filed with the SEC on February 1, 2013. In addition, please note that the date of this conference call is May 1, 2013, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.
+During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. This call is being broadcast on the Internet and is available on the Investor Relations section of the Facebook website at investor.fb.com. A rebroadcast of the call will be available after 6.00 PM Pacific Time today. The earnings press release and accompanying investor presentation are also available on our website. After management's remarks, we will host a Q&A session.
+And now I'd like to turn the call over to Mark.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah. And thanks, everyone, for joining us today. We got off to a good start this year with strong engagement in growth across the community, several major new product announcements and some good financial results. Sometimes it surprises me that our community can still grow so quickly beyond 1 billion active members. More than 100 million new monthly active members have joined in the last half a year. But now there are more than 650 million people who use Facebook every day. That's more than 60% of our community every day. We continue to see high levels of engagement globally across our whole community. We take our stewardship of this very seriously. We want to make sure we give every person in the world the power to share. And we're proud of these results.
+Overall, there are three main parts of our strategy -- build the best mobile product, build a platform with new services that leverage the social graph, and build a strong monetization engine. I'm going to use my time here with you today to give my assessment of how I think we're doing in each of these areas.
+Let's start with Mobile. One of the products I'm most excited about is Facebook Home. It's a family of apps that you can install on your Android phone to make the home screen of your phone much more personal and about people, not apps. We know that people spend an average of 20% or more of their time in apps on Facebook, staying up-to-date with the people they care about are doing. We each open the Facebook app maybe 10 to 15 times per day. But we probably check our phones over 100 times a day. So with Home, you can see fresh news and content from people and topics you care about every time you turn on your screen. It really brings your phone to life and provides a completely new experience.
+This product is still very early and this is just the first release in a long journey. We're planning on iterating quickly and tuning things based on feedback. We haven't really started encouraging people to install it from within our apps yet and it's only available on a few phones. But over the next few months we hope to push this out much more broadly and get this in the hands of a lot more people. We're excited about Home because we think it's a great product. But Home is also an important milestone for our Company. This is a completely new kind of mobile experience based on people, not apps. And we think this is how phones and computers should work. I'm looking forward to sharing more with you on the experiences that are borne on mobile that we're building over the rest of this year.
+Now, beyond Home, I'm really proud of how Instagram is doing. Kevin and his team have made amazing progress since last April. When we agreed to acquire them, the Instagram community had 22 million people actively using their service every month. And today, over 100 million people are using Instagram each month. The Instagram community is growing even faster than the Facebook community did when it was this size. And the two communities complement each other to create some great experiences where you can capture any moment in your life and easily share it across all the communities you care about.
+Next I'd like to talk about platform and building new services using the social graph. A couple months ago, we announced a new, richer and simpler design for our newsfeed, that's more visual and engaging for all the content that you might want to consume. From news stories from the New York Times to pins from Pinterest, or activities from a game that you play. This new design opens up a nicer canvas for content for every developer and publisher out there and we think it's going to create a lot more opportunities for engagement. Early feedback has been positive on the versions we've rolled out on iPhone, iPad and desktop web and we're looking forward to rolling this out more widely soon.
+For our development platform, we've had a long road map to build the tools for iOS and Android, to make building social apps and advertising with Facebook, as easy on mobile as it is on desktop web. We completed this transition by bringing Open Graph to mobile this month and our efforts are paying off, with now 81 of the top 100 grossing iOS apps, and 70 of the top 100 Android apps integrating with Facebook and continuing to grow.
+One of the developments that's been interesting is seeing how big of an opportunity mobile apps can be for Facebook. Because of the roles Apple and Google have in this space with their app stores, it wasn't as clear early on what kind of role Facebook would play. But I think it's clear now that we can create a lot of value for developers by providing a platform for identity and distribution where we're starting to see real revenue through selling mobile app installs. We just announced the acquisition of Parse, a platform and service provider for mobile apps, as part of our strategy to provide greater support for developers. Both of these products make it easier for developers to create and grow their apps and this could be the start of something much bigger.
+Now I want to talk a bit about monetization. I just mentioned mobile app install ads, which are growing quite well and have become one of our most important new ad products. This supports our hypothesis that Facebook should help you discover new apps and content that you may want to use. And even if not every recommendation we make is one that you take, I think this is still starting to provide some really good content for our community, in addition to the business opportunity here. This type of ad makes sense to me on mobile. On desktop web, most ads encourage you to visit a new website. On mobile, it makes sense that most ads encourage you to visit apps instead. And in order to visit apps you first need to install them. So these ads are the obvious first step.
+On mobile, the set of companies that produce apps is much broader than what you might think of as traditional developers. Every major brand, company or service wants to build apps as a store front or interface for their customers. And each of these companies wants to reach their customers to encourage them to install their apps. This market is already big and I expect it to continue to grow quickly.
+One more thing that's important to reinforce here is that we continue to measure people's satisfaction with all the content they see on Facebook, including ads. We haven't seen any meaningful impact on satisfaction and we're continuing to watch this very closely. This is important to us as stewards of this community. We aspire to have ads -- to show ads that improve the content experience over time. And if we continue making progress on this, then one day we can get there.
+So that's my update on our strategy for this quarter. We've already accomplished a lot so far this year. We've seen strong growth and engagement across our whole community, several major product announcements and good financial results. We think the products like Home and Graph Search are big opportunities to deliver some unique and important services to the world, that we're positioned to do better than anyone else. But these services are also big, long-term investments. So I want to be clear up-front that we're making these big investments because I think these are important areas for us to focus on.
+Now, finally, I want to take a moment to thank everyone who works at Facebook, and everyone who makes this community great. All of you are contributing to building these new experiences and helping more than 1 billion people stay connected. So thank you all. And thanks to everyone on this call for being with us today. I look forward to having more to share and report on next quarter. And now I'd like to turn the call over to Sheryl.
+
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+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark. As Mark said, we had a very solid start to this year and we're excited about the opportunities ahead of us. Our first-quarter total revenue was $1.458 billion and total advertising revenue grew to $1.245 billion. This means that ad revenue was up 43% year over year, faster growth than we had in any quarter in 2012. We believe that this shows that our ad product innovations are helping marketers reach customers effectively. Our growth is particularly strong from new small and medium-sized marketers, direct response marketers, and app developers. I want to use my time with you today to update you on the progress we've made in our three strategic ads priorities -- mobile, measurements and product innovation.
+First, mobile. As Mark has said, having billions of people carry social devices in their pockets, checking them multiple times a day, often checking Facebook, is a huge opportunity for us. A recent comScore report showed that in the US, people spend more time on Facebook than on any other app on their smartphones. The opportunity for us to connect people to each other and to marketers has never been greater. We are uniquely positioned to offer marketers massive reach on a daily basis. In Q1, mobile was approximately 30% of our ad revenue, up from about 23% in Q4. Importantly, we're seeing strong growth in our mobile ads business all around the world, particularly in Asia.
+As an example, our mobile app install ads performed very well this quarter. We offer developers a unique opportunity to drive downloads of their mobile apps, as Mark talked about. During the quarter, 3,800 developers used these ads to drive nearly 25 million downloads. Of the top 100 grossing apps on both iOS and Android in the last week of Q1, about 40% of them used our mobile app install ads. In gaming, travel, eCommerce and financial service industries, the early indicators are that our cost per install are highly competitive. In one example, British Telecom provider O2 used Facebook as its only digital marketing channel to promote its new music app, O2 Tracks. In just three days, they reached 9 million people and got to sixth place in iOS apps in the UK.
+Second, I want to discuss our progress in measurement. One of the challenges we face is helping marketers understand the value of our ads. This has been a major focus for us over the past several quarters. We're partnering closely with our clients to help them understand how their campaigns are performing and this measurement work also helps them gain a better understanding of their customers, which then makes their future campaigns even better. In the last nine months, we've conducted campaign effectiveness studies on over 100 campaigns across CPG, auto, retail and telco.
+One of these studies was with Bud Light. Bud Light ran Page Post ads to its 5.8 million fans on Facebook and these ads appeared in all of our placements, including mobile newsfeeds. We worked with Datalogix and found that these ads reached 20% of US households and had a 3.3% sales lift, yielding a 6 times return on ad spend, A result we are very proud of and Bud Light is really excited about. We plan to continue to invest heavily in measurement with our clients throughout the upcoming year.
+We're also really excited about our acquisition of Atlas which closed just last week, and I was able to welcome the team to Facebook earlier today. Atlas is a really important part of continuing to develop our measurement capabilities. For the past decade, digital marketers have primarily measured success by focusing only on click. But this oversimplifies how people make purchase decisions, both offline and online, because it ignores everything people do and see before they do that last click. Smart marketers are looking for a better way to value all of the impressions that they buy and engage, leading up to purchase. Multiple industry-wide studies have validated this multi-click attribution approach. For offline sales, both Nielsen and comScore have repeatedly shown that clicks are not a good predictor of sales lift.
+For online sales, aggregate knowledge found in an analysis of more than 500 online campaigns, that when clients move from allocating their advertising spend using last-touch attribution to using multi-touch attribution, it saw a 33% increase in actions, conversions and sales. In a study of campaigns from Q4 2012, they found that when measured holistically, cost per acquisition on Facebook is 68% less than other online channels. Datalogix studies validate this finding as well, demonstrating that, on average, 99% of people who saw a Facebook ad and then bought a product in the store never clicked on an ad at all. We believe the Atlas platform will help us demonstrate even more clearly the connection between ad impressions and purchases. We can help marketers measure the effectiveness of their ad impressions better, not just on Facebook but across the entire Internet. This means we can take the advancements we've made in measurement on Facebook, including our integration with Nielsen and Datalogix, and extend them to a much larger audience and to many more purchases.
+Third, I'd like to highlight product innovation in apps. Over the last year we've invested heavily in product innovation and I'm excited about what we've accomplished in a relatively short period of time. As always, our top focus is on the results we generate for marketers and we're pleased to see the ROI we can provide, as well as providing a good experience for our users. We continue to innovate new targeting capabilities that make it easier for businesses of all sizes to reach the right people, both on desktop and on mobile.
+In Q1, we gained traction with our Custom Audiences product. This product allows marketers to reach their target audiences based on their own customer databases or databases maintained by third parties. For example, a marketer can target ads to customers who have not returned to their store in the past month, but who have made purchases before. This product improves our targeting and generates higher ROI for marketers and a better ad experience for our users. We're really pleased with our adoption of this product. In Q1, more than twice as many marketers used Custom Audiences than in Q4, including 23 of the Ad Age 100 top global marketers, and many other important clients. Companies from hotels.com to Intuit to Virgin America are seeing success with this product.
+In April, we launched another powerful targeting product, Partner Categories. This enables marketers to use third-party data from Acxiom, Epsilon, and other data providers to target their ads. For example, we can deliver ads to the 12 million people in the US who are likely to purchase a car in the next six months, or to the 19 million people who are active purchasers of hair care products, households that purchase hair care products at multiples of other households. Or to the 23 million people in the US who are heavy soda drinkers. We apologize, Mayor Bloomberg.
+We have also seen more customers begin to use FBX, and we recently launched FBX to newsfeed on desktop. We think this will continue to drive the advertisers' options, given that we generally see higher engagements for ads in the newsfeed. In the last six months of 2012 as one example, retargeting platform AdRoll saw 70% lower cost per click on Facebook than on traditional web retargeting. FBX was so successful for them that by the beginning of Q1, AdRoll reallocated 63% of their total impressions to Facebook.
+Overall, we feel really good about our first quarter results. We've made tremendous strides in mobile; we continue to improve our measurement capabilities, most notably with our acquisition of Atlas; and we continue to innovate on our key advertising products and tools. We're still in the early days of developing our ads business and the huge opportunity ahead of us and we thank all of you for your continued interest in our business.
+Thank you, and now I'll turn it over to David.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Okay. Thanks, Sheryl, and good afternoon, everyone. I'd like to share with you the progress we made in Q1 against our key financial objectives -- to increase revenue, to invest aggressively to drive our future growth and to position the Company to maximize long-term returns for our investors. In March, on average, 665 million people accessed Facebook each day, up 26% from last year, and representing 60% of the 1.11 billion people who used Facebook during the month. Consistent with last quarter, mobile continues to drive growth in visitation and engagement. 751 million people accessed Facebook from mobile devices in March, up 54% from last year. These numbers do not include Instagram, which continues to grow rapidly, as Mark mentioned.
+Turning to revenue, in Q1 total revenue was up 38% and ad revenue was up 43% compared to last year, driven by the strong performance of newsfeed ads. Exchange rate had no meaningful impact on our revenue growth rates. Ad impressions were up 39% and average price per ad was up 3% compared to last year. The product changes we made and discussed last quarter -- primarily lowering the price floor in our auction -- had a significant impact on the price and volume year-over-year comparisons. In the United States and Canada, where the price floor changes had a smaller effect, average price per ad increased over 25% relative to Q1 of last year, driven by higher engagement and performance of newsfeed ads.
+Mobile ad revenue came in at approximately 30% of ad revenue this quarter versus zero last year, and desktop ad revenue in Q1 was essentially flat with last year. As we've discussed in the past, most of our advertising clients do not specify that their Facebook ads be shown on desktop only or on mobile only, but rather they put their ads into our system and allow us to show the ads on whatever device where the ads will perform best. Because of this, the flat desktop revenue does not reflect a particular trend relative to desktop demand so much as it reflects the fact that more of our available ad inventory is being shown on mobile, because that's where people are spending increasing amounts of time and because the mobile ads perform well. We believe our aggregate ad revenue number remains the most important reflection of our performance in terms of increasing overall advertising demand. And the most important ways for us to continue to increase ad revenue are to grow users and engagement and to build advertising products and measurement tools that increase demand from advertisers of all types around the world.
+Total payments and other fees revenue was $213 million in Q1, an increase of 15% versus last year. Payments revenue from games was up 12% so we believe 6% represents the best apples-to-apples comparison in terms of the increase for payments from games, if we adjust for items such as the Q4 change in revenue recognition timing. We're pleased that Q1 represented our largest three-month quarter of games revenue to date, despite a 37% drop in year-over-year payments volume from our largest developer, as our other developers increased their payments volumes by almost 60% and we saw a record number of people playing games on Facebook. Games revenue in Q1 benefited from the growth of games launched over the past year and also from our efforts to increase games distribution, usage and payments conversion. We believe Facebook continues to offer a compelling platform for developers to build great games and businesses and we will continue to invest in this area. Overall ARPU increased 12% to $1.35 for the quarter, including a 21% increase in the United States and Canada, and double-digit gains in the other major regions as well.
+Shifting now to expenses, in Q1 our total GAAP expenses were $1.08 billion. Excluding stock compensation, total expenses increased 56% to $895 million, driven primarily by headcount and infrastructure spend to support our growth. We continue to expect that our total non-GAAP expenses, including cost of revenue but excluding stock comp, will likely grow in the neighborhood of 50% in 2013, consistent with what we said last quarter, as we continue to invest in products to grow engagement and monetization.
+Our Q1 GAAP operating income was $373 million, representing a 26% operating margin. Excluding stock comp, our non-GAAP operating income was $563 million, representing a 39% non-GAAP operating margin. Our GAAP tax rate for Q1 was 38% and benefited significantly from the realization of a one-time $94 million R&D tax credit in the quarter. Our Q1 non-GAAP tax rate was 43% and we expect that our full-year non-GAAP tax rate will be similar to Q1.
+GAAP net income and EPS for the quarter were $219 million, or $0.09 per share and non-GAAP net income and EPS were $312 million, or $0.12 per share. We spent $327 million on CapEx in Q1 and we continue to expect 2013 CapEx to be in the neighborhood of $1.8 billion, as we invest in servers and data centers to rapidly and reliably provide our products to people around the world.
+In Q1, similar to Q4, upon the vesting of employee RSUs, we withheld shares and paid the associated income taxes for our employees which resulted in an outcome that's functionally very similar to Facebook having repurchased approximately $400 million worth of shares in Q1. We ended Q1 with $9.5 billion in cash and investments.
+Overall we believe that 2013 is off to a good start. We're pleased with our financial performance, as well as our progress in product development. We're continuing to invest aggressively in new products that we think will drive long-term engagement, as well as products and tools to grow our revenues and increase returns for the advertisers and developers working with us. And we're excited about the opportunity ahead of us to build out the network of people using Facebook and to bring our unique assets in terms of reach, engagement and identity to our large and important market opportunities.
+Now let's open the call for questions.
+
+
+
+================================================================================
+Questions and Answers
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+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions)
+Heather Bellini with Goldman Sachs.
+
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+Heather Bellini,  Goldman Sachs - Analyst    [2]
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+
+    Mark, I was wondering, you shared with us the continued success of mobile install ads. I was wondering if you could share with us the other monetization initiatives that you have that you're most excited about for 2013. And then my follow-up for David would be if you can share with us qualitatively how CPMs trended in the various regions on a year-over-year basis.
+
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+Sheryl Sandberg,  Facebook, Inc. - COO    [3]
+--------------------------------------------------------------------------------
+
+    I'll take the first question. In terms of our ads priorities, they are what I mentioned -- mobile, measurements and product innovation. We are particularly focused on improving the quality of our ads because we think that is the best way to have a great experience for users on Facebook, as well as for marketers. I think if you look at the success of Custom Audiences, Partner Categories, FBX, what you see in that are products that all move us towards better targeting, more relevant, better experience for users and for our marketers. And we're going to continue to invest very heavily in making the ad experiences as high return as they can for everyone involved.
+
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+Mark Zuckerberg,  Facebook, Inc. - CEO    [4]
+--------------------------------------------------------------------------------
+
+    Yes, and I'll just emphasize the same point. The things that I'm most excited about are things that are driving quality. The two big levers for the business are, A, obviously a lot of people spend a lot of time using Facebook to stay connected with all the people around them, and that gives us an opportunity to advertise. But I actually think over the long term, the thing that's going to drive the business the most is getting the ads to be very high quality -- personalized, good content in there and a lot of the things that we're doing are aligned with that. So, app installs, a lot of that stuff is just good content that people are interested in. There's no great way besides app stores today to discover a lot of apps on mobile devices. Similarly, I talked about the newsfeed redesign that we are rolling out and the content in there is much more visual. We've always had this policy that the advertising content will display in exactly the same way that the consumer content display is. And making it so that people can share much more visual content makes it so naturally advertisements can now have the same kind of compelling creative, as well. Which I think will increase the quality of that and over time increase the effectiveness, as well.
+
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+David Ebersman,  Facebook, Inc. - CFO    [5]
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+
+    Heather, in terms of your question about CPMs. Ads revenue grew well across all the geographic regions that we report on. I mentioned the US and Canada growth in CPMs. We saw a similar number, a little bit lower but similar, in Asia. For Europe and rest of world, the numbers were much lower. A little bit above zero in the case of Europe, a little bit below in the case of rest of world. The interesting question around this is what those numbers might have looked like if we hadn't made changes in the option dynamics, such as the price floor. And obviously we can't answer that question quantitatively because we don't have the data, but we feel pretty strongly and pretty confident that prices would have increased substantially more in all of the regions if we hadn't made those changes.
+
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+Operator    [6]
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+
+    Ross Sandler with Deutsche Bank.
+
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+Ross Sandler,  Deutsche Bank - Analyst    [7]
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+
+    Just two questions. Engagement, first, was up across most of the geographies. We assume that's primarily driven by mobile but can you talk about anything else that's driving up engagement? And then just a follow-up on the geographies. It looked like the US had a normal seasonal downtick sequentially, whereas international, most of those regions held up sequentially. So, can you just talk about the difference between sell-through rate in the US in newsfeed versus some of those international markets? Thanks.
+
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+David Ebersman,  Facebook, Inc. - CFO    [8]
+--------------------------------------------------------------------------------
+
+    Yes. In terms of growth and engagement geographically, I think you can see from the numbers that growth was strong across all the areas of the world. We continue to add a lot of users in places like India and Brazil. And engagement trends, I think, were similarly strong throughout. And mobile is clearly a big part of that equation, and been very helpful to us in terms of getting more users, more daily users, and more engagement from those users. In terms of revenue by geography, I don't know that there's a lot to add to the numbers I've already said. Europe looked good in the first quarter after being a little bit softer towards the end of last year and we continue to grow well in Asia and the rest of world. So I think just pretty consistent performance there.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+    Scott Devitt with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Jordan Monahan,  Morgan Stanley - Analyst    [10]
+--------------------------------------------------------------------------------
+
+    It's Jordan Monahan on for Scott. Just two quick questions. The first is, one of your competitors recently said something to the effect of, if you're building for mobile, you're building for today but not tomorrow, suggesting that tomorrow is a multi-screen world with all sorts of personalized devices. And I'm just curious, what opportunities do you see when you think about tomorrow? Would you agree that screen fragmentation will continue to increase? And does moving ads toward newsfeed and away from right-hand side help you in that environment? And then the second question is just about engagement. Engagement continues to improve despite more ads, which validates your strategy. So every time you launch a new product people get concerned that engagement may actually tick down, but it seems to do the opposite. So, are there other ad formats that you're thinking about that are likely to be complementary to engagement?
+
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+Mark Zuckerberg,  Facebook, Inc. - CEO    [11]
+--------------------------------------------------------------------------------
+
+    All right, well, I'll start. I think that the trend of more different form factors, I think is somewhat orthogonal from the main trends that we see, which is just people sharing more in different ways. People want to stay connected with their friends and family and all of these different folks in their lives. And they're going to use whatever technology they have to enable that, whether that's desktop computers or laptops or phones or tablets or glasses. Whatever the products are. And I think that there's going to be good ways for people to be able to consume social content on all of those. So I think the big question for us is just which platforms do we see growing the quickest. We're not tooled up as a company right now to make 10 huge investments like that at a time, but we can do a couple.
+Certainly tablets are growing very quickly and I think that's going to be increasingly important. But I think that consuming social content and staying connected with people is just such a fundamental human need that that that's going to be important on all of these. Getting ads in newsfeed was a valuable step in making it so that everywhere where someone is consuming content from Facebook, the business model goes along with that naturally. That was one of the early challenges that we had with mobile was ads for the first six or seven years of Facebook were just right-hand column, and that didn't translate to mobile. But it was fairly easy, with some amount of work, just to make that transition and we're there now. And now I think whatever the form factor is going forward, we'll be able to deliver advertising content in a proportion that we think is good, along with consumer content.
+For the sentiment stuff, I think what we're seeing is really positive and it's better than expectations. We assumed that sentiment and satisfaction might drop some amount. We continue to watch this really carefully because there's no guarantee that it won't in the future. But right now, what we have seen has made us more confident that we can do more with advertising over time and can ramp that up. Our strategy isn't to have a ton of different ad units. We really want to make it so that we're delivering these end-to-end solutions for our customers, and only have a small number of simple things to make it easier for advertisers to work with us. We want to deliver that and we're underway on this long road map to execute that.
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+
+    Anthony DiClemente with Barclays.
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Barclays Capital - Analyst    [13]
+--------------------------------------------------------------------------------
+
+    Thanks a lot. I have one for Sheryl and one for David. Sheryl, you talked about Atlas and the measurement capabilities there, and you framed it in terms of click-based ads. I'm wondering, is there also an opportunity for Atlas to improve or standardize measurement for impression-based ads? The spirit of the question, more generally, can you just talk about, or update us on, the potential for impression-based ads in terms of increasing as a percentage of the mix versus performance-based ads on Facebook?
+And then, David, question would be a little bit of a decel in the rate of growth of ARPU in the US. I'm wondering if there are other things you can call out in the first quarter, be it dollars from large events, TV events like the Super Bowl, or other things, other than seasonality. Or maybe you can quantify or comment on the seasonality factor in the US and Canada for 1Q. Thanks a lot.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [14]
+--------------------------------------------------------------------------------
+
+    On Atlas, you're exactly right. Our focus with Atlas is on impression-based ads. And the idea is that, historically, a lot of ads online, which were more based on search, the attribution was always that last click. And as people have looked more holistically at all the ad spending they're doing, what they find is that it's not just the last click that matters, but it's all the impressions leading up to that click.
+Importantly, we also drive sales offline. And offline, people aren't clicking through the purchase at all but they are actually walking into a store. So, in some sense, there is no last click. And so our focus with Atlas is to take that technology and enable us to improve our ability to connect ad impressions to purchase behavior, both offline and on. And not just on Facebook but across different ad purchases people do. So that's exactly why we made that purchase.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [15]
+--------------------------------------------------------------------------------
+
+    In terms of ARPU in the US and Canada, was up 21% versus last year so continuing to make good progress there. I really don't have anything unique to say about seasonality in 2013. We see it from Q4 to Q1 across the years that we've been an advertising business. And I'm sure there are unique things that impact each year, but there's nothing that we're aware of that was particularly important in 2013 in that regard.
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+
+    Jordan Rohan with Stifel.
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [17]
+--------------------------------------------------------------------------------
+
+    Thanks so much. I'm curious about how you address markets where it's a little bit harder to sell advertising. Specifically, if I'm calculating correctly, then 41% of monthly active users are in the US, Canada and Europe, as you define those geographies in your slides. And that's 74% of ad revenues. How can the other geographies of the world step up to be an even more meaningful percentage of total revenue? Do you have to add a lot of heads, a lot of sales infrastructure and technology infrastructure that you don't currently have? And from that perspective, did you meet your objectives in terms of hiring and expenses? Because I know how hard it is to support a business as global as Facebook. Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [18]
+--------------------------------------------------------------------------------
+
+    I'm very encouraged about our opportunity to sell ads all over the world. One thing I've learned in my time selling ads on the Internet, which is going over a decade now, is that markets that you don't expect to have ad markets develop faster than you would think. So, if had asked me seven years ago what Turkey's ad market would look like, I would not have predicted it as it is today. So I'm increasingly encouraged by small businesses around the world, and large businesses, and their adoption of the technology.
+I think with small businesses, we had an actually really deep competitive advantage, which is that people all around the world use Facebook. So when small businesses, who are historically way too busy to spend a lot of time using technology, start to use the Facebook platform, they're using something they already use as users. So once you have a time line or a profile, setting up a page is not a very big ask because you understand it and you're doing it anyway. And that's why we think, with almost no direct effort, we have 16 million small businesses actively using Facebook pages. I think one of the things we've done well over the past number of quarters is rolled out simplified ad products like Promoted Posts, where it's easy for those people who are using pages -- and this happens all over the world -- to become advertisers. And we're increasingly optimistic that we can do more and more of that.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+    In terms of hiring, I think everything has gone quite well. And as we've discussed, 2013 is a year where we're investing for future growth and I think in the first quarter, both in terms of hiring and building out our infrastructure, we're on track with where we want to be.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+    Youssef Squali with Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [21]
+--------------------------------------------------------------------------------
+
+    Thank you very much. Two questions, maybe one for Sheryl and one for Mark. On ad pricing, can you maybe just talk about CPMs for ads in the newsfeed versus ads on the right-hand rail? Can you give us maybe just an idea as to the magnitude of the difference between the two? Was that a big driver for that 21% increase? And then on video advertising, I was just wondering what's the strategy to bring video advertising to Facebook, both in your newsfeed on the desktop, initially, and then eventually on mobile, assuming that there's enough bandwidth for that? Thanks.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [22]
+--------------------------------------------------------------------------------
+
+    This is David. I'll take the first one, which is about CPMs. The ads that we show in newsfeed are displayed more prominently and they are more in the flow of a user's attention. So, as you would imagine, we get more engagement with those ads and they end up commanding a much higher average price per ad, as you would expect.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [23]
+--------------------------------------------------------------------------------
+
+    Video ads. Yes, sorry, I'll take the second part. So, video is a really exciting area because we had leveraged our scale and engagement and our ability to provide relevant ads. We have a video product out today. Advertisers can embed a video in their page posts and we're seeing really strong results. I think both because of that and because of marketers' inherent liking video as a format, we continue to explore new things as well, but we don't have anything to announced today.
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+    Justin Post with Bank of America Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [25]
+--------------------------------------------------------------------------------
+
+    Thank you. Two questions. First, on ad formats. Sheryl, do you think you really optimized the ad formats, especially on PC? Or is there a lot of room you can do to get better performance from that? And then, secondly, maybe you can just give us a business update on Instagram. Maybe you could compare where they are to where Facebook was when you turned on ads or any thoughts on how you could monetize that platform, maybe far down the road. Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [26]
+--------------------------------------------------------------------------------
+
+    On the first, I think there's a lot of room to improve our ads. I don't know whether that will take the format of different formats. I think more of it will be in terms of quality because I think we feel pretty good about our format. But one of the main pushes we have is to make each ad a better experience for users. Content in those ads, which is as good as the content they'll see from a friend or anything else on the site, as well as make those higher return for marketers. And those two go hand in hand. I think the place you will see the most from us is more around targeting, around ability to take the formats we have and make the ad better within those formats. That's certainly our focus now. But as our site evolves and our product evolves we never rule out changing a format, as well.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [27]
+--------------------------------------------------------------------------------
+
+    And on Instagram, they are really doing well and growing really quickly. And I think that that is the right focus for them. And they have this opportunity to capture and basically build off this huge community, and I think that that should be 100% of the focus right now. I am really optimistic about the business opportunity there, too. You already have a lot of brands from folks who advertise with Facebook, putting content into Instagram, getting huge engagement rates. So people are coming to us and asking for ways to make that even richer and it's something that we're thinking about. But right now I think that -- I'm just really proud of the team and excited about how quickly they are growing. And we mentioned this in my comments early on, but they are growing a lot faster now and were faster to get to 100 million than Facebook even was.
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+    Gene Munster with Piper Jaffrey.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray - Analyst    [29]
+--------------------------------------------------------------------------------
+
+    Good afternoon. You've seen some acceleration of revenue over the last three quarters. Can you just give us some guidelines in terms of should we continue to see that revenue accelerate. And if not, at some point, in the back half of this year or early next year, based on some of the investments in new products, could we see another inflection point in growth? Thank you.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [30]
+--------------------------------------------------------------------------------
+
+    I think we're still in the really early days of what we're doing and it's particularly true in mobile. A year ago we didn't have any mobile ad revenue and now it's 30% of our ad revenue. So this is great. We're really pleased with the progress and we still believe that mobile has the opportunity to be huge for us if we can execute well. We've got a really large mobile user base. They are very engaged and spend a lot of time with us. We have an ad format that works on mobile and we have identities so that we can put the right ads in front of the right people.
+So I think the future for us is, I think, much more interesting than trying to project it from any particular quarter at this point, just because we've got a lot left to do. And obviously we'll continue to try and develop tools to enable us to monetize our advertising better and potentially in different ways, as well. But the big opportunity that's right in front of us is trying to make the mobile advertising products higher quality and more relevant over time.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+    Ben Schachter with Macquarie.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research Equities - Analyst    [32]
+--------------------------------------------------------------------------------
+
+    A couple issues for Mark. I was wondering, first, if you could talk about the platform strategy and maybe give some specific examples of third parties that have really been successful. And, in general, what are the lessons that you've learned around the platform strategy and how it has evolved. And then, secondly, just around the evolution of Graph Search, any lessons from the launch, positive or negative? Thanks.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [33]
+--------------------------------------------------------------------------------
+
+    Sure. One thing that I think has actually gone well with the platform recently is the gaming ecosystem. David was talking about this earlier. With the exception of our largest partner, Zynga, whose growth hasn't been as awesome as everyone would hope, the rest of the community has actually grown quite well and is quite healthy. And so we're pretty happy with that and it's a pretty diverse group. I mentioned in my comments at the beginning, we're up to -- I think it's 81 of the top 100 top grossing iOS apps and 70 of the top grossing Android apps are connected in with Facebook, so we're getting good coverage. And that's always been the vision, is making it so that any app and experience that you have can be social. That's working well.
+And also we really want to be a source that developers can come to for distribution and make it so that they can come to Facebook and spread their apps. People have always had good tools to do it organically, but recently the app install ad product has been another tool in developers' arsenal in order to do that, and that's showing some real traction. So I'm pretty excited about that, as well.
+Graph Search was your other question. The strategy around this, and where we are in rolling it out is we developed it over a period of time at the Company. And we knew that in order to get it to be really good we had to get some real world data, so we rolled it out to just a small percent of people in order to be able to tune the ranking and all that. We're getting it to a state where we're really happy with it before we roll it out to everyone. But we're really optimistic that that will happen over the coming months.
+So I'm pretty excited about that. The people who use it, we've gotten very positive feedback from it and I think it's going to be a very big opportunity. But the launch wasn't this point where we expected a ton of people to start using it. We've gated who can use it quite aggressively, in order to just make sure that we get the data that we need, and the real rollout will hopefully start pretty soon.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney with RBC.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    Thanks. I was wondering if you could talk about engagement per cohort. There's an urban myth that those under 25 are disengaging from Facebook. It's hard for us to see that in, obviously, the data that you report. But you would know that. Is the mobile engagement, is that offsetting that? Could you talk about that engagement amongst younger cohorts?
+And then, secondly, you talked about advertising on mobile devices performing well. Could you actually make the statement as to whether it performs as well as desktop ads do for advertisers on Facebook -- similar to, sometimes greater, sometimes less? Could you compare those two? Thank you.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+
+    Sure. I guess I'd start by saying we remain really pleased with the high level of engagement on Facebook by people of all ages around the world. You asked about people under 25. We continue to have really high penetration rates among that age group, both in the US and globally, and that the younger users remain among the most active and engaged users that we have on Facebook. And then, in addition, younger users are extremely active users of Instagram, as well. So that's great and makes our position even stronger.
+From our standpoint, the urban legend you referenced flows, more often than not, from surveys people have done of younger users that indicate that they are using other social services. And we take this feedback seriously but our sense is much of the concern stems from the assumption that this is a zero sum game, and that's not how we see it.
+We think the overall amount of time spent on services that enable you to connect and share is growing and will continue to grow, because these kinds of services are really engaging and good. And it's great for us to be the leader in a market that's expanding rapidly with the foundation we have with both Facebook and Instagram. And I guess the challenge for us is just to continue building great products that appeal to users of all ages.
+Your second question about the engagement levels or the performance of mobile ads, I think it's fair to say that newsfeed ads on both mobile and desktop both perform extremely well and we're pleased with both formats.
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+    Ken Sena with Evercore Partners.
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore Partners - Analyst    [38]
+--------------------------------------------------------------------------------
+
+    I was just hoping that you could go back to Atlas for a second and maybe give us a sense of maybe the run rate quarter on quarter. And is it correct to see Atlas as an avenue into monetizing potential inventory off of Facebook? And how do Home and maybe your Mobile Open Graph tie into that strategy? Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [39]
+--------------------------------------------------------------------------------
+
+    Our main focus with Atlas is our own measurement. That being able to measure Facebook ads all the way through to purchase, and net compare those in an apples-to-apples way with other ad purchases you make not on Facebook, is really important to drive marketer engagement with us. And that's our focus. We have no plans to launch in the network. We also don't break out -- we're not breaking out the revenues from Atlas.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [40]
+--------------------------------------------------------------------------------
+
+    And it's small. We didn't buy Atlas for the run rate of its revenues, but because we feel like it's a tool that can help us to grow our own business.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth with JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [42]
+--------------------------------------------------------------------------------
+
+    Thanks for taking the question. Sheryl, you talked about having strong traction with SMBs, and also in direct response in app developers, and also about Atlas and attribution. But can you help us understand the biggest hurdles that you have right now with big marketers? And then, secondly, David, if you could help us understand the percentage of mobile ads revenue that's coming from mobile app install ads. Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [43]
+--------------------------------------------------------------------------------
+
+    There are lots of types of big marketers. There are big marketers out there who are direct marketers. There are also big marketers who are brand marketers. And I think first and probably it's the brands, so that's how I will answer it, even though it's worth noting that there are big advertisers across the spectrum of different types of ad buys. As I said before, the thing about brand advertisers is that they got very used to TV, then they got very used to search, and we are a third thing. And we will win that business client by client, CMO by CMO. It's something I personally spend a lot of time on and I think we have a great team in the field against.
+With some of the big brand advertisers, we have been working with them for years and years. A lot of the data and measurement you hear us talking about are studies we've done with them based on campaigns that we've run with. And I think we have a lot of belief at the top, and in many of them we're in the process of going through their companies and getting that same commitment to buy. So we'll have a CMO who has seen the value, we've proven the value, and really wants the company to come along. And now we're in the process of working brand by brand, region by region, to get that same buy-in lower in the organization, which actually takes more time, not surprisingly.
+But other brand marketers, they are just in the testing phase, and they really haven't done enough with us so that we can even do the studies to prove the value. And so the good news for us is we're engaged with all 100 Ad Age 100, so everyone is buying with us on an annual basis. And we're working client by client to bring them along that spectrum. The good news is, I think we're increasingly proving that we can return on ad spend in different parts of the purchase funnel.
+To share one recent example, MGM Resorts has used a different suite of Facebook products to address different customers at different parts of the purchase funnel. They used offers to acquire new customers and they saw a 3 times return on ad spend. Then they used FBX to re-target people who were in their booking process and dropped out and that gave them a 15 times return on ad spend. And then for past guests who had completed a purchase but hadn't come back, they used Custom Audiences to target them to return, and they got a 5 times return. And I think it's experiences like that, where we show the breadth of what we can do, that really move us forward with the brand spender.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [44]
+--------------------------------------------------------------------------------
+
+    You asked about mobile app install ads. We launched that product, I think, at the beginning of the fourth quarter, more broadly. It's early in its development but really doing quite well. And we're pleased with both the quality of the experiences we're providing and with the revenue growth that we've seen. It really fits in nicely with the idea of putting content into newsfeed that we think will be of interest to users and provide value for developers. The only other thing I'd note is that it's an incremental audience for us, for the most part, from an advertising standpoint, which is also nice. Some of those developers were advertising with us before but for a lot of the mobile app install ad purchasers are new advertisers to Facebook.
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+    Brian Wieser with Pivotal Research.
+
+--------------------------------------------------------------------------------
+Brian Wieser,  Pivotal Research - Analyst    [46]
+--------------------------------------------------------------------------------
+
+    Thanks for taking the question. First of all, I just wanted to go back into the segments of the advertisers between the brands, developers, small businesses and performance. Is there any way you can characterize what maybe the growth trends have been, even recognizing some of them blur the lines? Or, alternately, growth trends between the different ad products. I find it's useful to get a sense of where the relative growth is. That would be useful.
+And then a second question, I just wanted to get updated thoughts on data centers and the role of data centers for Facebook. The degree to which you think that it is strategic in investing in and building these out. Or if it's really just about operational efficiency. Thank you.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [47]
+--------------------------------------------------------------------------------
+
+    In terms of the segments, it's really hard to break out the revenue because the same advertiser crosses multiple segments with multiple objectives, sometimes with the same ads. One of the ways we use the segments is to help focus our product development on understanding the different objectives that marketers might have, but then translating that into individual groups of revenue is difficult. I think that, as Sheryl mentioned, we're particularly pleased with small businesses as something that we can measure on Facebook and see the number of advertisers increasing.
+In terms of data centers, I think it is both strategic and operational. There's no question that owning our own data centers removes another party from the mix relative to when we used to lease data center space. It also enables us to build the data centers to look exactly as we want them to look, so that the performance is optimized for precisely what Facebook needs to do with the servers that we put in there. And there's definitely some efficiency that comes from that. But I would also say that, given what we're trying to do and the world we're trying to reach, I do think it's strategic for Facebook to not be dependent on third parties to provide that critical part of our supply chain.
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+    Aaron Kessler with Raymond James.
+
+--------------------------------------------------------------------------------
+Aaron Kessler,  Raymond James - Analyst    [49]
+--------------------------------------------------------------------------------
+
+    Yes, a couple questions. On the unpublished Page Post, can you just give us an update? I think that got released towards the end of the first quarter. Maybe what type of traction you're seeing there. And also just going back to the US versus Europe, can you just maybe detail? Europe definitely outperformed US on a sequential basis. Was that due to some of the later adoption of some of the sponsored stories in the newsfeed? Or was that something else? Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [50]
+--------------------------------------------------------------------------------
+
+    On Page Post, Page Post ads first appeared May of last year, and then we just put them into newsfeed in March of 2013. In terms of unpublished, what that just means is the ability to target Page Posts only to the right people. So, for example, without posting it to everyone on your page. For example, if you're a retailer and there was a snow storm in one state, you could target snow shovels or other relevant stuff you want to sell for a snow storm only to people in that state. So it's just a really useful way of segmenting your audience. Again, part of our overall push to relevance, targeting and quality.
+We're really excited about Page Post ads. Over 7.5 million posts have been promoted by pages. Over 30% of the people using the product are new advertisers to Facebook. And I think that speaks to one of the earlier questions on small to medium businesses and their adoption. If you say to an SMB, do you want to become an advertiser? That's a heavy lift. If you say to them, you have a page, you've posted something, do you want to pay a few dollars to promote this post to reach more people? That is a much easier on ramp to advertising spend with us and we think it's working really well.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [51]
+--------------------------------------------------------------------------------
+
+    In terms of US and Europe, I really don't have a lot more to add. The Europe number, as I said, was strong in Q1. I'm certain it's true that for some of the products that we roll out, the US represents the first adopters and then they spread their way to other clients around the world. But I don't have any specific evidence to support that that was key to the trends in Q1.
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR    [52]
+--------------------------------------------------------------------------------
+
+     Operator, I think we have time for one last question.
+
+--------------------------------------------------------------------------------
+Operator    [53]
+--------------------------------------------------------------------------------
+
+    Daniel Ernst with Hudson Square Research.
+
+--------------------------------------------------------------------------------
+Daniel Ernst,  Hudson Square Research - Analyst    [54]
+--------------------------------------------------------------------------------
+
+    Yes, good evening. Thanks for taking my call. Two questions, if I might. If we look at the broad base of all ad impressions across Facebook, whether it's desktop or mobile, can you give us a sense of what percentage of those are generated or conditioned by social statistics or socially relevant data that comes out of the Facebook experience versus ads conditioned by external data, like from Acxiom or from re-targeting traffic from other web sites?
+And then, second, within the category of apps and other, can you give a sense of is there any materiality around the other category? So, not apps payments or what part of that might have been Facebook type services like gifts. Thank you.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [55]
+--------------------------------------------------------------------------------
+
+    To your first question on mobile, I think the question was on mobile ad load, is that right?
+
+--------------------------------------------------------------------------------
+Daniel Ernst,  Hudson Square Research - Analyst    [56]
+--------------------------------------------------------------------------------
+
+    No. Whether it's mobile or desktop, what part of the --.
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [57]
+--------------------------------------------------------------------------------
+
+    Okay. Sorry, I got lost in the second question, which I should have written down the first one. Right now, you asked about Acxiom and things like that. That's a very small percentage of the ad impressions we show. Hopefully over time we can bring tools to bear that can really increase our ability to do more targeting, or more effective targeting than we do today.
+In terms of the second part, I think you're asking about the whole payments and other fees revenue line. I said the whole line grew by 15%. Games represented 12% growth. So the increment in between the 12% and the 15% came primarily from user-promoted posts, which is a product we launched last year. To a lesser degree, also, from our gifts product.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [58]
+--------------------------------------------------------------------------------
+
+    Great. Thank you for joining us today. We appreciate your time. And we look forward to speaking with you again next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [59]
+--------------------------------------------------------------------------------
+
+    This concludes today's conference call. You may now disconnect.
+
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2013-Oct-16-BAC.N-137085760338-Transcript.txt

@@ -0,0 +1,968 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2013 Bank of America Corporation Earnings Conference Call
+10/16/2013 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Moynihan
+   Bank of America Corporation - CEO
+ * Bruce Thompson
+   Bank of America Corporation - CFO
+ * Lee McEntire
+   Bank of America Corporation - SVP IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Derek De Vries
+   UBS - Analyst
+ * Moshe Orenbuch
+   Credit Suisse - Analyst
+ * John McDonald
+   Sanford C. Bernstein & Company - Analyst
+ * Mike Mayo
+   CLSA - Analyst
+ * Glenn Schorr
+   ISI Group - Analyst
+ * Guy Moszkowski
+   Autonomous Research - Analyst
+ * Matt O'Connor
+   Deutsche Bank - Analyst
+ * Vivek Juneja
+   JPMorgan - Analyst
+ * Betsy Graseck
+   Morgan Stanley - Analyst
+ * Jim Mitchell
+   Buckingham Research - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day and welcome to the Bank of America third-quarter earnings announcement. (Operator Instructions) Please be advised today's program may be recorded.
+It is now my pleasure to turn the program over to Lee McEntire. You may begin.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP IR    [2]
+--------------------------------------------------------------------------------
+
+          Good morning to those on the phone and joining us by webcast. Before Brian Moynihan and Bruce Thompson begin their comments, let me remind you that this presentation, which is available at BankofAmerica.com, does contain some forward-looking statements regarding both our financial condition and financial results, and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations. Please see our press release and SEC documents for further information.
+So with that, let me turn it over to our CEO, Brian Moynihan.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Lee. Good morning, everyone. I will cover a few points, and then I will turn it over to Bruce to go through the details of the quarter, as we have done in other quarters.
+Consistent with prior quarters, our Company continued to show progress on the areas we have been focused upon -- capital generation, managing risk, achieving cost savings, addressing legacy issues, and driving our core growth strategies in our core lines of business.
+On the capital front this quarter, we generated $3 billion-plus of Basel 1 Tier 1 common capital. Our Basel 3 ratios now approach 10% on a fully phased-in basis. That capital and liquidity and the balance sheet optimization that has been going on for the last several quarters holds us in good shape with regards to the regulatory suggested or proposed requirements that we see on the horizon.
+The strength and capital is allowing us to return capital to shareholders. In the past six months we have repurchased 140 million shares, equalling about $2 billion of our $5 billion authorization.
+Turning to the revenue side, we have experienced relative stability this quarter. But of course we felt the impacts of the industrywide headwinds on a slower refi business in mortgage and a slowdown in the capital markets from a typical summer slowdown as well as the investor concerns of a political and monetary uncertainty.
+On expenses, this quarter we incurred additional litigation costs. Outside of that we continue to make progress on our expense initiatives, remaining on track to deliver the cost savings that we told you about two years ago in New BAC, and also reducing the costs in our Legacy Assets and Servicing area.
+In the credit area we continue to see asset quality improve, and our net loss rates are at levels not seen since 2005. As the macro environment slowly improved we experienced a 20% drop in net charge-offs and a decline in delinquencies from the second quarter.
+Our 248,000 teammates have been fully engaged with our customer clients to drive activity. We are pleased to see another quarter of solid loan growth in our commercial businesses, while we continue to see the consumer lending activity stabilize in our card balances and modest growth elsewhere, which has offset the runoff in our non-core portfolios.
+As a Company, we reached record deposit levels this quarter, more than $1.1 trillion in deposits. Our client balance flows in our Wealth Management clients helped us maintain our industry-leading positions. And you have seen that Bank of America Merrill Lynch has assumed prominent roles in the marquee investment banking deals that have gone on this quarter.
+We have also seen a nice trend of progress, absent some seasonality, of results in our equity trading business. It has been gaining market share and continuing to improve.
+So to sum it up, it is another solid quarter of progress in our core businesses; and I'm going to turn it over to Bruce to cover in detail the presentation. Bruce?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Brian, and good morning, everyone. I am going to start my presentation on slide 5. During the quarter, we earned $2.5 billion or $0.20 per diluted share.
+Before I address the core business trends let me mention a few noteworthy items from our results that we have disclosed to you previously. First, we sold our remaining stake in CCB, recording a pretax gain of $753 million, which was partially offset by a $443 million negative impact of FVO and DVA, as our as our credit spreads continued to tighten during the quarter. The net of these items benefited EPS by $0.02 in the quarter.
+We also recorded a $1.1 billion charge to remeasure our UK deferred tax asset, given the 3% decline in the tax rate, which reduced EPS by $0.10 a share. The net of these is obviously a reduction of $0.08.
+Moving to the core business, total revenues in the quarter on an FTE basis were solid at $21.7 billion, or $22.2 billion if we exclude the FVO and DVA charges. If we compare this to the second quarter, revenues declined on lower mortgage banking revenue as well as mostly seasonal declines within our sales and trading area.
+Total non-interest expense of $16.4 billion included $1.1 billion in litigation costs, a $600 million increase in litigation cost from second-quarter levels. The increase in these costs was partially offset by the improvement in both our Legacy Assets and Servicing costs as well as the benefits of our New BAC initiatives.
+Asset quality improved significantly, with net charge-offs improving 20% from the second quarter of 2013 to $1.7 billion. And with the reserve reductions we took in the quarter, we recorded provision expense of just under $300 million in the quarter.
+On slide 6 you can see that our period-end balance sheet remained relatively stable versus the prior quarter at about $2.13 billion. Customer activity remained solid with loans, largely led by commercial loans, up $12.8 billion.
+Consumer lending activity in the quarter improved as we saw increased loan generation in our Dealer Financial Services area and our continued stabilization of card balances, which was partially offset by the runoff within our home equity portfolio. Period-end deposits were up over $29 billion or 2.7%, led by commercial client activity and solid flows from our Wealth Management clients.
+If we move down the page, tangible book value per share improved to $13.62, and our tangible common equity ratio increased above 7%.
+A couple other things that I would like to mention during the quarter. We repurchased 60 million shares for roughly $900 million during the quarter. OCI increased by about $900 million during the quarter. And our preferred stock includes the completion of our previously announced preferred stock redemption for just under $1 billion.
+On slide 7 you can see our Basel 1 Tier 1 common ratio of 11.08% increased 25 basis points from the second quarter of 2013. Under Basel 3 on a fully phased-in basis under the Advanced Approach, Tier 1 common capital increased by approximately $6 billion to an estimated $131.8 billion. Our Tier 1 common ratio is 9.94%, showing a 34 basis point improvement from the second quarter of 2013.
+And our estimate of the Basel 3 Tier 1 common ratio on a fully phased-in basis under the Standardized Approach would be just over 9% above our proposed 8.5% 2019 minimum requirement.
+If we move to the supplemental leverage ratio, based on the proposed US requirements that don't take effect until 2018, at the end of the third quarter our bank holding company leverage ratio improved to above the proposed minimum of 5%; and our two primary banking subsidiaries, BANA and FIA, continue to be in excess of the 6% proposed minimum.
+So to reiterate what Brian mentioned, there are a lot of new capital regulations proposed or finalized, and we already exceed the requirements for the various known rules on Basel 3 capital and the supplementary leverage ratio.
+On slide 8, funding and liquidity, you can see our long-term debt ended the quarter $7 billion lower as maturities and the completion of our $5 billion tender offer outpaced issuances. We have $40 billion of parent Company maturities through 2014; and as we look forward, we expect issuances to be materially below that number as we continue to reduce and smooth the maturity profile of our debt footprint.
+Global excess liquidity sources of $359 billion increased from $342 billion at the end of the second quarter of 2013, and parent Company liquidity remained strong at $95 billion. That translates into a Time to Required Funding of 35 months, well above our two-year coverage that we target.
+I would also like to highlight that on October 1 of this year we have completed the legal entity merger of the Merrill Lynch Holding Company into Bank of America Corporation as part of our continued efforts to both simplify the Company and reduce cost.
+We turn to slide 9, net interest income. Net interest income on a reported basis was $10.5 billion, down from the second quarter of 2013, as the improvement in our core net interest income was more than offset by a negative impact from market-related impacts. If we exclude those market-related impacts, net interest income built off of Q2 2013's $10.4 billion to be just north of $10.5 billion.
+During the quarter, we benefited from higher rates in our discretionary book, lower long-term debt levels, higher commercial loans, and lower rates paid on deposits. These positives were partially mitigated by lower loan yields and lower trading-related NII.
+As you will note on the slide, the net interest yield excluding market-related impacts improved from 2.36% to 2.44%, driven by the lower balance sheet levels as well as our lower funding cost. And consistent with what we mentioned last quarter, we expect to realize the benefit of higher long-term rates as we reinvest, but note that some of those benefits will occur through time.
+On slide 10, we will spend a few minutes on expenses. Total expenses for the quarter were $16.4 billion, a $1.1 billion improvement from the year-ago quarter, but up $371 million from the second quarter of this year.
+I want to be clear. As you look at expenses and see the uptick in the linked-quarter expense, we continue to deliver on our non-litigation expense reductions in our Legacy Assets and Servicing area as well as the ongoing benefits from our New BAC initiatives in the balance of the Company.
+Compared to the second quarter of 2013, progress on LAS and New BAC, in addition to lower revenue-related incentive compensation, was more than offset by increased cost of litigation as well as some marketing initiatives that were accelerated from the fourth quarter of 2013. Our litigation expenses did increase as the continued evaluation of legacy exposures led to an addition to reserves.
+Our LAS expenses ex-litigation, which are shown on the gray bar on slide 10, of $2.2 billion declined $110 million from the second quarter of 2013. And we continue to expect our fourth-quarter LAS expenses ex-litigation to be below $2 billion as we continue to make very good progress on reducing the number of 60-plus-day delinquents that we have in that business.
+Our New BAC savings in the third quarter were approximately $100 million and are included in All Other, the red bar. We also remain on track to achieve the expected $1.5 billion of New BAC quarterly cost benefits by the end of 2013 and ultimately the $2 billion quarterly benefit upon completion of the project.
+From an employee staffing perspective, our number of FTEs ended the quarter at 248,000, a decline of more than 9,000 or 3.6% from the second quarter of 2013. That was driven by staff reductions within our Legacy Assets and Servicing area, declines in home loans given the slowdown in mortgage production, as well as the continued optimization of our branch network.
+While we were down by 3.6% from the end of the second quarter to the end of the third quarter, the average FTEs only declined 2.3%. So we will get some additional benefits during the fourth quarter relative to the third from those reductions.
+We touched on asset quality, slide 11. You can see that credit quality once again improved significantly. Net charge-offs declined to $1.7 billion, a 20% improvement on a linked-quarter basis.
+As Brian referenced, our third quarter of 2013 loss rate of 73 basis points declined 21 basis points from the second quarter and is now at 2005 levels. Delinquencies, a leading indicator of charge-offs, again declined nicely.
+During the quarter, we did reduce reserves by $1.4 billion on the back of steadily improving consumer data, which resulted in a provision expense of just under $300 million. Given what we see from the improving delinquencies as well as the current HPI trends, absent any unexpected changes in the economy, we expect net charge-offs to decline again in the fourth quarter and stabilize sometime in 2014 at approximately $1.5 billion per quarter.
+Let's move into the individual lines of business on slide 12. Our Consumer and Business Banking segment, we were very pleased with the results during the third quarter as we delivered improved earnings, with revenues growing modestly and expenses declining from both the previous quarter as well as the year-ago quarter. This, coupled with lower credit costs within the segment resulted in net income of approximately $1.8 billion during the quarter, a 28% improvement over the previous quarter and a 32% improvement over last year.
+That was achieved as we continued to do more business with our core customers. Our average deposits were stable as our organic customer growth was offset by small branch divestitures as well as migrations to our Global Wealth and Investment Management area.
+Our brokerage assets are at record levels within this business, up 6% from the second quarter and up 18% over the prior year's quarter. Average loans, as I mentioned, reflect stability in card balances as well as growth within our Dealer Financial Services area.
+Card issuance during the quarter remained strong. We issued more than 1 million new cards in the third quarter, which is at the highest level going back to 2008. Consistent with our relationship strategy, 63% of this issuance was to people that we have existing relationships with.
+And credit quality continues to be strong as delinquencies and net losses continued to improve during the quarter. Reduced expense levels in the segment reflect the benefits of our network optimization, partially offset by investments we continue to make as we build out our specialist salesforce in this area.
+On slide 13, Commercial Real Estate Services, where we operate the production, origination, and servicing of consumer real estate loans. In our supplemental information we report the two separate components of this segment, one focused on loan origination and the other focused on servicing and legacy issues.
+On originations this quarter, first mortgage retail originations were $22.6 billion, which was down 11% from the prior quarter and up 11% compared with originations in the year-ago period. We believe that the current-period decline in production is less than our industry peers, as we have been working through our existing pipeline.
+Our current pipeline at the end of the third quarter is, however, down approximately 60% compared to the end of the second quarter of 2013, which reflects the significant reduction in market demand, particularly in the refinancing space. Since our production revenue is booked at the point in which you lock a loan, as opposed to funding, I should point out that our lock volume was down 23% from the second quarter of 2013.
+In addition to those lower lock volumes, we saw a gain on sale margins decline compared to the second quarter of 2013. Our reduction was about 60 basis points during the quarter.
+As a result of all these factors, core production revenue was down 46% to $465 million from the second quarter of 2013.
+From a staffing point of view, just on the origination side, as we saw demand slow we reduced headcount by more than 1,000 employees toward the end of the quarter. We will continue to reduce these staffing levels, to be consistent with the lower volumes that we have seen.
+The other primary component in this segment, servicing revenue, declined approximately $100 million versus the second quarter as our servicing portfolio declined as we continued to complete certain servicing transfers.
+The other item that I want to highlight on this slide that is particularly important is the servicing costs that we see within the Legacy Assets and Servicing area. We have spoken a lot about reducing the number of 60-plus-day delinquencies in this portfolio, and we had a lot of success during the quarter as the number of 60-plus-day delinquent loans dropped below 400,000 units at the end of September, nearly 100,000 lower than what we had at the end of June.
+Roughly half of the decline was driven by the transfers of servicing that I referenced in conjunction with the MSR sales agreements that we announced in the first quarter of 2013. Once again, as a result of this work we continue to believe that our LAS expenses, ex-litigation, will be below $2 billion during the fourth quarter of 2013.
+On slide 14, our Global Wealth and Investment Management area had another strong quarter, generating solid earnings and solid returns. Within this segment, both Merrill Lynch and U.S. Trust maintained their leadership positions with a total of $2.3 trillion of client balances.
+Revenue remains near record highs at $4.4 billion, up 8% over the third quarter of 2012. Relative to the third quarter of 2012, net income improved 26% and was the third consecutive quarter in which our pretax margin was above 25%.
+Asset management fees achieved a new record during the quarter, while our brokerage income did decline from the second quarter due to reduced market activity.
+Client engagement remains quite strong. Long-term AUM flows were $10.3 billion, near doubling last year's production. Ending deposits were up $6.5 billion or roughly 3% from the prior quarter; and our ending client loan balances of $117.2 billion reached record levels and are up 2% from the second quarter of 2013 and 11% over the third quarter of a year ago as we continue to provide more banking products to both our Merrill Lynch and U.S. Trust clients.
+On slide 15, you can see Global Banking earnings were stable relative to the year-ago period. Revenue compared to a year ago includes the benefit of strong loan growth and stable investment banking fees.
+Expenses this quarter include very good cost controls offset slightly by elevated litigation expense. Global fee pools did decline, but we maintained our strong second-place ranking of global net investment banking fees, recording $1.3 billion of fees and improving our market share to 7.7%.
+In addition, if you look at it fees within the Americas, we ranked number 1 with an 11% market share. During 2013, we have advised on 7 of the top 15 announced M&A deals.
+As we head into the last quarter of the year, the pipeline looks quite strong. But I do want to highlight that during the fourth quarter of last year we did see record levels of debt issuance during that period.
+If we look at the balance sheet, average loans increased $4.4 billion from the second quarter, with more than half of that growth driven by commercial real estate lending, with the balance by C&I lending, particularly with our large corporate clients. Average deposits increased $12.2 billion from the second quarter of 2013, above our expectations, given certain timing considerations as well as customer liquidity that has been built around fiscal cliff concerns.
+If we move to slide 16, Global Markets, we earned $531 million during the quarter after excluding the $1.1 billion UK tax charge as well as DVA losses of $291 million. On a comparable basis, this is a decrease of $341 million compared to the third quarter of 2012 and down $403 million from the second quarter of 2013 due to lower sales and trading revenue as well as higher expense from litigation.
+Sales and trading revenue, ex-DVA, was $3 billion during the quarter, an 8% declined from the comparable year-ago period. FICC sales and trading revenue was down 20% versus the year-ago period, once again impacted by concerns regarding the Fed's position on its stimulus program as well as political uncertainty both domestically and abroad.
+Our equity sales and trading area had another very strong quarter with revenues, ex-DVA, up 36% over the year-ago period as we experienced higher market volumes and continued to benefit from the repositioning of this business that has happened over the last 18 months. We are gaining market share and we are improving our performance in each of the product lines.
+Expenses in the quarter compared to the third quarter of 2012 included higher litigation costs that were partially offset by a reduction in operating expenses. Average trading-related assets were down 4% from the year-ago period while our VaR was effectively flat.
+On slide 17, we show you the results of All Other. Gains on the sale of debt securities were $347 million in the third quarter, down $105 million from the second quarter of 2013. You can also see the breakout of $1.1 billion of equity investment income, which reflects the CCB gains I mentioned earlier as well as an additional $368 million of gains.
+The FVO that I mentioned earlier is also recorded in this segment. Expenses include roughly $350 million during this quarter for litigation. That compares to $100 million in the second quarter of 2013 and $950 million in the third quarter of 2012.
+As we close on All Other, I would note that the effective tax rate for the quarter, ex-the impact of the UK tax reduction charge, was 25%. And as we look forward to the fourth quarter of 2013, we expect the effective rate to be in the high 20%s.
+Before we take questions I would like to leave you with several thoughts about our results. Capital and liquidity both strengthened during the quarter. We had encouraging business results as we saw improvement in both activity and profitability within Consumer and Business Banking.
+We saw continued strength in Global Wealth Management. We maintained our top position in Investment Banking and had another quarter of strong growth in our equity sales and trading business.
+Credit continued to improve. Our cost initiative work remains on track. And to the extent that the steepened yield curve environment stays with us, it should allow us to move NII upward as we move forward.
+We will continue to execute on our strategy and continue to deliver on the earnings power of the Company. With that we will go ahead and open it up for questions.
+
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions) Moshe Orenbuch, Credit Suisse.
+
+--------------------------------------------------------------------------------
+Moshe Orenbuch,  Credit Suisse - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Great, thanks. In addition, the slides have got a good breakdown of the rep and warrant reserving. Could you talk a little bit about the litigation and how to think about the litigation costs as we go forward? Because that is obviously still volatile. Maybe discuss what is still remaining that could get roped into that as we go forward.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [3]
+--------------------------------------------------------------------------------
+
+    Yes, I think, Moshe, what I would say is that if you look, as we referenced, it was roughly $1.6 billion a year ago. It was $500 million in the second quarter, and it was roughly $1 billion this quarter.
+I'd go back to -- and I think we've been pretty consistent. If you go back to 2010 and look at the build over the course of four years from both a litigation and a rep and warrant perspective, I think you can see that we have had more of that over the course of a three-and-a-half year period than anyone else out there.
+And as we look at the remaining pipeline we put it in really four different buckets. The first is the GSE bucket for rep and warrant, which with one exception we have got global settlements from the end of 2008 back with Freddie and Fannie. So as we look at that bucket we feel very good about that.
+We then go to the second bucket which is mono-lines. You've got global settlements with three of the five mono-lines, and we have established the reserves for the remaining two based on that history of the three.
+We then go to the rep and warrant. With respect to the private label securities, the $8.5 billion Gibbs & Bruns case, which represents half the exposure, continues to go through the court process and we'll be back in court on that I believe in November. And obviously we set up reserves at that point based on the Gibbs & Bruns history; and as we have said before, for that which we didn't have the basis to establish a reserve, we put out a range of possible loss for rep and warrant that continues to be up to $4 billion.
+And then you move into the other piece that we have, that's the RMBS securities litigation. During the quarter, the Luther, Maine settlement received preliminary approval during the quarter, and we will look to get final approval by that sometime during the fourth quarter. And we obviously set up a reserve; and that settlement was for $500 million which represents in the ZIP Code of 65% to 70% of the Companywide exposure that we have for RMBS litigation.
+And then the other two pieces that we continue to work through in that bucket are the HAFA litigation on behalf of Freddie and Fannie as well as AIG. And there is really nothing to report new on either of those fronts.
+And what you saw during the quarter, as we said, was really an adjustment to the reserves based on as we get more information and to the extent that there are additional discussions with some of the people that we're in a party with those discussions, too.
+
+--------------------------------------------------------------------------------
+Moshe Orenbuch,  Credit Suisse - Analyst    [4]
+--------------------------------------------------------------------------------
+
+    I guess just to follow up on that, because JPMorgan had indicated that they had expenses in this quarter that were substantially higher than what they would have anticipated as possible even three months ago because of a change of the regulatory environment. Do you feel like you have taken that fully into account?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [5]
+--------------------------------------------------------------------------------
+
+    Yes, I think -- let me be a little bit more specific when we go back to it, because I think the one thing that has been overlooked a little bit -- and this is not a number we are particularly pleased with. But if you go back to the beginning of 2010 and look at the combined litigation and rep and warrant expense that we have had in this Company, it has been over $40 billion, which I think is quite a bit higher than the number that they quoted.
+Obviously, those numbers are particular to each institution. But I think as you look at what we have tried to do, that those numbers have been significant and I think at this point relative to our peers we have tried to be out front and get through some of the larger settlements that we have. And we think that $40-billion-plus number reflects that.
+
+--------------------------------------------------------------------------------
+Moshe Orenbuch,  Credit Suisse - Analyst    [6]
+--------------------------------------------------------------------------------
+
+    Just shifting gears on the mortgage business, you had a decline in rate locks that you identified; but the pipeline actually is down substantially more. Could you talk a little bit about how you see the fourth quarter and into 2014?
+Because you have got both the potential for obviously a further decline as the pipeline moves through. But then again you also had a fairly high rep and warrant in the quarter. Like how should we think about that from a revenue perspective?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [7]
+--------------------------------------------------------------------------------
+
+    I think let's talk about the production first. You remember that we had a lot of HAMP going on, and that has been dropping each quarter as we get through the volumes of that. And that had a pretty good impact; I think it was down roughly $3.5 billion or so linked quarter.
+The rest of the production continues to move forward. But if you look at what is really going on as we speak, because during the third quarter you had significant changes July/August as we ran through pipeline, etc. The current pipeline stands at a level of 30,000-odd. The current application volumes today are 1,000 plus, around 1,000.
+The purchased piece of that has maintained relatively constant, 300-ish a day. So if you think about that, we have sort of a month-and-a-half pipeline, and that has been pretty consistent as we got into September and to October. So if you extrapolate that out you should see production levels that will be down again in the fourth quarter, but will start to mitigate.
+The issue on the revenue is the spreads come in and the refinancing volume is at a higher profit margin because the work is not as much. So we expect to see a lot like we are seeing now, spreads that have come in a couple hundred basis points or so, and we expect that to hold and the volumes will come down, and so I think the number will continue to work in that direction.
+What you do mention is the other side, which is the rep and warrant exposure, and stuff that goes through there, and stuff that changes it. Bruce can touch on that.
+But in terms of overall volumes, we have started taking the people down to match the volumes. You remember we had a lot of work to do here. If you look at our non-HAMP production it has continued to grow each quarter.
+Our home equity loan production has doubled in the last few quarters and we'll continue to drive that forward. As we have told you many times it will never be a huge business for this Company, because it is a business which is very competitive out there and the profit margins will always be thin. But we need to do it for our customers and clients.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [8]
+--------------------------------------------------------------------------------
+
+    And on the rep and warrant front, you are right, the rep and warrant expense was just over $300 million a quarter. And we clearly would expect that the run rate of that expense is going to be much more in the $150 million a quarter type run rate as opposed to the $300 million-plus.
+
+--------------------------------------------------------------------------------
+Moshe Orenbuch,  Credit Suisse - Analyst    [9]
+--------------------------------------------------------------------------------
+
+    Got it. The very last one for me is you had mentioned expected improvement in charge-offs. The provision obviously was substantially lower. How should we think about the provision relative to those charge-offs in Q4 and into 2014?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [10]
+--------------------------------------------------------------------------------
+
+    Yes, I think once again our comments will be assuming that we don't see any slippage in the economy. During the quarter, if you look at the reserve release, roughly $250 million of it was from purchased credit-impaired, and roughly $1.150 billion from the core.
+As we go forward I would think about the provision -- or excuse me, think about the reserve release much more consistent with what you saw in the first and second quarters of this year over the next couple quarters. And then ultimately as we get into the latter part of 2014 and beyond, you'd expect most of that to go away.
+But I do think there are probably another couple quarters where it could be in line with what we saw in the first and second quarter. Clearly not at the third quarter of this year given the sharp improvement in credit we saw.
+
+--------------------------------------------------------------------------------
+Moshe Orenbuch,  Credit Suisse - Analyst    [11]
+--------------------------------------------------------------------------------
+
+    Great. Thanks very much.
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+
+    Betsy Graseck, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [13]
+--------------------------------------------------------------------------------
+
+    Hi, good morning. Just one follow-up on the conversation that we just had regarding the reps and warranties and litigation. I heard you that the mono-line, three out of five are done; you established reserves for the other two based on the three out of five.
+Is that part of the rep and warranty this quarter, the establishing reserves for the other two based on the three out of five done?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [14]
+--------------------------------------------------------------------------------
+
+    No, it is not.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [15]
+--------------------------------------------------------------------------------
+
+    Okay. Then on the litigation reserve, there's obviously a long list of stuff in your Q; so is it fair to say that litigation reserve was just all of the above of that long list? Or was there something specific that you saw in the quarter that drove the higher number?
+I am just wondering; do we do the $1 billion quarterly in our model going forward? Or is it going to be more episodic than that?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [16]
+--------------------------------------------------------------------------------
+
+    I think as we have said, that number tends to be lumpy. And I wouldn't say that there was any one specific item during the quarter that you could point to. It was really just a continued evaluation of the reserves as well as reflective of any current discussions that we are having with the different parties that we are trying to work through this with.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [17]
+--------------------------------------------------------------------------------
+
+    Okay. Then on the LAS expenses, you indicated that next quarter is sub $2 billion.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [18]
+--------------------------------------------------------------------------------
+
+    That's correct.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [19]
+--------------------------------------------------------------------------------
+
+    Okay. So you highlighted that your delinquents are down half from the asset sales and half from your own actions. So is it fair to say that the reduction, roughly $300 million or so -- well, $200 million to $300 million or so, that you are calling out for next quarter is also equally half and half?
+And part of the question is trying to understand. You know the run rate of how those expenses are coming out associated with the asset sale. And I am wondering; is that front-end loaded in 4Q? Is that going to be 4Q through 2Q next year?
+And are the organic actions you are taking likely to be equal in size in terms of the decline in the LAS expenses?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [20]
+--------------------------------------------------------------------------------
+
+    Yes, I think I would say a couple things on that, Betsy. That once again we told you at the end of the second quarter that we would get the number of 60-plus-day units down below 375,000 units by the end of the year. And you can see during the third quarter alone we got them down below 400,000, so we feel particularly good with that guidance.
+There is a lot of work that goes on in a quarter to move out and to get these servicing transfers done as it relates to both our own teammates as well as people that we use to help us with that. So that is why you saw some of the numbers Q2 to Q3 a little bit sticky.
+But the point that you raise I think is the right one, which is -- now that you've got the loans out you have the ability to take the expense out. And that is why we would expect the expense reduction in the fourth quarter to be greater than what we had seen in the third quarter.
+I think as you look out at and as you look through 2014, the guidance that we have given is very -- really remains the same. And we feel more comfortable with, given the delinquencies, that as you go through 2014 you should see that expense number go from below $2 billion in the fourth quarter of 2013 to below $1 billion by the end of 2014.
+And it always can be a little bit lumpy, but you should see that occur generally consistently throughout the year.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [21]
+--------------------------------------------------------------------------------
+
+    Okay, thanks. Then lastly, on page 7 you highlight the regulatory capital. Obviously it seems like you have set yourself up well for a bigger ask in CCAR from a buyback perspective. Is that a fair assumption to make?
+Could you highlight how SLR factors into that? And are your SLR numbers that you present fully loaded in 3Q, or is it on a phased-in approach?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [22]
+--------------------------------------------------------------------------------
+
+    Our SLR numbers are fully loaded at both the Bank Holding Company as well as at the subs. And as we look at CCAR what I would say is I think we have been consistent on this, that we have done it and done everything we can both in the way -- intrinsically the way we run the Company, which in many respects is not inconsistent with what you get tested in CCAR, in that we have built our Basel 1.5 ratio up significantly from last year. The Basel 3 ratios across the board are up.
+As you look at both credit risk and market risk, those have obviously gotten better. And we have continued to put the legacy issues behind us.
+So as we look at -- we obviously were able to return $5 billion to the common shareholders during this year as part of the CCAR process, and we will look to move forward from that, realizing that until we see the exact case that we are running and what the test is, I think it is probably premature to say anything more than that.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [23]
+--------------------------------------------------------------------------------
+
+    Okay. Thanks a lot.
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+    John McDonald, Sanford Bernstein.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [25]
+--------------------------------------------------------------------------------
+
+    Yes. Hi, good morning. Bruce, was wondering on the net interest income side; do you think that the core NII should grind higher at a similar pace that we saw this quarter? Looks like it was up $100 million, assuming no big change in rates.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [26]
+--------------------------------------------------------------------------------
+
+    I think that is fair, John. You are always a little bit subject to mix, loan pricing, as well as rate environment. But that is clearly the trajectory that we are on; so the answer would be yes.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [27]
+--------------------------------------------------------------------------------
+
+    How should we think about the market-sensitive component? Do you still have the NII hedges on? Or is it really the FAS 91 that adds volatility from here?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [28]
+--------------------------------------------------------------------------------
+
+    Yes, think it is important -- and the one thing that doesn't come out when you look at this slide is, it is not that we saw much variability in either FAS 91 or hedging effectiveness during the third quarter. It was that we had some benefit in the second quarter when you had the sharp increase in rate.
+So as long as you are within a reasonable range where rates aren't bouncing around, you shouldn't see much of that. But keep in mind that what you saw in the first and second quarters was because of the largely unprecedented movement up in rates that we saw, that gave us the FAS 91 benefit.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [29]
+--------------------------------------------------------------------------------
+
+    Okay. Over time does that FAS 91 affect dissipate, over time? Or is that always going to be with you?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [30]
+--------------------------------------------------------------------------------
+
+    Well, it gets reset so that you don't have any aberration from quarter to quarter. The only time you have an aberration on a run rate basis is when the underlying rates move.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [31]
+--------------------------------------------------------------------------------
+
+    Okay. Then just any update on your rate sensitivity relative to where you stood at the end of last quarter for a 100 basis point move in long rates?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [32]
+--------------------------------------------------------------------------------
+
+    Yes, I want to think we are in the same ZIP Code both on a 100 basis point steepening as well as a 100 basis point parallel shift. The guidance that we have given was it takes us about three years to earn back any impact in OCI.
+We are a touch better than that this quarter. If you look at the supplemental you will see that the level of debt securities is down modestly, as we are very sensitive to managing that OCI risk.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [33]
+--------------------------------------------------------------------------------
+
+    Okay. Then just a follow-up on litigation expense. Back in July you were thinking perhaps $500 million per quarter and clearly came in much higher than that this quarter. Recognize things are fluid here, but should we be thinking of litigation expense more like this quarter or more like last? Are you able to say?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [34]
+--------------------------------------------------------------------------------
+
+    John, that is really difficult to say. I think that the punchline is that it can be lumpy. And we obviously do and work hard each quarter -- to the extent that we can get things put behind us at reasonable levels for the shareholders, we do that.
+It is an evolving process and it is something that we are working hard on. At the same time there is no question that the expense was elevated this quarter.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    Okay. Then one more clarification on the core expenses. How much did the expenses come down for mortgage so far and what do you see left on that? And then just any comment on the IB comp ratio, how we should think about that going forward.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [36]
+--------------------------------------------------------------------------------
+
+    Sure. I am not sure I understand your question on the mortgage expense --
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [37]
+--------------------------------------------------------------------------------
+
+    Yes, any capacity reduction that you are doing as originations come down, have you gotten the benefit from that? And how much might we expect for you to do that going forward?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [38]
+--------------------------------------------------------------------------------
+
+    No, as we referenced on the front -- on the legacy piece we talked about the 2.3 going to 2.2 and how we will have that below 2. As we talked about, we needed to get through the pipeline on the front end during the third quarter, which we did. The 1,000 people that we referenced on the front end happened late in the quarter.
+As I mentioned we are 1going to continue to reduce t1hat, to size that for the volumes that we are seeing now. But we have not put out a specific number on that.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [39]
+--------------------------------------------------------------------------------
+
+    Okay. In terms of IB comp, what we saw this quarter and how we should think about that?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [40]
+--------------------------------------------------------------------------------
+
+    Yes, we typically -- if you look at combined Investment Banking and sales and trading you tend to be in the mid to high 30s, and I don't think you are going to see any significant variations in that Q3 to Q4.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [41]
+--------------------------------------------------------------------------------
+
+    Okay, thanks.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [42]
+--------------------------------------------------------------------------------
+
+    John, one thing on the -- both in the mortgage and otherwise, as Bruce talked about, the actions we've taken during the quarter to reduce headcount overall in the Company, a lot of it is in the second half of the quarter. So you always get a continuing-on effect of that.
+And by the way, next quarter as we reduce further LAS and mortgage you will see it go into the first quarter. So it does lag; and it is just the nature of the severance accruals you take at the time plus as we move the headcounts out, paying them on, as you go on the severance also in certain cases.
+So you should expect that those volume-related reductions will continue to move forward. And the economics of what we did in the third quarter is probably more in the fourth quarter than it is in the third quarter.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [43]
+--------------------------------------------------------------------------------
+
+    Got it. Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+    Glenn Schorr, ISI.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  ISI Group - Analyst    [45]
+--------------------------------------------------------------------------------
+
+    Hi, thank you. Question on FICC. I think the explanation on the down 20% was fair enough, and a lot of macro and political reasons, which I get. Just curious on if you had any early comments on swaps execution and clearing impact in the quarter and what you see going forward as clients migrate.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [46]
+--------------------------------------------------------------------------------
+
+    Yes, I wouldn't really note any specific change there, Glenn. It is something that we continue to look at. The one thing I would say that we are working hard on -- and this really flips more to some of the capital and central clearing type things -- that as we continue to have more and more of that migrated, that is going to benefit certain capital ratios as we look at counterparty.
+So I think that the ongoing -- to the extent that there is an economic negative going forward, we are obviously continuing to spend a lot of time with that. The one piece that is a little bit more tangible that we worked through is that there will be some decent benefits over the course of 12 to 18 months as more and more of that gets migrated.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  ISI Group - Analyst    [47]
+--------------------------------------------------------------------------------
+
+    Okay.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [48]
+--------------------------------------------------------------------------------
+
+    I think as you think about the markets business, one of the things that Tom and team have done is got the -- as we talked about in various quarters -- has kept the breakeven point relatively low. So in a quarter which the equities business was very good for us, comparatively -- but the fixed income business, which is a lot bigger than the equity business, was obviously down -- we still made $0.5 billion.
+So the goal there is to be able to serve our clients and customers well and keep the balance sheet in good shape, but also keep the expense base. So that when we get $2.5 billion to $3 billion we start making some decent money. And then in the good quarters we will make a good amount of money, and Tom and team have done a good job to keep that expense base in line.
+And most of the expense increase here is with litigation and things that were not fundamental, just show up in line of business related to broader question.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  ISI Group - Analyst    [49]
+--------------------------------------------------------------------------------
+
+    I appreciate that. Might be putting words in your mouth but it sounds like that there is a pretty good operating leverage built-in on the upside, then. In other words, it doesn't necessarily scale up and down with revenues to the same degree.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [50]
+--------------------------------------------------------------------------------
+
+    Yes, if you just look across the last four quarters you see it. But the key was going from 11 to 12 we move the fundamental level, so there is good operating leverage. You get another $1 billion in revenues, a lot of it comes through net of -- with incremental compensation here.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  ISI Group - Analyst    [51]
+--------------------------------------------------------------------------------
+
+    Okay. One other question just on cards. Looks like issuance and balances have been growing good. I am just curious how much of that is you turning up the heat on marketing, selling through the branches, and how you feel about the outlook. Because it has been a while since we saw the industry in general have decent balance growth.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [52]
+--------------------------------------------------------------------------------
+
+    Yes, I think a couple things and I'd just kind of reiterate a little bit, we touched on, is that we have made over the course of the last 12 to 18 months the investment of having more bankers in the branches and trying to do more things with our customers. And the two things that we feel best about as you look at that growth in cards to over 1 million cards in the quarter is that -- the first is that 63% of those people, once again, we already have an existing relationship with and obviously know something about and are trying to do more with.
+And the second thing I would say is that as you look at the overall FICO and credit quality of those borrowers, they tend to be in the mid-700s on average. So it is the right customer; it is sold the right way; and it is part of an overall deepening strategy.
+And now that we are starting to see some of the balances creep up, it is reflective of that activity, which I think, quite frankly, was overshadowed a little bit as we cleaned out some of the affinity and other programs, that the new stuff that you saw got overshadowed by things that were leaving the books. But now that we are largely through that, what we are doing on the front end is starting to come out.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  ISI Group - Analyst    [53]
+--------------------------------------------------------------------------------
+
+    Okay, perfect. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [54]
+--------------------------------------------------------------------------------
+
+    Derek De Vries, UBS.
+
+--------------------------------------------------------------------------------
+Derek De Vries,  UBS - Analyst    [55]
+--------------------------------------------------------------------------------
+
+    I just have a detailed question on the OCI. There was a $1.4 billion gain, I think from changes in pension. Could you just explain what that was about?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [56]
+--------------------------------------------------------------------------------
+
+    Sure. What happens is that typically you mark your pension OCI once a year as you update the asset values and assumptions at year end. You typically do that on an annual basis.
+Because we merged several pension plans at the end of August, we were required to remeasure those assets as of the end of August. And that $1.4 billion reflects the change in value from Jan. 1 to August 31; and then obviously we will remeasure those again at year end.
+
+--------------------------------------------------------------------------------
+Derek De Vries,  UBS - Analyst    [57]
+--------------------------------------------------------------------------------
+
+    That's clear. Thanks. Then just on -- talking more generally, you obviously have a lot of corporate relationships, and I guess there is some unease about what is going on in Washington. But assuming we can get through that, do you get the sense that the corporates are looking to move from margin preservation to investment? Or are they just really worried about the macro environment?
+I am trying to get a sense of where loan growth could go, going forward.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [58]
+--------------------------------------------------------------------------------
+
+    Yes, I think if you look at our client base, which ranges from small businesses through the largest companies in the world, I would say all of them feel very good about their operating position. They are making money, have done a tremendous job of keeping a cost structure in line.
+I had an example of a company that had 200 employees; their sales were going to grow by 25%; and they said we are only going to add five employees. So American business has gotten very efficient.
+But when you put on top of them the uncertainties, because they are all engaged in global commerce, the macro uncertainties at the world level, the US level, I think there has been an uncertainty hold-back here that will come through as more and more clarity both in the economy -- i.e., final demand for their products -- and the macro situation comes clear.
+So is it a sprint out of the blocks? No. They are running forward; it will probably be a speedup of the process. And you saw some of that this summer with some of the M&A activity and stuff in the larger companies has strengthened and you are seeing it go on.
+So I think there is demand in the system, so to speak. There is money on the sidelines from the investor side. And the more clarity, you will see better activity.
+Meanwhile, underneath it, you see the core economy continue to push forward even with all the things going on around the world.
+
+--------------------------------------------------------------------------------
+Derek De Vries,  UBS - Analyst    [59]
+--------------------------------------------------------------------------------
+
+    That's very helpful. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [60]
+--------------------------------------------------------------------------------
+
+    Jim Mitchell, Buckingham Research.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [61]
+--------------------------------------------------------------------------------
+
+    hey, good morning. Could you talk -- run me through the expense line a little bit on the compensation side? I guess I am just struggling a little bit with, on a year-over-year basis you guys were down around $100 million on the comp line but headcount is down 25,000 employees. Capital markets revenues are down.
+Why are we seeing that stay elevated? How do we see that go down more significantly going forward?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [62]
+--------------------------------------------------------------------------------
+
+    Sure. You have a couple things going on. The first thing I would say is that the expense number during the third quarter of last year -- and I'm going to speak to -- if you flip to slide 10 for a moment. That if you look at that All Other bucket, which is I think what you are referring to, that $13 billion in the third quarter last year was particularly low. If you look at where was in the fourth quarter it was at $13.4 billion; so that can bounce around by a couple hundred million dollars. So realize it was off a low base.
+You did see a couple things, though, in the third quarter of this year that you wouldn't have had. The first is that the Wealth Management revenues, which there is a fair bit of formulaic compensation, are running at, as I mentioned, at higher levels in 2013 than 2012; so you have some compensation there.
+The second thing that you had this quarter, as Brian referenced, is we took down headcount. We had roughly $100 million of severance that came through the P&L during the quarter.
+The third thing that you had during the quarter that I referenced is you had some elevated marketing expense that will go down in the fourth quarter, that you also didn't have in the third quarter. So a combination of a variety of items.
+But I think what we would say is as you look to go forward you should see that red bar come down based on our overall expense initiatives as well as New BAC.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [63]
+--------------------------------------------------------------------------------
+
+    And remember also that when we give you these reduction numbers we are not giving you a reduction and saying that then we are growing elsewhere. This is a net number that you pointed out. So all the investments we're making and from the third quarter last year to the third quarter of this year, you are seeing the mortgage production costs go up, which will come back down. But all the investment we made in salespeople to do the cards that we talked about earlier, small business lending, investment services that you can see at the branch level, we can see the numbers growing there -- all those are in those numbers.
+So all those investments are more commercial bankers that are helping our commercial loan growth. And yet we are overcoming them.
+And then you have the natural salary increases and stuff like that are all absorbed in that. Then you have -- the nominal numbers are flat; and, frankly, if you back out a couple of the things that Bruce just mentioned are down.
+So we are comfortable on course for New BAC. But remember these numbers are absorbing all the usual costs that we do plus the investments in the business, which we are making strong investments in the areas that we have growth opportunity.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [64]
+--------------------------------------------------------------------------------
+
+    Okay. No, that's helpful on the severance. I guess I would assume that we would see some less of that going forward given the significant reductions in mortgage this quarter, right?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [65]
+--------------------------------------------------------------------------------
+
+    That's correct.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [66]
+--------------------------------------------------------------------------------
+
+    Okay, great. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [67]
+--------------------------------------------------------------------------------
+
+    Matt O'Connor, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [68]
+--------------------------------------------------------------------------------
+
+    Hi, guys. Just as we think about the overall size of the balance sheet, you mentioned managing the securities book with OCI risk in mind; and obviously the securities did come down as you mentioned this quarter, while the loans are growing. How do we think about the net impact of those two, I guess looking out next several quarters?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [69]
+--------------------------------------------------------------------------------
+
+    As far as just notional size of the balance sheet?
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [70]
+--------------------------------------------------------------------------------
+
+    Yes, I am really focused on the loans plus the securities; because obviously liquidity levels can vary quarter to quarter and the trading book can vary quarter to quarter. So just -- I mean, loans are growing nicely, but it is being offset by securities coming down. So I am really just focused on those two components.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [71]
+--------------------------------------------------------------------------------
+
+    Yes, I think at this point what I would expect is that generally speaking the securities book should remain relatively consistent with where it is. And then if you look at the loan book I would say that you are going to see that the loan book as well as the shrinkage of the debt footprint will be absorbed through deposit growth, as well as a reduction to some extent in our parent Company liquidity as we are carrying an elevated level of parent Company liquidity to address the significant debt maturities in 2014.
+The net of those, which I thought you were getting to initially, is that you should continue to see this balance sheet in the $2.125 billion to $2.15 billion type area. But as we go forward we should continue to get it to be more and more efficient.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [72]
+--------------------------------------------------------------------------------
+
+    Yes, I think one of the things that we haven't talked about in a while is we still have significant runoff portfolios that we are replacing. We still have -- which gives us the ability to grow the core business without growing the balance sheet footings.
+And I think that is something that will help us in our capital levels, that are already very strong today, going forward. Because effectively we don't need incremental capital to grow the balance sheet, even to have commercial loan growth and other types of growth that you are talking about.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [73]
+--------------------------------------------------------------------------------
+
+    Great. So flattish balance sheet, but optimizing the capital usage; and then obviously the NIM probably benefiting from the remix there.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [74]
+--------------------------------------------------------------------------------
+
+    Yes, and you know, by the way everything is on the NIM is still -- the short rate move drives a lot of profit because the deposit franchise is an advantaged funding source, as you well know.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [75]
+--------------------------------------------------------------------------------
+
+    Then just separately, circling back on the core expenses of $13.1 billion. I guess it is $13 billion ex- the severance and there is some of the mortgage staff reductions, still some New BAC coming in, and then maybe some investments. Where does that -- on the revenue base that you have right now, where does that $13.1 billion go to, if you just fully loaded all the stuff that you can see?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [76]
+--------------------------------------------------------------------------------
+
+    I think the best guidance that we'd give at this point is we have got roughly $600 million a quarter in New BAC to get done over the next five to six quarters.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [77]
+--------------------------------------------------------------------------------
+
+    Okay, that is a net number; so think about it $12.4 billion, $12.5 billion?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [78]
+--------------------------------------------------------------------------------
+
+    Yes. But then you've got to remember, you've got to add back some of the LAS costs -- the subtract in there. But there is always -- LAS is a servicing business; it is always going to have some costs (inaudible) to.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [79]
+--------------------------------------------------------------------------------
+
+    Yes. I guess I was just breaking the -- you've got the litigation, which is a moving target; you've got the LAS which you have been pretty explicit; and then everything else is the $13.1 billion that --
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [80]
+--------------------------------------------------------------------------------
+
+    Sometimes people take that lower number and multiply it times 4, but you've got to remember parts of those other costs will also be in there.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [81]
+--------------------------------------------------------------------------------
+
+    Okay. Thank you very much.
+
+--------------------------------------------------------------------------------
+Operator    [82]
+--------------------------------------------------------------------------------
+
+    Vivek Juneja, JPMorgan.
+
+--------------------------------------------------------------------------------
+Vivek Juneja,  JPMorgan - Analyst    [83]
+--------------------------------------------------------------------------------
+
+    My questions have been answered. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [84]
+--------------------------------------------------------------------------------
+
+    Mike Mayo, CLSA.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [85]
+--------------------------------------------------------------------------------
+
+    Hi, I just wanted to clarify the New BAC benefits. How much of New BAC have you achieved?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [86]
+--------------------------------------------------------------------------------
+
+    Roughly $1.4 billion a quarter, Mike, relative to $2 billion a quarter that we had previously announced.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [87]
+--------------------------------------------------------------------------------
+
+    Originally I thought you were looking for mid-2015. So when you say $600 million more, that is what you mean, when you say over six or so quarters?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [88]
+--------------------------------------------------------------------------------
+
+    That's correct.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [89]
+--------------------------------------------------------------------------------
+
+    Just to clarify the last answer, so you expect all that to hit the bottom line? Or some of that will be offset by investments and salespeople and other investments?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [90]
+--------------------------------------------------------------------------------
+
+    I think what we said was at the current run rate level you should be expecting that to hit the bottom line.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [91]
+--------------------------------------------------------------------------------
+
+    Okay. Switching back to the legal questions, you said you had taken over $40 billion of charges. What is your legal reserve as of the end of the third quarter?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [92]
+--------------------------------------------------------------------------------
+
+    We do not put out a litigation reserve on a standalone basis. The number that we do put out is where we are in rep and warrant, and that was just over $14 billion at the end of the third quarter.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [93]
+--------------------------------------------------------------------------------
+
+    $14 billion rep and warranty?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [94]
+--------------------------------------------------------------------------------
+
+    That's correct. $14.1 billion.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [95]
+--------------------------------------------------------------------------------
+
+    Okay. Would that include anything other than the $8.5 billion settlement?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [96]
+--------------------------------------------------------------------------------
+
+    That includes another $5.5 billion for a variety of matters.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [97]
+--------------------------------------------------------------------------------
+
+    So for the Gibbs & Bruns settlement you have an $8.5 billion reserve for that settlement. I think I asked this on some other earnings calls; but if that agreement was not approved by the judge, what is the potential range for that $8.5 billion reserve?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [98]
+--------------------------------------------------------------------------------
+
+    As we have said before we would need to look at that based on the circumstances that come out at the time. I don't think it is a foregone conclusion it goes one way or the other.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [99]
+--------------------------------------------------------------------------------
+
+    Okay. Switching gears, in terms of loan growth, what is the loan utilization level? And what are you seeing as far as acceleration or deceleration in loan growth?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [100]
+--------------------------------------------------------------------------------
+
+    I would say that the -- we really haven't -- and one of the things that we have tried to do and we will continue to optimize, particularly the way that the Basel 3 standardized ratio works, that we are focused more and more and for those places where we make credit commitments to have the loans be funded as opposed to unfunded, given the capital treatment that is out there.
+So I would say generally as you look at line utilizations that there hasn't been much that has changed at all. Where you are seeing the loan growth has been more funded-type loan growth, in many cases for large, high-quality companies that are making acquisitions. A couple that we would have seen this quarter would have been Verizon Wireless as well as Amgen.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [101]
+--------------------------------------------------------------------------------
+
+    Overall, Mike, the loan utilization rates, they haven't moved around a lot but they are at low levels historically across the board, whether it is our business banking segment, the middle-market segment. And the large corporates don't really use their lines other than as Bruce described, when they are doing something inorganic.
+But they are very low, which gives you two things. One, it indicates that they have got lots of cash and have lots of room for investments. But secondly, as the economy picks up, moving back the 1,000 basis points or so we are from more normal levels, for lack of a better term, there is a lot of loan growth within the -- without new customer relationships or any more work.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [102]
+--------------------------------------------------------------------------------
+
+    I understand you are picking and choosing your spots more. So would you say that demand really hasn't changed a whole lot over the past year or two? Or is it picking up in certain areas?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - CEO    [103]
+--------------------------------------------------------------------------------
+
+    I think demand has picked up over the last couple years. I think that if a company had a line of credit in their dynamics, they are using it at a lower level than they did, not necessarily two years ago but during the normal economic times.
+And that is the second point. The demand has been picking up across consumer demand and things like that; but it is still not as strong as it would be because it's a 2% growth rate economy out there.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [104]
+--------------------------------------------------------------------------------
+
+    All right, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [105]
+--------------------------------------------------------------------------------
+
+    Guy Moszkowski, Autonomous Research.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [106]
+--------------------------------------------------------------------------------
+
+    Good morning. I just have a few cleanup questions. With respect to the long-term debt footprint then, have you talked about how much of the $40 billion that is coming due that you would expect to refi? Or are you going to let it all just go?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [107]
+--------------------------------------------------------------------------------
+
+    It won't all just go, but I think it is safe to assume that less than half of it will be refinanced.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [108]
+--------------------------------------------------------------------------------
+
+    Okay, thanks. That's helpful. On the last question you were asked about the litigation reserve, which understandably you don't want to go there. But do you have an estimate of what your reasonable and possible beyond the litigation reserve will be this quarter?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [109]
+--------------------------------------------------------------------------------
+
+    Yes, I believe, Guy, that at the end of the second quarter, I believe that we had said that the range of possible loss with respect to litigation was in the high $2 billions; and we will obviously need to freshen that up as we get the third quarter Q out. But I wouldn't expect to see anything significant one way or the other.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [110]
+--------------------------------------------------------------------------------
+
+    Got it. The $1.1 billion litigation expense and I guess reserve build this quarter, can you give us a sense of how it breaks down by business unit? Because it didn't seem like it all goes to All Other.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [111]
+--------------------------------------------------------------------------------
+
+    Yes, if you look at by business unit, I referenced that as you float through that you had -- you can see it in the Commercial Real Estate Service area, there was over $300 million of it there. There was roughly $300 million of it between banking and markets. And then the majority of the rest of it was in All Other.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [112]
+--------------------------------------------------------------------------------
+
+    Great. That's helpful. You mentioned that you had accelerated some marketing initiatives from the fourth quarter to the third. I was just wondering if you could give us a little color on specifically what they were, since everybody is looking for growth.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [113]
+--------------------------------------------------------------------------------
+
+    Yes, I think the only two things is that you have obviously seen a little bit more brand that is out there. And then with CCB there was the acceleration of what we do from a charitable perspective from the fourth to the third. Those were the two items.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [114]
+--------------------------------------------------------------------------------
+
+    Got it. Then the very final question is, you had a meaningful improvement in your Basel 3 capital above and beyond the earnings, and it looks like it is a pretty meaningful reduction in the threshold and other deductions. I was wondering if you could just give us a little more granularity on what was going on there.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [115]
+--------------------------------------------------------------------------------
+
+    Well, no, is a great question. Really two things going on. Keep in mind, as we have said, because we have a decent chunk of disallowed DTA from a Basel perspective, that ballpark we will accrete capital on a pretax basis generally speaking as opposed to a post-tax basis for a decent number of quarters going forward. So, when you look at that, think pretax not so much post-tax.
+And then the second benefit that you had, which was an earlier question, was the benefit of OCI during the quarter of roughly $1 billion after-tax or $1.5 billion pretax. And that was the combination of pension to the positive; and then to the negative CCB coming out, as well as some of the debt securities gains.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [116]
+--------------------------------------------------------------------------------
+
+    Got it. Okay, that's great. Thanks so much for taking my questions.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [117]
+--------------------------------------------------------------------------------
+
+    Okay. I think that's all the questions that we have, so thanks for joining us this morning.
+
+--------------------------------------------------------------------------------
+Operator    [118]
+--------------------------------------------------------------------------------
+
+    This does conclude today's program. You may disconnect at any time.
+
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2013-Oct-24-AMZN.OQ-139066299673-Transcript.txt

@@ -0,0 +1,507 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2013 Amazon.com Inc Earnings Conference Call
+10/24/2013 02:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Tom Szkutak
+   Amazon.com, Inc. - CFO
+ * Sean Boyle
+   Amazon.com, Inc. - VP of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Scott Tilghman
+   B. Riley Caris - Analyst
+ * Jordan Rohan
+   Stifel Nicolaus - Analyst
+ * Tom Forte
+   Telsey Advisory Group - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Kerry Rice
+   Needham & Company - Analyst
+ * Greg Melich
+   ISI Group - Analyst
+ * Benjamin Schachter
+   Macquarie Research - Analyst
+ * Ron Josey
+   JMP Securities - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * Victor Anthony
+   Topeka Capital Markets - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * John Blackledge
+   JPMorgan - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Mark Miller
+   William Blair & Company - Analyst
+ * Mark May
+   Citi - Analyst
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to the Amazon.com third-quarter 2013 financial results teleconference.
+(Operator Instructions)
+Today's call is being recorded. For opening remarks, I will be turning the call over to the Vice President of Investor Relations. Mr. Sean Boyle. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello and welcome to our Q3 2013 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 24, 2013, 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 our 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'll 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 2012. Now I will turn the call over to Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Sean. I will begin with comments on our third-quarter financial results. Trailing 12 month operating cash flow increased 48% to $4.98 billion. Trailing 12 month free cash flow decreased 63% to $388 million. Trailing 12 month capital expenditures were $4.59 billion. This amount includes $1.4 billion in purchases of our previously leased corporate office space as well as property for our development of additional corporate office space located in Seattle, Washington, which we purchased in the fourth quarter of 2012. The increase in capital expenditures reflects additional investments as part of our continued business growth, consisting of investments in technology infrastructure, including Amazon web services, and additional capacity to support our fulfillment operations.
+Return on invested capital was 3% down from 10%. ROIC is TTM pre-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 475 million shares compared with 469 million shares. Worldwide revenue grew 24% to $17.09 billion or 26% excluding the $332 million unfavorable impact from year-over-year changes in foreign exchange rates. We are grateful to our customers who continue to take it advantage of our low prices, vast selection, and shipping offers. Media revenue increased to $5.03 billion, up 9% or 13% excluding foreign exchange.
+EGM revenue increased to $11.05 billion, up 29% or 31% excluding foreign exchange. Worldwide EGM increased to 65% of worldwide sales, up from 62%. Worldwide paid unit growth was 29%. Active customer accounts exceeded $224 million, worldwide active seller accounts more than $2 million. Seller units represented 40% of paid units. Now I will discuss operating expenses excluding stock-based compensation. Cost of sales was $12.37 billion or 72.3% of revenue compared with 74.7%. Fulfillment, marketing, technology, and content, and G&A combined was $4.46 billion or 26.1% of sales, up approximately 250 basis points year over year. Fulfillment was $1.96 billion or 11.5% of revenue compared with 10.5%. Technical content was $1.58 billion or 9.2% of revenue compared with 7.8%. Marketing was $671 million or 3.9% of revenue compared with 3.8%.
+Now we will talk about our segment results and consistent with prior periods, we do not allocate to segments our stock-based compensation or other operating expense line item. In the North America segment, revenue grew 31% to $10.3 billion. Media revenue grew 18% to $2.61 billion. EGM revenue grew 33% to $6.73 billion representing 65% of North America, revenues up from 64%. North America segment operating income increased 1% to $295 million, a 2.9% operating margin. In the international segment, revenue grew 15% to $6.79 billion. Adjusting for the $327 million year-over-year unfavorable foreign exchange impact, revenue growth was 20%. Media revenue increased 2% to $2.42 billion or 9% excluding foreign exchange. EGM revenue grew 23% to $4.32 billion or 28% excluding foreign exchange. EGM now represents 64% of international revenues, up from 59%.
+International segment operating loss was $28 million, compared to a $59 million loss in the prior period. Consolidated segment operating income increased 15% to $267 million or 1.6% of revenue, down approximately 10 basis points year over year. Excluding the unfavorable impact from foreign exchange, CSOI increased 18%. Unlike CSOI, our GAAP operating income or loss includes stock based compensation expense and other operating expense. GAAP operating loss was $25 million compared to a $28 million loss in the prior year period. Our income tax benefit was $12 million. GAAP net loss was $41 million or $0.09 per diluted share compared with net loss of $274 million or $0.60 per diluted share. The third quarter 2012 included a loss of $169 million or $0.37 per diluted share related to our equity method share of losses reported by LivingSocial primarily attributable to its impairment charge of certain assets including goodwill. Turning to the balance sheet, cash and marketable securities increased $2.44 billion year over year to $7.69 billion. Inventory increased 20% to $607 billion and inventory turns were 9.2, down from 9.7 turns a year ago, as we expanded selection, improved in stock globals, and introduced new product categories. Accounts payable increased 20% to $10.04 billion and accounts payable days was 75, consistent with the prior year.
+I will conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we have seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending. It is not possible to accurately predict demand and therefore our actual results could differ materially from our guidance. As we describe in more detail in our public filings, issues such as settling intercompany balances from foreign currencies amongst our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rates can all have a material effect on guidance.
+Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, report any further revisions to stock based compensation estimates, and net foreign exchange rates remain approximately where they have been recently. For Q4 2013, we expect net sales of between $23.5 billion and $26.5 billion or growth between 10% and 25%. This guidance anticipates approximately 125 basis points of unfavorable impact from foreign exchange rates. GAAP operating income or loss could be between a $500 million loss and $500 million in income compared to $405 million income in the fourth quarter 2012. This includes approximately $350 million for stock-based compensation and amortization of intangible assets.
+We anticipate consolidated segment operating income or loss which excludes stock-based composition and other expense to be between a $150 million loss and $850 million income compared to $678 million income in fourth quarter 2012. We remain headstrong focused on driving a better customer experience through price, selection, and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks. And with that, Sean, let's move to questions.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator would you please remind our listeners how to initiate a question?
+
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions)
+Ben Schachter, Macquarie.
+
+--------------------------------------------------------------------------------
+Benjamin Schachter,  Macquarie Research - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    On the press release it says that you signed up millions of new Prime members. I believe if you read it, it says that it happened in the last 90 days. I wonder if you ever commented on a time period like that before. Is that a normal run rate to add millions of Prime users in 90 days or is it something special in this quarter that drove Prime? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+    I do not recall if we've actually given a 90 period before. I do not believe that we have. In terms of beyond that, there's not a -- that I can add to that. We are very excited. Prime is growing very fast. I am very excited for the service that we offer customers both in terms of physical and digital goods. So it is exciting and that is why we put it in there today in the release.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+    Scott Devitt, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [5]
+--------------------------------------------------------------------------------
+
+    Two if I could. First on the Kindle family. It seems like the timing of device launches, on the eBook library size, and local language content could be drivers of different levels of penetration in digital media in the US relative to what you've been able to obtain outside the US to date. I was wondering if there was anything else notable that you would highlight that helps explain the different dynamic that seems to be playing out within the media revenue line, domestically versus international. And whether you think any of those issues are structural or they just work themselves out with the benefit of time and your execution. And then secondly, if you could talk a bit about how you think about the lifetime value of a non-Prime customer versus a Prime customer and what the intended outcome may be as it relates to the increase in super saver pricing in the US market. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [6]
+--------------------------------------------------------------------------------
+
+    In terms of the first question, certainly we have been launched devices in the US earlier in terms of content, both, you are really referring to mostly eBook content. And both are growing very fast. The base is different, as you mentioned. We have a higher base in the US just based on when we launched. So you're absolutely right. You do see that difference in the media line between North America and international. And so it is just again, both are growing very nicely right now in terms of digital Kindle books. In this case as you referenced, but it is just a different base. And so we're excited about the opportunity that we have in both segments there. But we are further ahead right now in North America. And then, I am sorry, can you repeat the second part of your question again?
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [7]
+--------------------------------------------------------------------------------
+
+    How do you think about lifetime value of those that are not Prime subs versus Prime subs given the increase you recently did with super saver shipping in the US from $25 to $35 threshold?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [8]
+--------------------------------------------------------------------------------
+
+    In terms of Prime customers, we have seen not only a very strong increase in Prime membership but we have seen a very good retention of Prime members. And so certainly, when you look at that, in terms of lifetime value, we have a customer base that is certainly staying with us longer. They are doing more cross shopping and they are getting the benefits of Prime that we are offering that we continue to add to. And then we still have a very good customer base that is non-Prime. You mentioned that the threshold changed. We did change. We have different thresholds in various geographies around the world for super saver, shipped with our super saver delivery in those geographies.
+And in the case of the US, we have had the $25 threshold for over 10 years and we changed it to $35. And during this time frame, we have certainly increased our selection that is eligible for that by millions of items. And certainly as you would know, during this rather lengthy time frame, transportation costs and fuel prices have changed significantly over that time period. So we had to change it. So we just thought that was the right thing to do.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney, RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [10]
+--------------------------------------------------------------------------------
+
+    I want to ask about the North American EGM line. I guess it is the second quarter in a row you have had acceleration. When I asked about you about it last quarter, I think you singled out fashion apparel and consumer staples. But the acceleration really seems to be in line with using comps. Is there something in there that to you indicates that you are getting real critical mass with your customers in those two particular categories? And then just real quickly on the Kiva robots, is there a reason you would call that out? Should that have some sort of material impact over time on leverage in the fulfillment cost line? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [11]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of our growth in EGM, you highlighted a couple of categories that are growing very nicely that we mentioned last quarter as well. What you are seeing there, and actually the growth is very broad. We have added a lot of unique selections in both our hard lines and soft lines, categories including consumables and apparel, as you mentioned. The experience has gotten better on the site. Unique selection has increased dramatically over the past few years. So just a number of things are coming together in those categories so when I look at it, it just seems very broad, which we like. And there is just a lot of new selection with great category expansion too over the last several years. That is really what you are seeing there.
+In terms of Kiva, we have launched in a few FCs. We think it is an interesting opportunity. I think as I mentioned, last quarter at this time we're ahead of the schedule that we had set forth at the time, that we joined with Kiva and we are excited what we see. Certainly, we will still be adding associates. Certainly over time in those FCs but this certainly will be productivity with Kiva. And we will have to stay tuned to see what that looks like but we are certainly excited about that opportunity and the roll out.
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+
+    Victor Anthony, Topeka Capital Markets.
+
+--------------------------------------------------------------------------------
+Victor Anthony,  Topeka Capital Markets - Analyst    [13]
+--------------------------------------------------------------------------------
+
+    ROIC is the metric you highlighted each quarter. It has hovered around 20%, 30%, 40% range throughout the quarters of 2010, 2011. It is obviously been depressed over the past several year and a half due to investments. Maybe you can help us with the timing of when you expect ROIC to return to levels we saw in 2011. And second, you are investing a lot in video content for Prime Instant Video. Are there any hard numbers you can share in terms of conversions from the Kindle devices? And there -- in the past there has been talk about converting Prime Instant Video into standalone product. Maybe you can share your thoughts there. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [14]
+--------------------------------------------------------------------------------
+
+    Sure. Keep in mind, when the -- as you mentioned, we are investing very heavily in the business. We think that is the right thing to do. We have a lot of good long-term opportunities which is why we are doing it. It is depressing ROIC. Just keep in mind from a pure metric standpoint, just as a reminder, the way we measure ROIC is free cash flow divided by average investor capital so total assets minus current liabilities. That is over a five point average and so when you do that first in the numerator, we do have, keep in mind, it's about $1.4 billion in our free cash flow number that relates to the purchase. It goes back to Q4 last year but it's in our TTM free cash flow that relates to the purchase of our campus here in Seattle and some nearby land, so it's $4.4 billion of that. So that is bringing the free cash flow down.
+Also keep in mind in the invested capital, we do include cash and marketable securities which is certainly the largest piece of our invested capital. We think that is the right thing to do until we either deploy that capital or return it in some way. Just keep in mind that is included in the metric. In terms of Prime Instant Video, we are getting great usage from a broad set of customers on Kindle as well as other devices, and the adoption is going very well. I apologize. I can't share any specific metrics today but we like what we see. It certainly -- we think it is certainly helping the Prime numbers, you know, the Prime membership increases that you're seeing. It is -- we think it is interesting and we are investing there. We included in both our Q3 results as well as the Q4 guidance, our assumptions around additional content that we'll be acquiring including original content. So I am very excited about that opportunity.
+
+--------------------------------------------------------------------------------
+Operator    [15]
+--------------------------------------------------------------------------------
+
+    Mark May, Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citi - Analyst    [16]
+--------------------------------------------------------------------------------
+
+    The seasonal hiring is -- I think last year it grew about in line with growth rate in US revenue growth. But this year it looks like it's -- you are growing it about 10 percentage points above the midpoint of your range. Is there anything that is different this year that is driving that? And then second question on pricing. There have been numerous reports recently, and I think for a while now, that the multi-channel competitors are competing more fiercely with Amazon in terms of price parity, et cetera. What impact are you seeing or do you think you could see from that and how you are addressing it? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [17]
+--------------------------------------------------------------------------------
+
+    In terms of the seasonal employees, unfortunately there is not a lot I can add to that. We are getting ready for an exciting holiday season. And that includes making sure that we have the right amount of employees as well as seasonal help during that period. It also includes making sure that we have the right capacity in place, making sure we have -- we have added a lot of selection over the past couple of years and particularly over the last 12 months in making sure that we have good in-stock levels related to that selection. We are making sure that we have people to help us with not only serving customers with our retail inventory but also Fulfilled by Amazon has grown, certainly very strongly over the past year. And that impacts the capacity and the number of employees that you see there.
+So that is really what you are seeing in that number. In terms of pricing, we operate in a very competitive arena. That is not something that is new. That is something that we have been doing since our inception. We have many, many different competitors. You will pass those competitors on your way to work and on your way home. They are offline, they are offline. It's a very competitive marketplace. It is something -- pricing is something that we worked very hard at over the years. We want to make sure that we have great values for our customers. And it is something that we spent a lot of time on and worked very hard to make sure that we can offer that to customers. So I would not say that it is anything new. It is something that we have been dealing with since our inception. But it is a very competitive environment.
+
+--------------------------------------------------------------------------------
+Operator    [18]
+--------------------------------------------------------------------------------
+
+    Carlos Kirjner, Sanford Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [19]
+--------------------------------------------------------------------------------
+
+    Two quick questions. First, how do you see your competitive position versus Alibaba in China and what gives you confidence that you have a chance of being a relevant player there, even in the long term? And secondly, in the US you have a service similar to subscription video-on-demand that is a feature of Prime which is Amazon Prime video, while in Europe you have a full-blown standalone service you offer them. Why is your strategy in Europe so different from your strategy in the US when it comes to video-on-demand? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [20]
+--------------------------------------------------------------------------------
+
+    In terms of China, it is very early there. There is certainly room for many winners. It's a very large segment. We have seen -- we have a good business there in terms of top line that is growing, and we continue to look for ways to make sure that we satisfy customer demand. We work on a lot of the same inputs that we work on in our other geographies to make sure that we have great prices, good selection, speed of delivery. We've worked very hard in terms of putting in a lot of capacity close to customers. So those are the things that we're working on to try to ensure our success there.
+In terms of the visual competitors, we have a long-standing practice of not talking about other companies, but again, there is room for a lot of winners. In terms of video content, there's not a lot that I can add to that question. I apologize. But certainly we have been ramping up our content in the US on Amazon.com as part of Amazon Prime. It is something that we have been looking at very carefully. We like what we see so far. We think it is interesting but beyond that, I can't speculate what we might do or might not do in another location.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+    Mark Miller, William Blair.
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair & Company - Analyst    [22]
+--------------------------------------------------------------------------------
+
+    On AmazonFresh, can you comment on what you are seeing in LA versus the Seattle test? How important is the attachment rate with general merchandise? And then as you are making more frequent deliveries, are you finding that it is driving higher sales of general merchandise?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [23]
+--------------------------------------------------------------------------------
+
+    It is very, very early in LA, but we see so far we like. We are adding a lot of selection there on behalf of customers. It is a great opportunity for customers to get both a number of different items through AmazonFresh. So we are excited. We like the trials that we have done have been very good. The conversion has been good. We look forward to even improving the experience even more over time for customers but it is very early. We like what we see but you will have to stay tuned on that one.
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair & Company - Analyst    [24]
+--------------------------------------------------------------------------------
+
+    And with general merchandise?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [25]
+--------------------------------------------------------------------------------
+
+    Sorry?
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair & Company - Analyst    [26]
+--------------------------------------------------------------------------------
+
+    Are you selling more general merchandise as a result of more frequent deliveries in that market?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [27]
+--------------------------------------------------------------------------------
+
+    Yes.
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+    Kerry Rice, Needham & Company.
+
+--------------------------------------------------------------------------------
+Kerry Rice,  Needham & Company - Analyst    [29]
+--------------------------------------------------------------------------------
+
+    I just wanted to ask a question on your acquisition of TenMarks which is really diving a little bit deeper into the Ed Tech market. I know you sell and rent the textbooks. Can you talk a little bit maybe what your strategy is there?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [30]
+--------------------------------------------------------------------------------
+
+    We though it was a company that is doing some interesting things about helping students and children learn math. We thought it was an interesting fit for us, and we look forward to exploring what opportunities we can do together there. And you'll have to stay tuned on that one but we think it is -- it's doing a very nice job and we are very excited to have them as part of the Amazon business.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+    Scott Tilghman, B. Riley.
+
+--------------------------------------------------------------------------------
+Scott Tilghman,  B. Riley Caris - Analyst    [32]
+--------------------------------------------------------------------------------
+
+    I just wanted to touch on the North American segment margins for a little bit. We have seen some pretty good progress there in terms of year-over-year improvement, a little bit of a back step last quarter but not too much. The category fell back this quarter. I am wondering if there is anything unusual there in terms of timing or investments that may be more called out and how we should think about it over the next few quarters.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [33]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of Q3 specifically, Q3 just because of the, as I would call it the Q4 readiness, the seasonal readiness, you see this often in Q3 where both our total and our segment operating profit is lower than other quarters. That certainly is what you are seeing in Q3 in North America, so that is in terms of the investments we are making to get ready for the season. We talked about, you heard in Jeff's quote, the capacity that we are adding and certainly in multiple geographies but certainly in the North America is impacting that as well. You can see it in our fulfillment line item as a percentage of revenue being up. You can see it in our technical content. We are certainly investing. The other part too that I mentioned earlier is we are investing in video content for Prime in the US, and you see that certainly in this result as well.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+    Tom Forte, Telsey.
+
+--------------------------------------------------------------------------------
+Tom Forte,  Telsey Advisory Group - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    I wanted to know where you stand. Last year, I think you added 20 fulfillment centers on a full-year basis. And the last time you gave us an update, I think this year it was five US and a handful of international. I wanted to know where you stood on that and why the change versus last year. And then also very quickly I wanted to see where you stood or how you felt about your Amazon locker initiative. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of fulfillment centers, the number is seven but it is a net number. And so included in that are several consolidations. We are building generally larger FCs and we are consolidating some of those. So that is a net seven. And so what that means is if you were to take that as a percentage of our total fulfillment centers, you would certainly get a number that is less than the square footage that we are actually adding. We are adding square footage that would be significantly higher than that. In terms of lockers, it is early. It is another way to get closer to customers to make it convenient for customers, and it is interesting. We have it in a few different geographies right now. It is limited. We do not have it probably across our full network. So that is something we are learning. It is an interesting experience. It is certainly something that over time we will continue to take a closer look at and certainly expand if it makes sense to do so on behalf of customers.
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [38]
+--------------------------------------------------------------------------------
+
+    I just want to ask two things. First, Tom, can you give us some color on where you are in the shift from third party to first party eBooks and how much of a factor that has been in re-accelerating media revenue? We have seen re-acceleration in media the last three quarters I think in North America. And then secondly, it looks like there are six fewer shopping days this holiday season between Black Friday and Christmas. I am just curious what you do if anything differently to prepare for that and do you think that could actually drive more holiday shopping online. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [39]
+--------------------------------------------------------------------------------
+
+    In terms of your second one, second question, there are fewer days. There is not a lot that we do different. We certainly see when that happens, there is some behavioral differences on behalf of customers just because of the shorter time period. We have certainly some more sizable days during that period. But there is not a lot to add to that. In terms of the transition for eBooks, in terms of our total growth across Amazon on both North America total or global total, it is not a significant or meaningful impact to the overall growth rate. And certainly this transition has been going on for some number of quarters now so there is not a lot I can help you with there.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+    Greg Melich, ISI Group.
+
+--------------------------------------------------------------------------------
+Greg Melich,  ISI Group - Analyst    [41]
+--------------------------------------------------------------------------------
+
+    I wanted to dig into the inventory a little bit. It looks like the growth slowed to 20% if the sale is accelerated. Tom, could you give us an insight as to why that is and maybe which categories out- performed in the quarter?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [42]
+--------------------------------------------------------------------------------
+
+    Sure, I would look at it more from a turns perspective. And if you look at it more over an average turns basis, it has gone down and the reason is unique selection. We keep adding a growth and unique selection so it certainly has increased over the past year, in stock levels have gotten better. And so those are the things that are really driving it. In terms of endpoints for any particular quarter, they can be a little bit lumpy, but I would look to the turns.
+
+--------------------------------------------------------------------------------
+Operator    [43]
+--------------------------------------------------------------------------------
+
+    John Blackledge, Cowan and Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  JPMorgan - Analyst    [44]
+--------------------------------------------------------------------------------
+
+    Two questions. First, is it a priority to offer one day or same day delivery at some point as some competitors are offering same-day delivery in large markets for certain brick and mortar retailers? And then secondly, can you talk about the prospects for the log in and pay program? How many online merchants are signed up for it and what is Amazon getting out of it either economically and/or from getting data out of the purchases? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [45]
+--------------------------------------------------------------------------------
+
+    In terms of speed of delivery, whether it be one day or same day, what has happened certainly over the past 10 plus years is we have added a lot of selection, we have added a lot of fulfillment centers. As a result of that, we have selection that is by default, increased in our selection that's closer and closer to customers. As a result of that, our speed of delivery has improved. And certainly for Prime customers, depending upon the geography in the case of the US, we have expressed two day shipping for free and then first of all fees so they get it faster than that. That is something that you have seen that improvement gradually over the past 10 plus years. You have seen it certainly getting even better the last few years as we have rapidly increased the number of fulfillment centers.
+That is something that we think is important and we will continue to work on behalf of customers to give them those options and to make sure they get product when they want it. In terms of log in and pay, it is something that we think is interesting. Because of our large customer base and the credentials that we have and the secure payments that we have, we think it is an interesting opportunity. We think that there is -- it is certainly interesting ways to monetize that over time. But again, we think it is an interesting opportunity.
+
+--------------------------------------------------------------------------------
+Operator    [46]
+--------------------------------------------------------------------------------
+
+    Ron Josey, JMP Securities.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [47]
+--------------------------------------------------------------------------------
+
+    I want to talk about newer international markets. Specifically, I think Amazon India was called out given 10 new category launches in the past 120 days or so. My question is related to infrastructure in India and how good is it so that Amazon can continue to grow there. Specifically if other countries can follow a model like this, Brazil comes to mind. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [48]
+--------------------------------------------------------------------------------
+
+    Sure. We have a few different models in India. And we -- from a -- we have a marketplace model which we offer Fulfilled by Amazon, which as you mentioned, certainly would be infrastructure is not as advanced as some geographies but we also we also view that as an opportunity. And we're happy to help sellers, we'll fulfill by Amazon. It is an interesting opportunity. It is very, very early. We are in investment mode there. It's a long-term opportunity but it is a very exciting opportunity. We are a very strong team that is working on that opportunity. So we're excited about it.
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+    Brian Pitz, Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [50]
+--------------------------------------------------------------------------------
+
+    Maybe you could comment on what you are seeing domestically and internationally in terms of eCommerce trends in the current quarter. Anything specific stand out, especially in North America, given some of the mixed commentary we have heard from some of your competitors? And then just some additional comments if you could on growth in the other revenue category, specifically on AWS and/or on your advertising business. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [51]
+--------------------------------------------------------------------------------
+
+    Sure. I will take the second one first. In terms of AWS, it is growing very, very strong. It is an area that is very early for us. It is growing very, very strong. We have a great team that is working on it, servicing customers, and we are very excited about the long-term opportunity. In terms of you mentioned the trends in North America, what you have see is there are really a nice steady acceleration of growth since Q4 last year. If you look back to Q4 last year, for North America specifically, and you just trace that back over the past four quarters, you see a really nice sequential increase from quarter to quarter. Again, that gets back to it went from 23% in Q4 last year to 26% to 30% and 31%. Those are the year-over-year increases in by quarter for North America revenue And so a lot of it is what we talked about earlier. It is focused on a lot of the retail basics as well as also improving seller performance as well. Those are things that are driving it.
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+    Jordan Rohan, Stifel Nicolaus.
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [53]
+--------------------------------------------------------------------------------
+
+    A follow-up to the last question on US in particular. Did you see any weakness or any discernible trends around the government shutdown and all of the politics going on in Washington in September and early October? And separately, can you talk about what you are learning from being an investor in LivingSocial? The accounting charges aside, can you talk about your own local business, how that may compete with other players in the space and all of the various initiatives you have with? What can be learned from what you know at this point? You are no longer a new investor in that company. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [54]
+--------------------------------------------------------------------------------
+
+    In terms of North America growth, other than what I mentioned on the quarterly growth, Q3 was strong, 31% growth. Again, we see a nice steady increase over the past four quarters. That is overlapping a quarter from Q3 of last year that was 33%. So again, we like what we see from a growth perspective in Q3 for North America. In terms of total growth, giving a wide range for Q4 and that reflects our view for Q4 but we are excited about the quarter and about getting ready for customers during this heavy seasonal quarter. So we are excited about what we see there. In terms of LivingSocial, there is really not a lot that I can add to your question. I apologize. They are doing a good job in terms of local. We also have a local offering on Amazon. The team is very dedicated to make that work and it is an interesting area. We're learning but it is early.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+    Heath Terry, Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [56]
+--------------------------------------------------------------------------------
+
+    When you look at the deceleration in growth in North America and other revenue and obviously it is still at a very high level. When we are thinking about the major components of that line, AWS, advertising, credit card relationship, is there anything relevant to the relative growth rates between those components that we should be thinking about?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [57]
+--------------------------------------------------------------------------------
+
+    I am not sure how to answer your question. The only part I would call out, you mentioned there is a number of different items that is in there. Certainly the largest and fastest growing largest area by far is AWS, and it is growing very nicely. That is certainly reflected in that line item.
+
+--------------------------------------------------------------------------------
+Sean Boyle,  Amazon.com, Inc. - VP of IR    [58]
+--------------------------------------------------------------------------------
+
+    Thank you for joining us on the call today and for your questions. A replay will be available on our investor relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [59]
+--------------------------------------------------------------------------------
+
+    Thank you. That does conclude our conference. You may now disconnect. ( End of transcript )
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2013-Oct-30-FB.OQ-138249704477-Transcript.txt

@@ -0,0 +1,495 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2013 Facebook Earnings Conference Call
+10/30/2013 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * David Ebersman
+   Facebook, Inc. - CFO
+ * Deborah Crawford
+   Facebook, Inc. - Director IR
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Richard Greenfield
+   BTIG, LLC - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Jason Helfstein
+   Oppenheimer & Co. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Wieser
+   Pivotal Research Group - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Brian Nowak
+   Susquehanna Financial Group - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * Peter Stabler
+   Wells Fargo Securities - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Jay and I will be your conference operator today. At this time I would like to welcome everyone to the Facebook third-quarter earnings conference call. 
+(Operator Instructions) 
+Thank you very much. Miss Deborah Crawford, Facebook's Director of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's third-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, CEO; and David Ebersman, CFO. 
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. The actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release, our annual report on Form 10-K, and our most recent quarterly report on form 10-Q, filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today. And we undertake no obligation to update these demands as a result of new information or future events. 
+During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is to included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. 
+And now, I'd like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah. And thanks, everyone, for joining today. This has been a busy quarter at Facebook where we planted the seeds to achieve our long-term goals with Internet.org, our AI group, and our efforts to build the knowledge economy. We continue to see strong overall engagement and are making good progress on our strategy, especially in mobile. This contributes to the results we reported today -- strong revenue growth, strong growth in daily actives and good growth in engagement, as our ratio of daily actives to monthly active continues to grow. 
+We've also reached new milestones as a mobile company. Now, 49% of our revenue comes from mobile. And 48% of the people who use Facebook on any given day are only accessing it from mobile. That's almost half of people only using Facebook from their phones. And it's a pretty incredible sign of how Facebook has evolved over the last year. 
+On our last earnings call I talked about our three big goals for the next phase of our Company -- connecting everyone, understanding the world, and helping to build the knowledge economy. Connecting everyone means giving everyone in the world the power to use the Internet and stay connected to the people and things that matter to them. Understanding the world means helping people not just share day-to-day updates but also building up long-term knowledge about the world, and being able to answer questions for you that no other service can. Building the knowledge economy is about helping people create growth in jobs, and supporting a larger economic shift in the world based on information and ideas. This framework is how I'll think about our progress as a company over the next few years. So I think it's a useful way to look at our progress over this quarter, as well. 
+Let's start with connecting the world. This quarter we took an important step. In August, we launched Internet.org, a global effort with Samsung, Ericsson, Qualcomm and other industry leaders to make affordable Internet access available to everyone in the world. Today, only about one-third of the world's population is online. And the Internet is growing more slowly than you'd probably expect, less than 9% a year. We want to change this. Our mission has always been to connect the world, and to us that means everyone. When the next 5 billion people have a chance to use these basic services and participate in the global economy, that's going to create huge benefits for everyone in the world. 
+By working together on technology and new business models, we think we can help accelerate the process of connecting everyone. We believe we're in a unique place to help encourage broader growth of the Internet because so much of what people do on the Internet is use Facebook. According to comScore, around 20% of the time that people spend in apps in the US alone is in Facebook services. And when you ask a lot of people in developing countries what service they care about using most, the answer is often Facebook. We're already trying to make access to Facebook cheaper. And we think that all the same tools and innovations that we're developing to do this can be applied to other basic Internet services, as well. Like messaging, search, weather, and Wikipedia, to make those services cheaper or free to deliver. 
+We also recently acquired Onavo. This is a team that builds world-class data compression technology in mobile analytics. And they'll play an important role in helping us build more efficient technologies and services that use less data. Of course no single company can do this alone, and we're working closely with our partners to develop our future plans. It's still very early for Internet.org, and we'll have more to say in the months ahead. But I'm very excited about this effort, and I'm grateful to our partners for being a part of that. 
+Next, let's talk about understanding the world. What I mean by this is that every day people post billions of pieces of content and connections into the graph. And in doing this, they're helping to build the clearest model of everything there is to know in the world. A big part of why this works is that people can share things with any audience they want. They don't have to share publicly with everyone at the same time. They can share with just their friends. So, this means that the model of the world that people are building in our systems includes things that people only want to share with just a few people. 
+This has the potential to be really powerful. But right now we actually do very little to utilize the knowledge that people have shared to benefit everyone in our community. The service we invest in the most is News Feed, which gives you a great sense of what's going on with your community today. News Feed has proved itself incredibly useful for people. And is the most used app on people's phones by far. But this is just the start of what's possible. And when we get to the point where anyone can easily ask any question to Facebook and get it answered by our community, that's going to be very powerful. 
+In the last quarter, there have been several important evolutions in our strategy of understanding the world. The first is around Graph Search. At the beginning of this year we announced the first beta version of the service on desktop, and indexed more than 1 trillion connections between people and things. In the last quarter we started testing what we call Post Search, which allows you to search all of the unstructured text and posts that people have ever made on Facebook -- about 1.2 trillion more posts. The folks on the team who have worked on web search engines in the past tell me that the Graph Search corpus is bigger than any other web search indexed out there. It's still early for Graph Search because it is still in beta, only in English, and we haven't launched our mobile version yet, but it's something I'm really excited about. 
+Another evolution in our progress to understand the world is around our approach to building mobile apps. Our goal has always been to help people share anything they want with anyone they want. Historically we've done this by building a lot of features into the core Facebook app. But we also have a few separate apps that are widely used, like Instagram and Messenger, our standalone messaging app. These are each large services that help people share in different ways. Instagram enables more than 150 monthly actives to share beautiful photos, often more publicly than people would want to share on Facebook. Messenger is part of how people send billions of private one-to-one and group messages everyday. And with the latest release of the app yesterday, we're continuing to add features and make this a better experience. In the future, we expect to develop more of these services to help people share different content with different groups of people. And we'll continue to build our Messenger as a better, distinct messaging experience. 
+There's one more evolution in our strategy to understand the world that I want to mention. In September we formed the Facebook AI group to do world-class artificial intelligence research using all the knowledge that people have shared on Facebook. The goal here is to use new approaches in AI to help make sense of all the content that people share so we can generate new insights about the world to answer people's questions. We started assembling a team of some of the best people in the field to work on these problems. We also announced the acquisition of Mobile Technologies, a speech recognition and machine translation company that will help expand our work in the field beyond just photo recognition to voice. Over time I think it's going to be possible to build services that are much more natural to interact with, and can help solve many more problems than any existing technology today. I'm excited that we're working on this problem and I'm looking forward to us doing a lot more here. 
+Finally, let's talk about the progress we've made towards building the knowledge economy. The key to building the knowledge economy is building tools for everyone to use information to do their jobs better. So, in addition to connecting everyone and understanding the world, we're also focused on building these services for businesses as a way to accelerate the growth of this new economy. The way businesses will experience this effort is that we'll keep building better services for them to reach their customers with higher quality ads, more efficiently, with better targeting, better analytics and using richer formats. The way people will experience this effort is that the ads they see will become more and more relevant to their lives. 
+Last quarter I started talking about how our approach going forward would be to grow our business through improving the quality of our ads rather than by just increasing the quantity. This quarter we continue to do this. And the results show our approach is working. We've been able to deliver better content and grow business for our customers and ourselves. We're finding that a lot more people are finding our ads useful and engaging with them. And the average daily actives is engaging with more than one ad per week. Most people probably wouldn't expect to engage with ads that often. So I think it's a great sign that people are finding ads useful, and they're adding value to the experience on Facebook. I think there's still a lot of room to improve the quality of our ads and grow our business over time. So, this is something that we're going to keep on investing in going forward. 
+So, that's my update on how we're thinking about the next big changes we want to make in the world -- connecting everyone, understanding the world, and building the knowledge economy. We made a lot of progress this quarter. And I want to take a moment to thank everyone who works at our Company and everyone who is part of our community for all that they do to make Facebook great. Looking ahead, you can expect us to keep preparing for the future, even as we keep on building momentum today. As I said in our original S-1 filing, we don't build services to make money, we make money to build better services. This approach has served people who use Facebook, marketers and entire Facebook community well. It's a different way of looking at the world. But it's how we're going to keep succeeding as a Company. Thank you for being with us today. And now I'm going to hand it over to Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark. We continue to see strong growth in our ads business, especially mobile. Q3 total ad revenue grew 66% year over year to $1.8 billion. And mobile advertising grew to 49% of our total ad revenue. This is a remarkable milestone in the short time since we introduced mobile News Feed ads just last year. Similar to last quarter, our performance is very broad-based, with strong growth across all geographies and types of marketers. At the same time, our overall user engagement metrics remain strong. We think this validates the careful approach we're taking to building our ads business. 
+I'd like to highlight some of the key drivers of our performance this quarter. These are, to a large degree, the results of investments we've made over the past few years. And they will continue to be our priorities going forward. The first driver is the continued growth of mobile engagement around the world. In 2013, for the very first time, people will spend more time with digital media than watching TV. eMarketer estimates more than five-and-one-quarter a day on digital services, including mobile, compared with four-and-a-half hours watching TV in the US. Facebook is well-positioned to benefit from this shift. In the United States, Facebook, including Instagram, that's one in eight minutes people spend on the desktop but one in five minutes on mobile. 
+According to ComScore, Facebook and Instagram have more mobile time spent than many of the next largest services, including YouTube, Pandora, Yahoo, Twitter, Pinterest, Tumblr, AOL Snapchat, and LinkedIn combined. Along with this engagement, we believe that we have the best mobile ad products, with ads that are integrated unit into News Feed, where people spend most of their time on Facebook. 
+As people shift to where they spend their time, marketers are starting to follow. Our results today show that we're benefiting from this shift to mobile. And we believe this shift will continue, and will continue to benefit us. Today mobile represents 12% of consumer media time but it's still only 3% of ad budget. 
+The second driver of our performance is an increasing number of marketers spending their ad dollars on Facebook. From brands to direct response to local businesses to developers, more marketers are advertising on Facebook, which is a recognize that our ads work to drive sales. This growth is taking place globally. In the third quarter, the number of Facebook advertisers in EMEA nearly equaled the number in North America, reflecting global growth in our online advertising. 
+The third driver of our growth is product development. We're working in a number of areas to make the ads people see on Facebook better. More targeted ads are better, and we're improving our ad targeting to increase relevance. We're investing in features like custom audiences and partner categories to improve targeting. These are great tools that are still in their early days and we will continue to invest. We also want to make it easier for marketers of all sizes to buy ads and measure their impact. In late September we rolled out at ad format changes to make ads look more consistent across Facebook. And we reduced the number of ad units marketers have to choose from, to reduce complexity. And earlier this month we rolled out a full redesign of our ads buying tools to simplify the ads creation process. Advertisers now select from one of eight business objectives, such as website conversions or app installs. We think these product investments make it easier for marketers to achieve their goals. 
+We're also expanding our products for developers. We already have launched mobile app install ads and these are going very well. And we now launched mobile app install ads for engagement. These ads help developers and businesses reach people that have already installed there app, and directs them back to increased engagement. We believe these apps are a nice complement to our install ads, and represent a unique opportunity. 
+We also continue to invest in helping brands see that our campaigns increase in-store sales. We recently launched outcome measurement for the telecommunications industry. And initial tests showed that more than 90% of people who made a purchase after viewing a Facebook ad had never clicked on that ad. This shows that impressions matter, and focusing only on clicks does not tell the whole story. Similarly, a recent study by Kenshoo, one of our leading preferred marketer developer partners, proves this point. The Kenshoo study found that marketers who use multi-touch attribution to measure campaign ROI credited 12% to 30% more value from Facebook than marketers who use last click attribution. But, we still have work to do. Brand marketers aren't moving as quickly as we would like. And we believe measurement is key to influencing the advertisers. 
+Another important trend influencing our growth is our preferred marketing developer, or PMD, program. Over the past two years, we've invested in building an ecosystem that supports all types of marketers. And PMD has helped those marketers advertise effectively with us. Today, this program is a community of hundreds of technology and service companies spread across more than 45 countries. 
+In summary, we think our strong performance this quarter further validates that our ad strategy is working. Marketers are responding favorably, as we heard during Ad Week in New York. Our messages are on reach, targeting and measurement are resonating, and we'll continue to reinforce them. Our ads are getting better, and we still have a long way to go. Moving forward, our focus remains the same -- continuing to capitalize on the shift to mobile, increasing the number of marketers who advertise with us, and continuing to invest in our ad products. We believe that we're in the early stages of a major transitioning in advertising. And we're uniquely positioned to capitalize on that opportunity. 
+Now, David. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. Q3 was a strong quarter for us in terms of our financial results. Our business grew rapidly around the world. And we're pleased with our performance across our key financial metrics, highlighted by the fact that Q3 was our first $2 billion quarter in terms of revenue. Let's start with the size and engagement of the Facebook community, which continues to grow. 728 million people used Facebook on an average day in September, up 25% from last year. Growth continues to be driven by mobile. In Q3, for the first time, daily actives on web declined year over year, albeit very modestly. Daily users represented 61% of the 1.19 billion people who accessed Facebook during the month of September. And our overall engagement data remains strong. Also, as we announced in September, Instagram now has over 150 million monthly actives. 
+I want to say a few word about youth engagement on Facebook. As we've said previously, this is a hard issue for us to measure because self-reported age data is unreliable for younger users. So, we've developed other analytical methods to help us estimate usage by age. Our best analysis on youth engagement in the US reveals that usage of Facebook among US teens overall was stable from Q2 to Q3. But, we did see a decrease in daily users, specifically among younger teens. We won't typically call out such granular data, especially when it's of questionable statistical significance, given the lack of precision of our age estimates for younger users. But we wanted to share this with you now since we get a lot of questions about teens. We're pleased that we remain close to fully penetrated among teens in the US. Our monthly user numbers remain steady. And overall engagement of Facebook remains strong. We'll continue to focus our development efforts to build products that drive engagement for people of all ages. 
+Turning to the financials. Total revenue in Q3 was $2 billion, up 60%. And ad revenue was $1.8 billion, up 66%. Exchange rates had no meaningful impact. Revenue growth was strong around the world, with each of the four geographic regions we report on growing by more than 50% versus last year. The primary drivers of ad revenue growth were an increase in the number of and the strong performance of News Feed ads, and increasing the number of marketers using Facebook, and increased demand in our system. In Q3, overall ad impressions were up 16%. And the average price per ad was up 42% compared to last year. The growth in ad impressions was primarily due to more people using our service, combined with the impact of a price floor reduction late in the third quarter last year. The growth in price per ad was primarily due to the increase in News Feed ads. 
+In the US and Canada, where last year's price floor change had a smaller impact, ad impressions decreased 8%, and average price per ad increased over 60% compared to last year. The decrease in ad impressions, despite an increase in the number of users in the US and Canada was due to the continued migration of usage to mobile devices where we show fewer ads per person compared to web. The greater than 60% increase in average price per ad in the US and Canada was primarily due to the increase in the number of News Feed ads shown on both mobile and web. Due to their high engagement levels, News Feed ads have a significantly higher price per ad then right-hand column ads. Therefore, the mix shift of our ads towards a higher percentage being in News Feed versus right-hand column is driving up our average price per ad. 
+Mobile ad revenue in Q3 was approximately 49% of our ad revenue, up from 41% in Q2. The sequential quarterly growth of mobile ad revenue was due to three factors -- an increase in the average price per mobile ad, an increase in the number of mobile users, and an increase in ads shown per mobile user. Looking now at web, ad revenue from web usage decreased both sequentially and year over year. Web ad revenue includes both News Feed ads on web and right-hand column ads on web. Revenue for News Feed ads on web increased significantly in Q3, sequentially and year over year, driven largely by an increase in the number of News Feed ads per web user. The increase was not enough to offset the revenue decline from right-hand column ads. Total payments and other fees revenue was up 24% year over year to $218 million, and roughly flat sequentially. Payments revenue from games was up 18% from last year. But we believe 12% represents the best apples-to-apples comparison, adjusting for accounting items such as the change in revenue recognition timing from late last year. Overall ARPU of $1.72 per user was up 33% compared to last year. We saw 43% increase in the US and Canada, and greater than 40% gains in each of the other three regions we report on. 
+Turning now to expenses, in Q3 our total GAAP expenses were $1.28 billion. On a non-GAAP basis, excluding stock compensation, total expenses increased 40% to $1.03 billion, driven by higher headcount and infrastructure spend. We ended Q3 with just under 5,800 employees, up 34% from last year. And we continue to be pleased with our success in attracting talent. Our Q3 GAAP operating income was $736 million, representing a 37% operating margin, up from 30% last year. And on a non-GAAP basis, operating income was $987 million, a 49% margin, up from 42% last year. Our GAAP and non-GAAP tax rates for Q3 were 41% and 36%, respectively. GAAP net income was $425 million or $0.17 per share. Non-GAAP net income was $621 million, or $0.25 per share, up around 100% from last year. In Q3 we spent $284 million on CapEx. And free cash flow was $666 million. 
+Looking at our balance sheet, we ended Q3 with $9.3 billion in cash and investments. During the third quarter we repaid our $1.5 billion term loan, and replaced it with a new $6.5 million line of credit, which is currently undrawn. We'll continue to manage our balance sheet to meet our liquidity needs, protect the business against risk, and provide us with flexibility to invest in new opportunities to grow the business. 
+Now, let's look forward. We continue to believe that improving the quality and relevance of News Feed ads provides us with a big, long-term opportunity. However, as we think about the future we do not expect it to significantly increase ads as a percentage of News Feed stories beyond where we were at the end of Q3. This is important because increasing ads in News Feed has been a meaningful driver of our revenue growth in 2013. So this should be factored into your expectations for next year. Turning to payments revenue, remember that in the fourth quarter of 2012 we recognized revenue from four months of payments transactions. So, for that reason, we expect payments revenue will be down this coming Q4 compared to last year. 
+Looking at expenses, we now expect that our 2013 totaled non-GAAP expenses, including cost of revenue but excluding stock compensation, will likely grow around 45%. In terms of our tax rate, we expect that our Q4 and full-year non-GAAP tax rates will be a few percentage points higher than our Q3 rate. Finally, we expect our 2013 CapEx to be in the neighborhood of $1.4 billion. This is down from our prior estimate of $1.6 billion due to a combination of efficiency gains and changes in timing of our planned purchases. 
+To sum up, in Q3 we made great progress against our key financial objectives -- growing revenue, investing for growth, and positioning the Company to maximize long-term returns for our shareholders. And, we remain excited about the opportunities ahead. 
+Now, we're ready to open the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions) 
+Heather Bellini, Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Great, thank you for taking the question. I just had two -- one for Mark and then one for Sheryl or David. Mark, the first one, as Facebook's value proposition is connecting the world, how should we expect Facebook, in the future, to more specifically leverage deal location data to advertisers to make the ads even more useful for your users? And over what time frame should we expect that to play out in your mind? And then the second question for Sheryl or David would just be, you talked about brand advertisers taking a little bit more time, I think, that you might've liked. Just wondering if you could help share with us how your mix between DR and brand advertisers has played out over the course of the year, if you could just give us some rough ideas. Thank you. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+    The way we think -- I'll take both actually -- the way we think about using location data is that every time we use data we use it in accordance with the privacy controls we offer people. And we are working hard at making our ads better targeted. And over time I think you'll see the industry continue to evolve to get better at targeting more ads. We certainly see it's a significant upside for us to get better at targeting more dads, not just from geo-location data but from all kinds of different data we get based on what users do with our service. 
+On brand advertisers, we don't break out the different marketer segments. Our results this quarter are based on growth in all marketer segments, including brand. And we continue to make progress. We have every one of the Ad Age global 100 have advertised with us over the past year. My comment was based on the fact that marketing spend is just not keeping pace with the transition to time online and mobile in that segment of the market. And since that segment of the market is so big, helping that transition happen presents significant upside for us. 
+Our focus there is measurement. We have to show brand marketers that our ads drive in-store sales. And we work on that. We work on that client by client. To share a few examples from this quarter, Cadbury in the UK worked with us to sell their cream egg products the day before Halloween to talk about candy to 16 to 24 year olds. They used Facebook media for user-generated posts, along with TV. They reached 15 million people. 21% of those people they only reached on Facebook, not TV. And the combined impact of TV and Facebook where sales were up 9%. Another example, because it shows how we can move awareness, is the Alfa Romeo 4C launched in Portugal. And they did a pretty cool thing where a person could do a test drive with a Formula One driver. And they got the highest buzz they have ever had in Google trends for a product launch. So, for us, we think it's a big opportunity ahead of us. You have to work on these clients account by account, client by client. But we think as the shift to mobile and digital happens, it's a big opportunity, and we're focused on helping that shift happen. 
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+    Scott Devitt, Morgan Stanley. 
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [5]
+--------------------------------------------------------------------------------
+
+    Hi, thanks. Sheryl mentioned some of the tools that have been added to make it easier for advertisers to access and use the ad platform. One example was objective-based ad buying. I was just wondering how much you would attribute reduction in friction, like the examples that were referenced on the call leading to direct and immediate increases in inflow of ad dollars versus be more gradual in nature? And then, secondly, for Mark, the concept of the knowledge economy. I was wondering how you envision what the consumer will be doing on the site five years from now, if today is more about sharing, and sharing is more developed in search and product integrations? How you think about that relationship between those three activities on the site over a five-ish year time horizon? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [6]
+--------------------------------------------------------------------------------
+
+    On the first, our growth overall is based on the strong performance of News Feed ads, an increase in the number of News Feed ads per user, and also more marketers. And the simplification of products has actually been very important in attracting new marketers. If you look at the new advertisers we acquired in Q3, 62% of them started with either promoted posts or promoted page lives which are the most simple of our advertising formats. So, we think continuing to roll out very simple ways to become an advertiser is driving our growth, and will continue to. 
+The larger question you ask was based on our focus of business objective. And that's actually a really big deal for us. We are now getting to the point where our ad product support is really helping marketers achieve their core business objectives. So, before people used to buy via the product -- what product do you want to buy -- and now they're buying from us by identifying -- I want to get mobile app installed, I want to get mobile engagement, I want to get website conversion. I think the fact that we're pivoting to focus on those end business results and making everything else, including social, part of meeting those business results, is a really important part of our strategy. It's driving our growth and I think it's going to continue to. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [7]
+--------------------------------------------------------------------------------
+
+    I just want to answer the part of the question about the product experience over time. I move there are two pieces of this that we're thinking about related to the knowledge economy. The first is just helping our customers use information better to grow their businesses and create jobs. So, we're thinking about small businesses and making it so that they can have better insights into who their customers are, and better ability to reach them. Developers being able to use better analytics for being able to find new customers as well. And those are a lot of the inspiration and the strategy behind the ad products that we're delivering. 
+On the side of the product experiences that we're creating for people who use Facebook, right now I do think that the Facebook experience is very push-based, in that you go to Facebook and we're suggesting content to you through something like News Feed. And over time I think if we do a good job we should be able to create more value through all of the knowledge that has been shared over time that we're not really surfacing on a day-to-day basis right now in terms of helping people answer a lot of different questions that they have around the world. That's the direction we're starting to go in with Graph Search and a few other areas, as well. But, it's pretty early so I think around a five-year timeframe, like you were saying, hopefully we will have made pretty significant progress towards going in that direction. 
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+    Mark May, Citigroup. 
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [9]
+--------------------------------------------------------------------------------
+
+    Thanks for taking my questions. Maybe this first one for Sheryl and then David. It seems like a year-and-a-half ago, around the time of the IPO, the Company was very focused on top-of-the-funnel brand-related advertising. But over the last year or so it's been much more around direct response. But certainly get the sense that on the top-of-the-funnel brand is starting to move in a more meaningful way. What's the Company doing and what are some of the main projects that you're working on that you think will really start to move the dial on the top-of-the-funnel segment of the market? And what role does video maybe play into that? And then for David, regarding the ad load comment, had ad load not increased in North America, give us a sense of what the ad revenue growth would have been if you normalized for that? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [10]
+--------------------------------------------------------------------------------
+
+    So, top-of-the-funnel ads remain very important to us. And, again, our growth this quarter was very broad-based including top-of-the-funnel ads. The reason they're important is that Facebook is such a unique and powerful discovery place. When you're on Facebook you are open to discovery, you're open to getting messages. And that's what we're seeing with News Feed messages from friends and with ads, as well. The key for us is measurement. The way we're really going to make progress is better measurement. It's easier to understand and measure a click that goes through to an online sale. It's harder to measure households that see ads and don't see ads change their purchase, change their purchase behavior in stores. 
+The thing I think we've done a lot of over the last year, and we're continuing to do that, is put those measurements in place. So I talked in my opening remarks about measurement for telecom. We've also done a ton of work around CPG so that we can look at households that saw an ad, households that didn't see an ad, and what their difference is. To share one more example, Mondelez did a promotion with us for the Nilla Wafer in the US. They were targeting 35- to 44-year-old females and moms. Because we were able to do this type of measurement, that we couldn't have done a year ago, we were able to show that the got a 5 extra turn on their ad spend. We measured household spending who saw their ads versus households who didn't see their ads, and there was a 9% difference. They were also able to tell that a lot of the 9% was driven by new buyers of their products, which is what they want. So I do think we have a big opportunity. I do think the brands are going to continue to need to be convinced account by account that this moves products off shelves, and that's what we're doing. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [11]
+--------------------------------------------------------------------------------
+
+    Mark, thanks for your question. This is David. So, it's really not possible to tease out individual contributions because the way the auction works everything is interdependent. So if we have fewer ads, that's going to play out with different pricing and other sorts of things. So, I can give you our best feel for it but I can't quantify it precisely. If you look at overall ad revenue growth, for example, in the third quarter compared to the second quarter, there's probably three factors that contributed materially that are important to understand. One is just growth in users. Second is growth in demand which plays out into pricing. And then the third is an increase in the number of ads that we showed in News Feed per users. I'd probably order the ad load, probably third of the three, relative to the sequential. I think it plays out a little bit differently on mobile versus web. On mobile we really increased the number of ads as a percentage of the overall mobile experience quite modestly in the third quarter versus the second quarter. On web, the increase in the number of ads, or the percentage of ads, in the web News Feed experience went up more significantly than mobile did in the third quarter versus the second. 
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth, JPMorgan. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [13]
+--------------------------------------------------------------------------------
+
+    Great, thanks for taking the question. I just wanted to ask you about two things. First on video, can you talk about what you've learned from the recent launch of video on Instagram, and how that may have shaped your thinking on rolling out video ads on Facebook? And then, secondly, just following up on the ad volume, just to clarify, when you're saying the ad volume won't necessarily increase anymore beyond where it was at the end of 3Q, is that on average or in the more penetrated markets? And then can you comment relative to the 5% of stories in the News Feed that you mentioned last quarter? Thanks 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [14]
+--------------------------------------------------------------------------------
+
+    The experience with video on Instagram has been very positive so far. And I think that we proved through that, that having clips that autoplay can be a good experience in line in a feed. And that people really feel like they're in control of the experience because they can just scroll away if they don't like the content. If it's good content then that can be really good. So we're heartened by that. This is an important launch for Facebook overall because the addition of video content to the stream could be one of the most positive things that we've done in a long time for making it more engaging. But if we do it poorly, then it could also be a negative thing. And we're trying to take our time to make sure that we do this in a very positive way, and I'm pretty confident that we will. But that's why you're seeing us take the process that we have on this 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [15]
+--------------------------------------------------------------------------------
+
+    I'll add on video ads, we do have a video ad product today because anyone can embed a video in page posts. And we're actually seeing very good results, particularly around entertainment and media. This is driving some of out ad spend. And the area remains pretty exciting because this is a very compelling way for marketers to tell their story. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [16]
+--------------------------------------------------------------------------------
+
+    Doug, you asked about what we mean when we say ad volume won't increase. The first thing I would say is I would frame that in the context of as a percentage of the News Feed experience. So, obviously, if we can drive more engagement, that provides more opportunity for us to show more ads. In general, I think your questions referenced whether this was geographic. The ad load in News Feed is reasonably consistent across the world. It's a little bit less in the least developed markets because we have less advertisers there. But it's not grossly different. So, I think that that comment holds generally across most of the markets where we make our advertising dollars. 
+In terms of relative to the 5%, what we said last quarter was that of the total volume of stories in News Feed, about 5% of those were ads. As I said on the last question, the mobile piece of that didn't change very substantially in the third quarter versus the second. The web percentage did go up. So, if you mix those two together, the Q3 number would be modestly higher than the 5% number from Q2. 
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney, RBC Capital Markets. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [18]
+--------------------------------------------------------------------------------
+
+    Great, thanks. Two questions. First, David, can you just give us some color why the reduction in the OpEx growth for this year? Were there certain investment projects you decided to cut, and what were those, and why? And then, secondly, Mark, this five-year vision of moving towards, going from push-based to pull-based, that opens up a lot of opportunities. That's been the sauce, maybe, behind Google, and an interesting part of Twitter, et cetera. But could you talk about the challenges in order to get there? And maybe both in terms of the user experience, the advertiser opportunity, how difficult, substantial the technology challenges are to get there? It's a very different direction and there's a lot of opportunity but how do you get from point A to point B? Thanks 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+    Hi, Mark. In terms of OpEx growth, we're continuing to invest aggressively in the business with particular emphasis on technical hiring and building out our infrastructure. At the same time, we're trying to do this in a disciplined fashion, making sure that all the investments we make and the dollars we spend are spent wisely in terms of furthering our mission and creating returns for the Company. I'm really quite pleased with how things are going in that regard in 2013. From an R&D standpoint, we're really on track or, if anything, ahead of where we expected to be in terms of hiring and spend. And that's really the most important area for us in terms of investing to drive future growth. 
+In other areas of the business such as cost of revenue, G&A, marketing and sales, I think we're ramping up spend less than we anticipated for a couple of reasons. One is better success than we expected in some of the efficiency projects that are helping to keep the Company small even as revenue ramps up. A second reason is some slower than expected ramp up in both hiring and new projects. And then the third contributing factor is just we have in the budget some expectations for the unplanned stuff that comes along that can drive spend, like an asset acquisition or something like that. And we really haven't spent as much money as we expected in the unplanned areas. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [20]
+--------------------------------------------------------------------------------
+
+    And for your question about how do we make the knowledge that's been shared in Facebook more useful, the first thing we needed to do is just index it all and build the infrastructure to start being able to use it in different ways. The first beta for Graph Search we'd indexed more than 1 trillion connections, friendship connections, group memberships, live connections. Then for post search we indexed more than 1 trillion of the posts that people had put into the system. The basic insight that we think we're operating on here is that right now a lot of the behavior and engagement on Facebook is very day-to-day. You're sharing something, and Facebook is the best place for you to share photos or an event that's going on in your life. And for you to go to News Feed and see what's going on with the people around you. But what's happened is that over the past almost ten years of this behavior, this amazing base of knowledge has been built up -- and it's trillions of pieces of content and information -- that now we're just trying to find different ways to expose that and basically make that more useful to people instead of just the stuff that has been shared in the last day or so. So, Graph Search is one way that you can see that coming to light in terms of people being able to do directed queries for different types of content. There are other kinds of services that we think we can build, as well, that just give people more utility from this corpus of knowledge that's been built up. And that's going to be a big focus for us over the next few years. 
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+    Justin Post, Merrill Lynch. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [22]
+--------------------------------------------------------------------------------
+
+    Thank you. Mark, after a successful revenue year you start next year with a clean slate. And you highlighted some big ambitions in your prepared remarks about access and improving search. Just maybe remind us how you think about driving profit growth as you look at the Company relative to your long-term objectives for the Company. Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [23]
+--------------------------------------------------------------------------------
+
+    We care a lot about that, and in terms of the shareholder value that we're generating, as well. And I think the recent results -- and what I said at the end of my remarks there was that we're going to keep on planting seeds for future growth while continuing to build momentum now. And I admit that's a philosophy that we've taken in terms of building the Company. We generally want it to be profitable and such. But I don't think we're going to commit or have any specific guidance on this right now. 
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+    Carlos Kirjner, Sanford Bernstein. 
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [25]
+--------------------------------------------------------------------------------
+
+    Thank you. Mark, can you talk a little bit more about how the knowledge and the Facebook graph compares with the knowledge in the overall web today qualitatively and quantitatively? And if you are planning to connect the World Wide Web graph to the Facebook graph when you think about the answers that you're going to give people in the future. Secondly, there's draft regulation in the European Commission, in Brazil at least, that may require Internet companies such as Facebook to store all their data locally. What do you think would be the impact on Facebook's CapEx and expenses if these regulations are indeed implemented? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [26]
+--------------------------------------------------------------------------------
+
+    On your question about the graph, the graph that people share on Facebook versus the web overall, I think they're pretty different. So, in terms of quantity, they're getting to a pretty comparable size. So, engineers on the Graph Search team have told me, folks who have worked on other web search engines before, told me that the scale of things like post search are as big or bigger than any web search index that's out there. But I know they are just different use cases with different kinds of knowledge, and people are going to use them for different things. So, our approach with Graph Search is not to build something which is web search. We think that companies have done that and they're doing a good job at that. But there's different kinds of knowledge, things that you'd want more opinion on from people that you trust, that I think it's latent inside Facebook that we need to do a better job of surfacing that. So that's going to be the focus on that. Over time, there are a lot of possibilities for things that we can do. And I'm not really ready to talk about a lot of them today. But you can look at what we've launched in a couple of Graph Search launches that we've done so far. And we're pretty early in that journey. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [27]
+--------------------------------------------------------------------------------
+
+    And, Carlos, the second part of your question was about draft legislation or discussion about companies needing to store data locally in various countries. It's an interesting question and definitely something we're tracking. But the answer is really going to depend on the details of what that looks like. It's very hard to assess what kind of implications it would have for a company like Facebook without understanding what we would need to do. So, we'll continue to pay close attention to it but really hard to give you anything in the way of a specific answer at this point. 
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+    Jason Helfstein, Oppenheimer & Co. 
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [29]
+--------------------------------------------------------------------------------
+
+    Thanks. Can you give us some color on how many advertisers you guys ended the quarter, how that grew? And then if there's a way to think about how many advertisers have claimed pages, so we can get a sense of how deep the penetration is. Because it looks like you guys are more successful than other companies, and growing at a faster rate, particularly on the local penetration side. Thanks 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [30]
+--------------------------------------------------------------------------------
+
+    Last quarter we reported that we had 1 million active advertisers. And that number continues to grow, and continues to grow healthily. We believe globally we have 20 million small businesses and local businesses of some kind who have pages. So obviously just a fraction of those are advertisers. And I think it's one of the most exciting opportunities in front of Facebook. It's really hard to get small businesses to use technological products. And 20 million small businesses are using us. And we haven't gone out and done aggressive sales efforts to make that happen. Going from having a page that you're using for organic distribution to paid distribution is something we're very focused on. It's why we roll out these simple products. And I think our track record at doing that is good and we plan on getting better at it. 
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+    Ross Sandler, Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [32]
+--------------------------------------------------------------------------------
+
+    David, sorry to beat a dead horse but back to the ads per user comment. Can you just give us some color on, since you guys started the mobile News Feed ads a year-and-change ago, how much CPC and click-through rate improvement you've been able to drive? And should we think about it going forward, if mobile users are growing at 18% in the UK, 20% in the US, and I think 60% for ROW, should we think about revenue growth as a slight premium to that but somewhat correlated to that? Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [33]
+--------------------------------------------------------------------------------
+
+    Sure, Ross. I think if you look back over the last year, some of the metrics that I think been most positive for us have been, as we've ramped up from a very low volume, very few ads shown in News Feed to larger numbers, what one could reasonably have expected, given the way the auction dynamics work, is that the pricing would really come down as we were delivering more clicks, and as we were diving deeper into the pool of advertising demand. And the way pricing has really held up, and click-through rates have filled up, and CPCs have held up as we've progressed through this over the last year, I think, has really validated our confidence that News Feed ads were going to be a really important product, that could really drive the performance of the business. So, we remain really encouraged and pleased by that. 
+Going forward, clearly we will try to continue to grow the user base, as you described. And that's been an important part of our revenue growth since the Company started. And the other opportunity is for us to continue to improve the quality, the relevance and the performance of the ads, and to drive up pricing by bringing more demand into our system. We're certainly, I think, doing a good job of that right now, and we've got to continue to execute. 
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+    Eric Sheridan, UBS. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    Thanks, guys. Two quick questions. One, following up on the last one with respect to ROI around advertising products going forward. I guess maybe more for Sheryl. But how do you guys think about the dialogue between advertisers and yourselves about ROI? And how much of that fits with measurement and attribution tools that you guys need to develop internally versus what they need to think about in terms of the ROI on your properties versus other online and off-line properties? And the second question on mobile app install ads, a question about the diversification of the advertiser base and how that's really developed since the product's been launched? Thanks 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [36]
+--------------------------------------------------------------------------------
+
+    To the first question, it's really both. In order to measure all the way from seeing a Facebook ad through to a purchase, particularly one that's off-line, that takes work and tools on our site, including the data systems. And it also takes thinking about measurement on their side. The industry overall is moving. We've been really pleased to see more embracing of multi-click over last-quick attribution. You can see that happening with a number of big players in the industry. The PMDs are really important here. The PMDs are good at helping people and helping marketers measure. But, really, the develop of measurement systems, take our measurement, take industry measurement. Particularly for brand advertisers, they also takes some rethinking of the ways they have measured ads and ads performance before. And we work very closely with our clients on that. 
+On mobile app install and mobile engagement ads, we are very focused on growing across the board. We want growth in all of our marketer segments, and we want growth that's broadly across the world. Developers are a really interesting place for us because we think not only do we have, we think, the best mobile ad product in general, because people spend a lot of their time in News Feed, they spend more time in News Feed than they spend in any other part of our service, that gives us an opportunity to sell ads broadly. But it also gives us a great opportunity for developers. Because what developers want people to do happens on their mobile phones and on the desktop. Mobile app install ads have been very successful for us. And they're interesting because the mobile app install market didn't even exist a few years ago. I think the move to roll out engagement ads further deepens our relationship with developers. And shows that we can help get them users, and then we can get those users to continually use their products. So we're pretty excited about this part of the market because we think it can grow so quickly. And we think our ad products and offering is so unique. 
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+    Peter Stabler, Wells Fargo. 
+
+--------------------------------------------------------------------------------
+Peter Stabler,  Wells Fargo Securities - Analyst    [38]
+--------------------------------------------------------------------------------
+
+    Good afternoon. Thanks very much for taking the questions. You introduced hash tags in June and I'm just wondering if you could comment on usage trends, how strategically important hash tags are to indexing the knowledge graph going forward? And whether hash tags could become a meaningful part of an ad targeting opportunity in the future if usage catches on in a significant way? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [39]
+--------------------------------------------------------------------------------
+
+    The launch of hash tag was more just following behavior that we see from people. All we really did was take hash tags that people were putting into the product and make them linked so that people could find other posts that had the same tag. The effort that I think you're latching onto is basically we are putting some more effort now into both public content on Facebook and more private content. So, there are a bunch of different sets of people that a person will want to share with. One is all of their friends. But a lot of the sharing and communication that's done is one-on-one in messaging, or with small groups, or with  a community. And then there's a large set of content that's public, which is often very high-quality content, as well. And we have efforts in all of those areas to make it that people can share all of those different kinds of content on Facebook. And that's going to be something that we're going to continue to do. 
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+    Brian Nowak, Susquehanna. 
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Susquehanna Financial Group - Analyst    [41]
+--------------------------------------------------------------------------------
+
+    Thanks. I have two, please. You continue rolling out a lot of new products. I was wondering if you could speak to the traction and any of the user adoption of the early topical and interest trending that you've rolled out? And then last quarter you talked about strength in e-Commerce driving some of the advertising. Which kind of verticals would you speak to this quarter? Ad as we're adding into the holiday season, are you still seeing e-Commerce being a big driver again? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [42]
+--------------------------------------------------------------------------------
+
+    You're asking about the effectiveness of some of the public content efforts that we've done. I think it's starting to do very well and we're very pleased with it. Some of the questions that we've gotten have asked if this is an area we've started focusing on recently, which actually it isn't. It's something we've been working on for a while. But I think the question is a sign that the results are starting to be quite good and folks are starting to notice the traffic that we're driving and the higher-quality content that's public that people are coming across on Facebook. So we're going to keep on focusing on this. It's not just about public content. It's about giving people the power to share with every different audience that they want, whether it's the most private, one-on-one communication and thread, up to the most public content that you want to get out for everyone in the world to be able to consume. We're just going to keep pushing on all of that 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [43]
+--------------------------------------------------------------------------------
+
+    To your second question, direct response, including e-Commerce, continues to perform well. We have high click-through rates, competitive CPCs, so we're attractive for marketers. When you think about verticals, I think we have really tremendous opportunity in basically all of them. Things that are performing particularly well right now -- financial services, media and entertainment, e-Commerce, professional services. But even if you look to a vertical like auto that we haven't historically been strong in, I think we're starting to make real inroads client by client, like the Alfa Romeo case study I showed, because we have such a great opportunity to engage the people they want to reach. Our targeting is also getting better. So with custom audiences and partner categories we're able to identify -- here are the people you want to show your ad to who we believe are in the market to buy a car, for example. So the combination of the measurement work we're doing and the ability to target, I think means we have a strong play in every vertical. 
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+    Richard Greenfield, BTIG. 
+
+--------------------------------------------------------------------------------
+Richard Greenfield,  BTIG, LLC - Analyst    [45]
+--------------------------------------------------------------------------------
+
+    Hi. I really wanted to ask you about the Instagram blog post that you put up the other week where you stated specifically that -- I think the quote from the blog was you want ads to be creative and engaging. And that seems pretty different than most of the advertising that I've seen on Facebook, whether on mobile or on the desktop. And wanted to ask you how do you think, or is it possible that if this strategy of advertising works well on Instagram, could we actually see a new form of advertising appear on Facebook sometime in 2014 or 2015? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [46]
+--------------------------------------------------------------------------------
+
+    What we announced last week is a small test with 10 advertisers to start showing ads in the Instagram feed. And we're excited about it because there's a lot of interest and a lot of excited brands. When you think about ads being exciting and engaging, I think we think about two things. We think about ads that fit the format of the product that they're part of. So, the Instagram ads right now are the pictures and videos, which are exactly what people post on Instagram. If you look at the progress we've made with our News Feed ads, those ads, those in the size, the shape, they got larger when they moved over from the right-hand side, right-hand column. But they're also meant to be as exciting, as engaging as the content. So, our goal is we want our ads to be as good as the user-shared content. Some of them are, a lot of them aren't. We have a lot of room to grow in improving that quality. But in terms of the excitement you'll see, or the interest, that is our goal. And we're just going to match the format of the product we're working with as we roll out ads. 
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+
+    Brian Wieser, Pivotal Research. 
+
+--------------------------------------------------------------------------------
+Brian Wieser,  Pivotal Research Group - Analyst    [48]
+--------------------------------------------------------------------------------
+
+    Thanks for taking the question. I'll take another crack at the number of businesses advertising. I was wondering if you could quantify the number of new small businesses, perhaps, or number of advertisers going beyond that 1 million in the quarter. The reason I ask is I'm trying to understand to what degree that maybe the shift to spending mix towards smaller businesses may have contributed to margin expansion? And maybe you could talk about the margin profile, the different segments of marketers bring to your business. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [49]
+--------------------------------------------------------------------------------
+
+    We don't break out our business by marketer segment and we don't give margins by marketer segment. But to help answer your question, we've seen strong growth across all of our marketer segments. All of them are growing. Brand's growing, direct response and eCommerce are growing, SMB and local businesses are growing, developers are growing. We definitely think there is a big opportunity, both to grow same-store sales of our large clients, particularly with the shift that's happening from TV to digital and mobile. We think that there's a really exciting opportunity. We also think SMBs are a big opportunity for us. And certainly in an advertiser base of over 1 million advertisers, the great majority of those are obviously the small- to medium-sized businesses. 
+We worked hard on our sales effort so that we have the right sales and support effort to meet our clients. We care about our margins. Certainly simplified products, such as we've rolled out over the last year, make it easier and cheaper for SMBs to use our products. Easier for them and cheaper for us. And we will continue to focus on the automated tools that help. 
+I think the most important thing we've done on this goes back to an earlier question about focusing on marketer objectives. Before, we were asking marketers to come in and choose what ad products they were buying. With our shift to focusing on marketer objectives, it's easier for everyone from the largest to the smallest. A small business owner can come in and say -- I want my app installed. Or -- I want web conversions. Or -- I want web click. And then we are doing the harder work of figuring out what products are there, figuring out which of those ads should have social context so that we can meet those objectives. I think that move of moving more towards using their language and focusing on their business needs is a simpler product for them. It will help gain us more marketers and it helps us work with them in a more efficient way. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director IR    [50]
+--------------------------------------------------------------------------------
+
+    Great, that's it. Thank you for joining us today. We appreciate your time and we look forward to speaking with you again next quarter. 
+
+--------------------------------------------------------------------------------
+Operator    [51]
+--------------------------------------------------------------------------------
+
+    This concludes today's conference call. You may now disconnect. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2014-Apr-23-FB.OQ-137448671471-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2014 Facebook Earnings Conference Call
+04/23/2014 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * David Ebersman
+   Facebook, Inc. - CFO
+ * Deborah Crawford
+   Facebook, Inc. - Director IR
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Co. - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Wieser
+   Pivotal Research Group - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Peter Stabler
+   Wells Fargo Securities - Analyst
+ * Evan Wilson
+   Pacific Crest Securities - Analyst
+ * Anthony DiClemente
+   Nomura Securities Intl - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook first-quarter earnings conference call. 
+(Operator Instructions) 
+Ms. Deborah Crawford, Facebook's Director of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's first-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and David Ebersman, CFO. 
+Before we get started I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. And actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and our annual report on Form 10-K filed with the SEC. 
+Any forward-looking statements that we make on this call are based on assumptions as of today. And we undertake no obligation to update these statements as a result of new information or future events. 
+During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. 
+The press release and an accompanying investor presentation are available on our website at investors.FB.com. And, now, I would like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah. And thanks, everyone, for joining today. This was a busy quarter and a strong start to 2014. We continued to grow our community in size of engagement, with nearly 1.28 billion people now using Facebook each month, and almost 63% visiting daily. We also reached new milestones as a mobile company, with more than 1 billion monthly actives on mobile, and almost 55% of our daily actives only connecting on mobile. 
+When you look at our business performance, we've also made some good progress. Our total revenue grew 72% year over year. Our advertising grew 82%, our strongest annual growth rate in nearly three years. And mobile accounted for 59% of our advertising revenue. These results show Facebook's business is strong and growing, and we are in a great position to continue making progress towards our mission. 
+This quarter we made a number of big investments in our future. We reached agreements to acquire WhatsApp and Oculus. And we announced our new connectivity lab that's focused on developing technologies to expand Internet access around the world. These are important efforts that we believe will help us continue making progress towards our mission over the long term. 
+But as this quarter shows, we are also staying focused on execution and carefully improving our core products and business. Execution gives us the strength to bet on the future. And our success over the long term depends on us serving our community today and delivering against our current strategy. 
+So, with that in mind, I'd like to run through our progress this quarter towards our three big Company goals -- connecting everyone, understanding the world, and building the knowledge economy. Connecting everyone is about making Internet services available to everyone in the world, and allowing everyone to connect to the people and things that they care about. 
+Our strategy for connecting everyone is based on two approaches. The first is about giving people new apps for sharing different kinds of content with different people. Today our apps are at different stages of maturity. 
+Our core Facebook app has an audience of over 1 billion people and has become an essential sharing infrastructure for the world. We are currently focused on building a great business around this, and our continuing revenue growth on mobile this quarter shows our strong momentum here. 
+For the next set of apps, like Messenger, Instagram and, hopefully soon, WhatsApp, the current priority is growth. Messenger and Instagram both reached 200 million monthly actives this quarter. We believe these apps have a lot of room to grow and will start to be important businesses in the future. But monetization isn't our near-term priority here. 
+And for the new apps that we're building as part is our Creative Labs effort we are still in the very early stages of development. We're working hard to develop the technical foundation for these services so we can rapidly launch new products and then refine them based on the initial feedback from our community. 
+For Creative Labs projects that demonstrate a lot of value, our next priority will be to grow them to reach 100 million people before we start developing them into significant businesses. We are pleased by the early reaction to Paper, our first app from Creative Labs. And we expect this to be a good test case for our strategy. 
+The longer-term part of our strategy for connecting everyone is focused on internet.org, our effort to make affordable basic Internet services available to the entire world. We recently reached 100 million monthly actives in India. And through internet.org we are looking to build on this kind of success. We've already started to deliver results. 
+By partnering with mobile operators in the Philippines and Paraguay, we've doubled the number of people using mobile data with our partners, and brought almost 3 million more people onto the Internet. Our early test and research into new technologies, such as drones and other infrastructure to connect people, are promising. 
+And over the long term, we also expect WhatsApp to play an important part in connecting everyone by offering a simple, fast and reliable messaging system that could be as ubiquitous as Facebook one day. We will have more to share after that deal closes. 
+Next, let's talk about understanding the world. Understanding the world is about using Facebook to build up long-term knowledge about the world, and helping to answer questions for people that no other service can. 
+Next week Facebook holds our fifth f8 conference, the main event for our developer community. We do this because even with all the experiences we are building, we understand that there will always be more social experiences that we can't build. So, we want to keep serving developers better, and to help them build, grow and monetize their apps. 
+We've made good progress here. On mobile, app installs have been one of our best-performing ad products, driving over 350 million installs to date. Over 60% of the top grossing apps on the Apple App Store and GooglePlay use mobile app ads, which is pretty impressive performance for a product that launched in January of last year. 
+On desktop, games continue to be popular on our platform. And over the last 12 months desktop game developers generated more than $3 billion in payments volume on Facebook. 
+It's worth noting that even though our mobile and desktop products seem completely different, they're both delivering the same value to developers -- the ability to reach a large targeted audience. That's what we provide. And regardless of the format, we will continue to improve this value. 
+We see a big opportunity to continue improving the relevancy of the ads people see on and off Facebook, to help mobile developers better monetize their apps, and to help provide greater reach for marketers. I look forward to sharing more details next week at f8. 
+Finally, let's talk about our efforts to build the knowledge economy. Building the knowledge economy is about building out the technology platforms the world needs for the future so everyone can use information to do their jobs better. Advertising and the ability to reach people more broadly is one of the most important technology platforms for achieving this. We are investing a lot to serve four major kinds of partners -- small businesses, brands, developers, and e-commerce partners. 
+After introducing News Feed ads, which increased the supply of ads in our system, our recent efforts have primarily focused on improving the relevance and quality of these ads. To do this, we've been working to improve the tools we provide for marketers so they have access to better targeting capabilities, simpler ad products, and more useful measurement tools. Our approach is less about developing new products for marketers, and more about improving existing ones and helping businesses use them efficiently. 
+Our goal is to make our ads as interesting and valuable as the organic content that you find on Facebook so that more people find ads useful, and businesses can engage effectively with our community and grow. Our most recent data shows that this approach is working well. And we continue to be really encouraged by the feedback we are seeing from people about our ads. There's still more work to be done here, but we've shown that we can continue to serve our community well while also growing a healthy business. 
+That's my update on how we've been executing against our strategy over the last quarter. It's been a busy quarter and a strong one. We are proud of our progress as a company and everything that we are accomplishing today. In large part this is due to the incredible quality of our team. And I'm very grateful for the support of everyone here at Facebook, as well as our stockholders and partners, as we continue working to achieve our mission. 
+In addition to thanking our employees, I also want to thank one person in particular, David Ebersman, who is stepping down as CFO after almost five years. David has been a great partner in building Facebook. He set the right tone about operating efficiently. He set us up to make the long-term investments we need. And, most importantly, he's built an incredibly strong team, including Dave Wehner, who will be our next CFO. I've learned a lot from Dave, both personally and professionally, and am grateful for everything he's done to help make the world more open and connected. 
+Thank you. And now here is Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark. And hi, everyone. Before I start, I want to join Mark in thanking David for being an extraordinary partner and friend over these past five years. As Mark said, he's contributed so much to our Company, and I've learned so much personally working with them. 
+Great people build great teams, and that's what David has done. And, so, I'm also really excited to continue working with Dave Wehner as he steps into his new role as our CFO. 
+We are off to an outstanding start in 2014. Our total revenues were up 72% year over year. And our advertising revenue growth accelerated to 82%. That's our strongest year-over-year advertising growth rate in nearly three years. 
+We are really pleased with these results and the level of execution in our business. The team is staying focused on each element of our monetization strategy, capitalizing on the shift to mobile, growing the number of marketers who advertise with us, and investing in our ad products. 
+Mobile continues to be a big driver for us and a big opportunity. Mobile comprised 59% of our ad revenue in the quarter, up 6 percentage points from Q4. We continue to believe that this is because Facebook has the best mobile ad product in the market. 
+We also continued to grow the number of marketers using Facebook and saw growth from existing advertisers, as well. Our growth is very broad-based, coming from all types of marketers, with particular strength with SMB and direct response. We saw strong performance this quarter from verticals such as mobile gaming, e-commerce and consumer package goods. 
+I'm especially pleased with what we're seeing and hearing from clients around the world as they shift budgets to online, to mobile, and to Facebook. One recent powerful example is Sport Chek, Canada's largest sports retailer. They recently decided to pull their paper circulars, which their company had relied on as its primary ad vehicle for 92 years, for two weeks, and replace them completely with digital spend, a majority of which was on Facebook. 
+During those two weeks, national in-store sales grew 12% year over year. And in-store sales of the items they promoted on Facebook grew 23%. As a result, they're going to continue with their test. And their goal is to transition more than 25% of their print spend to digital and Facebook in the next year. 
+Last week I was in Europe meeting with clients, agencies, SMBs and developers. And what I heard from them was how Facebook was becoming increasingly important in driving their businesses. 
+Investing to improve and expand our ad products remains a very important priority for us. Our goal is to continue to develop new ways to help marketers reach their customers. We've done this over the last couple of years by enhancing our targeting capabilities, simplifying our ad products, and improving our measurement tools. I'll touch on each of these three areas. 
+First, targeting. Along with Facebook's reach and scale, marketers value our proprietary targeting to help them reach the right customers and create more personalized and therefore more efficient and effective ad campaigns. 10 times more marketers are now using our custom audiences targeting feature compared to last year. 
+To share just one recent example, Ben & Jerry's wanted to drive more sales from its classic flavors. They used a wide range of our targeting capabilities, including Custom Audiences and Partner Categories, to reach premium ice cream buyers. Their campaign reached 14 million people, roughly 90% on mobile, and drove an 8.1% sales lift from those consumers. As more marketers use our targeting tools, our ads become more relevant for our users and drive even better results for marketers. 
+Second, we're simplifying and enhancing our ad tools for the over 1 million advertisers on Facebook. The tools that were previously available to only the biggest and most sophisticated advertisers, like Custom Audiences and Partner Categories, are now available on our self-service ad creation process. By making these tools more accessible, we believe we can grow the number of advertisers on our platform and improve their results. Additionally, for direct response marketers, we've added more specific calls to action in our ads, including buy now or install now buttons that greatly improve the efficacy of these ads. 
+Finally, we are also really pleased with the results we're seeing from our investments in measurement tools. Our online conversion measurement tools enable our direct response advertisers to measure the impact their Facebook ad campaigns have on online sales. And we recently launched new off-line conversion tools to measure in-store sales, which have yielded positive initial results. 
+Our ongoing service will continue to be on improving the quality, relevance and performance of our ads, and demonstrating value to marketers. We believe we still have a lot of opportunity to generate future returns by continuing to focus in these areas. 
+We also have significant opportunities to develop newer products, like premium video, ads on Instagram, and our recently launched ad network test. Our initial efforts show a lot of promise and we've gotten good feedback from marketers in all of these areas. But it's still very early and we don't expect meaningful contributions from these projects this year. 
+To summarize, our ads business is performing very well. I want to take a minute to congratulate and thank our teams all around the world, and our ads engineering, product, and design teams on all the progress we have made. I also want to thank our clients, agencies, TMDs and over partners who work with us every day to use our platforms to build relationships with their customers to create personalized marketing at scale. 
+It's an exciting time for us as more marketers around the world gain conviction in the results they can achieve on Facebook. We have a great opportunity to build the world's first platform for personalized marketing at scale. It's early in that journey and we are going to stay focused on making the right investments in our ad business and executing against our plan. 
+Thanks, everyone. And now here's David. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl. And good afternoon, everyone. Before I dive into the numbers I wanted to say a few words about my decision to step down as CFO. This was a hard decision for me because of how much I love Facebook and all the people I work with here. 
+In particular, I can't thank Mark and Sheryl enough for their friendship and support, and for letting me be a part of their team. I'm confident that Facebook's best days lie ad. And I'm excited about the path Mark and Sheryl are leading the Company on. 
+My decision is a personal one based on my desire to get back into healthcare where I spent my entire career before Facebook. And after 10 years as the CFO, half of them here, I'm ready for a different role and challenge. 
+Right now feels like a great time for this change. The Business is doing well, the foundation is solid. And in Dave Wehner we have a terrific successor who is up to speed and ready to go. I have complete confidence in Dave and the rest of the finance team. 
+Dave will formally take over for me in June and he'll take my place on the next earnings call. I plan to stay with the Company through September to ensure a smooth transition. I also want to thank our shareholders for your partnership and support. 
+Now, to the quarter. Q1 was a strong quarter for us across the business. We increased our revenue growth rate, expanded operating margins, delivered free cash flow of over $900 million, and continued to make investments to position the Company for near-term and long-term growth. 
+Let's start with some people metrics. The number of people using Facebook on an average day in March grew to 802 million, up 137 million from a year ago. As Mark mentioned, this daily number represents almost 63% of the 1.28 billion people who used Facebook during the month. And overall engagement remains strong. 
+Additionally, these stats don't include Instagram, which now has more than 200 million monthly active users, showing the remarkable progress by the team. Two years ago this month when the acquisition was announced Instagram had fewer than 22 million monthly actives. 
+Turning now to the financials. Q1 total revenue was $2.50 billion, up 72% versus Q1 last year. And total ad revenue was $2.27 billion, up 82%. Ad revenue growth was strong around the world, with each of our four geographic regions growing by over 70%. 
+Mobile ad revenue was approximately $1.3 billion compared to around $377 million in Q1 last year. And, notably, mobile ad revenue was up 7% sequentially despite the seasonal benefits in Q4. Desktop ad revenue in Q1 was up 8% compared to Q1 last year. 
+In Q1 the average effective price per ad displayed increased 118% year over year, while total ad impressions declined 17%. The decrease in ad impressions was due to factors including the continued shift towards mobile use, where people are shown fewer ads compared to desktop. The increase in average price per ad was primarily driven by a mix shift, with more ads being shown in News Feed. News Feed ads have significantly higher engagement, click through rates and price per ad compared to right-hand column ads, so a higher proportion of ads appearing in News Feeds drives up the overall average price per ad. 
+The price volume trends were pretty consistent across our four geographic regions. Total payments and other fees revenue was $237 million, up 11% versus Q1 last year. However, the more meaningful comparison that better reflects the organic growth we saw in the payments business comes from looking at payments volume from games specifically, which was up 1% in Q1 compared to Q1 last year, down from the 8% year-over-year growth rate we saw in Q4. 
+As we've discussed before, the shift to mobile is a significant headwind since our games payments revenue comes from desktop only where usage is flat or declining. So, growing this business going forward will be challenging. 
+Turning to expenses, our Q1 GAAP expenses were $1.4 billion, up 32%. And our non-GAAP expenses were $1.1 billion, up 26%. Our headcount increased 39% from a year ago. 
+Our Q1 GAAP operating income was $1.1 billion, representing a 43% operating margin. And our non-GAAP operating income was $1.4 billion, represented a 55% margin, up from 39% last year. While the margin improvement was helped by some nonrecurring items that drove up costs in Q1 last year, we're pleased that the increase in margins came mostly from cost of revenue and G&A. As planned, we've created efficiencies in infrastructure and administration, while continuing to aggressively grow our investment in R&D, along with marketing and sales, to drive future performance. 
+Our GAAP and non-GAAP tax rates were 40% and 36%, respectively. GAAP net income was $642 million, or $0.25 per share, and non-GAAP net income was $885 million, or $0.34 per share. In Q1 we spent $363 million on CapEx and generated $922 million in free cash flow. We ended Q1 with $12.6 billion in cash and investments. 
+Now, looking forward. First, I want to note that the forward-looking comments I will share today do not reflect any impact from the recently announced acquisitions of WhatsApp and Oculus, neither of which has closed. After the deals close, we will update our guidance, as appropriate. 
+In terms of expenses, consistent with what we've said previously, we're planning that our total 2014 GAAP expenses, including cost of revenue and stock comp, will likely grow in the neighborhood of 35% to 40%. And that non-GAAP expenses, including cost of revenue but excluding stock comp, will likely grow in the neighborhood of 40% to 45%. 
+For taxes, we expect GAAP and non-GAAP rates for the rest of 2014 to be similar to or a bit higher than our Q1 rates, although this could vary widely depending upon our international revenue and expense mix and other factors, including the impact from acquisitions. We continue to anticipate our 2014 CapEx will be approximately $2 billion to $2.5 billion. 
+We also continue to expect shares outstanding for calculating EPS to grow from around 2.6 billion at year-end 2013, by 2% to 2.5% in 2014, excluding the two large deals we've announced. Those deals, once closed, will add another 207 million shares, as well as additional unvested RSUs that will affect our share count over the subsequent four to five years. 
+Turning last to ad revenue. As you know, our year-over-year comparables will get more challenging going forward from here because of the timing of the ramp-up of News Feed ads in 2013. As the comps become more difficult, we continue to expect that over the rest of 2014, our year-over-year ad revenue growth rates will decline from the Q1 rate and be meaningfully lower by the end of the year. 
+That being said, we believe we are still in the early stages of building our ads business. And we remain as optimistic as ever about the long-term opportunity to grow revenue impressively by improving the quality and relevance of our ads and increasing the value we bring to marketers. 
+In summary, Q1 was a great start to the year. We are very pleased with how well our ads performed, the strong marketer interest in our ads platform, particularly on mobile, and the investments we're making to build long-term shareholder value. Now let's open for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions) 
+Heather Bellini with Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    I was just wondering, Mark or Sheryl, if you can share with us your vision of payments for Facebook, and how the Company might be able to play a role in reducing the friction that exists today when users are trying to engage in mobile e-commerce. And then the follow-up question was just going to be if you could share with us what inning do you think we are in, in terms of improving the relevancy of the ads that you are showing? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [3]
+--------------------------------------------------------------------------------
+
+    On payments, our payments business has been important in supporting some of the developer activity on Facebook, primarily games. And we continue to be interested in that. I think it's really important to know that our advertising business is very relevant for e-commerce. And that doesn't depend on taking payments, and it doesn't depend on a payment strategy, because we provide a really great opportunity for marketers to find customers who are then going to go ahead and buy their products both online and off-line. 
+In terms of relevance, I think we are in really early innings. I think people can see it from their own experience. Most people I talk to, and certainly the data we have across the base of people who use Facebook, suggest that the ads are getting more relevant. But, there's a long way to go. 
+Our goal is that every time you open News Feed, every time you look at Facebook, you see something, whether it's from consumers or whether it's from marketers, that really delights you, that you are genuinely happy to see. I think we hit that more than we used to with our ads. But I think the truth is we still have a long way to go to hit that bar, and that's the bar we are striving for. 
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth with JPMorgan. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [5]
+--------------------------------------------------------------------------------
+
+    David, just wanted to ask you a little bit more about margins, in particular. If we look at this quarter, it looks like the incremental margins here are 78% or so. So, I was hoping you could drill down a little more just on the drivers within cost of revenues and how you are thinking about the sustainability of that going forward. 
+And is the 40% to 45% growth that you mentioned in non-GAAP OpEx, is that taking into account the acquisitions at all? Just thinking about how you can get to that level of spend given what you are starting the year. Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [6]
+--------------------------------------------------------------------------------
+
+    Thanks for the question, Doug. I think Q1 is traditionally a light spending quarter for us because we budget with an annual cycle and often it take some time to ramp up the new programs. So, I don't think it's surprising that Q1 year-over-year increase would come in a little lighter than we expect for the full year. 
+Additionally, there were some one-time things that benefited the quarter that kept expenses down, particularly in cost of revenue as we continue to exit leased data centers and amend our supply chain. I think that, going forward, our expectation was and remains the 40% to 45% growth excluding the impact from the acquisitions. We will update that guidance once the integration plans are clearer and we have a better sense for what those spend patterns will look like. 
+In general, in terms of margins, the comments I would make are that we don't have a quarter-to-quarter target margin that we're managing closely to. To do so would require varying our spend patterns as revenue changes up and down over time. And I think that's the wrong way to focus on how you spend your money in the Company. 
+Our priority is really to try and make investments that are high quality, that drive the creation of value and make the business better. And since many of those investments take a longer period to mature, we want to be able to think about our spend increases over a longer-term horizon. As you can see, looking back at the last couple of years, and our plans for this year, there's been a pretty steady rate at which we've been growing spend, particularly in R&D and marketing and sales, where we really want to focus on making sure we are growing smartly and thoughtfully at a rate we can manage wisely, and doesn't get ahead of our ability to manage it. 
+On cost of revenue and G&A, what you can see in the Q1 numbers is the fruits of a lot of labor trying to manage those parts of the business really efficiently, and free up resources to invest elsewhere. So, I think we've always believed that Facebook has the opportunity to be a sustainably high-margin business, and we continue to believe that, noting that there were some individual items that helped us in Q1. 
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+    Carlos Kirjner with Sanford Bernstein. 
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [8]
+--------------------------------------------------------------------------------
+
+    I think for Mark, how do you think about the evolution of browser technology, HTML5, and development tools versus native apps? If you look two to three years out, do you think native apps could finally become less important for many use cases? Or, in other words, maybe you guys were not wrong when you tried HTML5, you were just too early. Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [9]
+--------------------------------------------------------------------------------
+
+    Timing matters a lot. I do think that there's nothing wrong with the standard of HTML5 technically. I think a lot of what we see is what the main platform providers want to push as the standard for developing on their own platforms. What we've seen is that both Apple and Google have really favored and made it easier to build high-quality experiences in their own proprietary formats, rather than the open Web format. 
+So, while our bias, for a number of reasons, would have been to have really pushed on HTML5 -- and I don't want to sound like we've walked away from this because a large number of people access Facebook from the mobile web. I don't know if we break that out specifically but it's quite a large number of people. So, we are continuing to develop that. But for the foreseeable future, we see the best path to continuing to deliver great experiences be by working on the native app experience that we have now. 
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+    Eric Sheridan with UBS. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [11]
+--------------------------------------------------------------------------------
+
+    Congratulations, David, on your future endeavors, as well. Mark, maybe a quick question for you about the way in which you think Facebook, and the various applications Facebook is developing also, move towards a communication ecosystem longer term. A big picture question on where the various applications go, the ones that are in the process of being acquired and the ones you are developing organically. 
+And then second question, to use the baseball analogy again, as you continue to take ad impressions out of the Facebook platform, wonder if we should think about where you get to longer term on a level of ad impressions that you think are the perfect mix for balancing engagement and monetization, and what inning we are in that process. Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [12]
+--------------------------------------------------------------------------------
+
+    Sure. I think I can probably take both of those. In terms of building out a whole communication ecosystem, the way that we think about the new apps and products that we are building is that people want to share all kinds of different content with all kinds of different audiences. 
+Sometimes you want to have a one-on-one conversation or text or chat or voice call. Up to having a small group conversation, to communicating, updating all your friends on something at once. And sometimes there's really good public content, whether it's news or premium video, or things like that. 
+At the intersection of each type of content and each audience, we think that there's a really compelling experience to be built. Facebook, historically, has focused on friends and public content. Now, with Messenger and WhatsApp, we are taking a couple of different approaches towards more private content, as well. 
+You're going to see us do more things in more private content, I think. That's an ecosystem that's growing incredibly quickly. And, also, that speaks to why WhatsApp and Messenger are both growing independently, quickly is because they actually serve pretty different use cases within private sharing and private context. 
+In terms of our investments, I think you want to look at it as -- I outlined this in my remarks but I think it's important enough to say again -- there are different stages of maturity for the different things that we're doing. The Facebook app by itself is the furthest along. More than 1 billion people use it. And it's not only one of the most used apps, probably the most used app, it's also the core of our business. 
+Then the second set of apps that we have are Messenger, Instagram, and soon, WhatsApp. Messenger and Instagram are each now greater than 200 million active users. I think the WhatsApp folks independently announced, I think it was yesterday, that they just passed 500 million actives. 
+These are apps that are now at a pretty big scale. And the immediate priority is going to be getting them to 1 billion people. So we're continuing to focus on that before focusing on monetization in the way that we have with the core Facebook app. So, that's the second page. 
+The third set are the new Facebook Creative Labs apps that we're just getting started. So, things like Paper and a number of other things that we might announce at some point. Those are even further along than even Messenger, Instagram and WhatsApp, where it will probably take a few years for those to even get to the stage that Instagram, Messenger and WhatsApp are at. Which, by themselves, are probably a few years away from being big and important business. 
+So, that's the pipeline of things that we see. And there's a full ecosystem of different ways that people want to share with different people. 
+In terms of ads, going to your second question, I don't actually think we have a strategy to decrease ad impressions. I think what you are seeing, and what David mentioned, we have News Feed ads, which are higher quality and perform better, and then we have this legacy of right-hand column ads on desktop, which generally are just showing higher volume and they perform less well per ad unit. 
+As we shift more toward News Feed, what you are seeing is the total raw number of impressions is decreasing, but actually, the amount of value that we're delivering is increasing. That might continue to shift as we continue to shift towards mobile. 
+But I think, overall, what we're trying to do is make it so that the individual load on a per person basis isn't increasing at a dramatic rate. But instead we are driving most of the wins in user experience, advertiser performance, and our own revenue through increasing the quality, primarily around News Feeds adds. And we think that there's quite a lot to go there, as Sheryl said. 
+We want to get to a state where the ad content is as good as the organic content. And we see that we are getting pretty close to that in a few countries, but we want to get to that everywhere. 
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+    Peter Stabler with Wells Fargo. 
+
+--------------------------------------------------------------------------------
+Peter Stabler,  Wells Fargo Securities - Analyst    [14]
+--------------------------------------------------------------------------------
+
+    I wanted to ask a question about engagement. By one measure, DAU over MAU, it's at an all-time high. But no doubt you always have a body of last users. I'm wondering if you could share any color on what types of algorithm or product tweaks that you've made have yielded the most return or the greatest return in terms of re-engaging last users. And then, secondly, just quickly, any color you could provide on your estimate of the overlap of Instagram and Facebook users, perhaps based on the linking of those accounts. Thank you very much. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [15]
+--------------------------------------------------------------------------------
+
+    Unfortunately, I don't think I'm going to have much color on either of those. We are constantly doing things to make it so that people can share the content that they want, that they have the tools that they need, and that we're showing the most relevant content to people. That is always going to be the way that people use the service, not through some kind of trick or something that we are using to reengage people. 
+One state that I think is pretty interesting is that you would expect naturally that, as the community continues to grow, and we are getting into later and later adopters, that the percent of people who are using Facebook, who use it every day, would decrease. And I've actually predicted for a long time that eventually that will flatten out, and I thought it would decrease. But actually, it continues to increase, much to our surprise and joy. And now this quarter, I think we are at almost 63% of people who use Facebook in a month will use it in a given day. 
+Another step that I think is actually quite interesting is we track how many people use Facebook not just every day. So, one day out of -- so, what percent of our monthly folks used it today. But what percent of people use it six out of seven days of the week. That number, for the first time in the last quarter, passed 50%. 
+So, that's pretty crazy, if you think about it. You have this really big engaged community, and not only are almost 63% of people touching it in a given day and using the service because it's really engaging content, but we've gone through a period where more than 50% of people have used it six out of seven days of the week, almost every single day of a week. That just speaks to, I think, the underlying fundamental strength in the content and the work that we're doing to serve the best content to the best people. 
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+
+    Ben Schachter with Macquarie. 
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [17]
+--------------------------------------------------------------------------------
+
+    First, David, let me add my congratulations on your success. And good luck with the future role. Mark, beyond games, do you see other categories of apps that are ramping? And do you need to see that or can games continue to be the primary driver of app install and app engagement ads? 
+And then, separately, on Graph Search, do you see the potential for more partnerships for Graph Search in terms of additional data sets and distributions partners? Or is this more go-it-along? And then, finally, maybe for Sheryl or David, can you just give us a sense on pricing trends on app install ads? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [18]
+--------------------------------------------------------------------------------
+
+    On app installs, I actually think we see more diversity in the customers and developers on mobile now than we saw on desktop with Canvas. Canvas, the business, was almost entirely games. And now we see that a lot of it is games, but a lot of it is other kinds of folks because everyone who is building apps on mobile needs installs, and we have the number one products out there for delivering that. So, we see that happening and we feel pretty good about that. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [19]
+--------------------------------------------------------------------------------
+
+    On pricing, we don't break out pricing by type of ad. But overall in the ecosystem our prices are up. As Mark said, the effect of price per ad shown is driven up by more ads in News Feed. And that's because News Feed ads have significantly higher engagement and click-through rates. 
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+    Evan Wilson with Pacific Crest. 
+
+--------------------------------------------------------------------------------
+Evan Wilson,  Pacific Crest Securities - Analyst    [21]
+--------------------------------------------------------------------------------
+
+    Just a small item. It looks like the Asia engagement metric, the MAU, was down sequentially, slightly. Was there something there that impacted that in Q1 or was there something competitive there you think might be impacting that part of the business, like the big mobile messaging services? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [22]
+--------------------------------------------------------------------------------
+
+    I don't know that I would read anything into that yet. We haven't identified that as a trend that we are focused on at this point. The numbers do bounce around a little bit from quarter to quarter in various regions. 
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+    Anthony DiClemente with Nomura. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities Intl - Analyst    [24]
+--------------------------------------------------------------------------------
+
+    Congratulations, David. And best of luck in your new endeavors, as well. One question for David and one for Sheryl. 
+David, I just wondered if you could talk about your mix of impressions in terms of brand versus direct response. How has that changed this quarter versus prior quarters? And what else can be said about that split? 
+And then, secondly, for Sheryl, just wondered if you could give us a little more of an update on premium video ads. Specifically, I'm curious as to how those are sold. Are they sold on an impression basis or on a performance basis, or some hybrid of the two? 
+And then I know you don't give pricing by property, but is there a way to think about the premium or premium multiple of price that premium video ads would go for as compared to core News Feed ads? Thanks for any color on that. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [25]
+--------------------------------------------------------------------------------
+
+    Thanks, Anthony. I'm happy to take the first part of the question. In the first quarter, we delivered strong performance across all the advertiser segments that we focus on. So, I think they are all growing nicely. 
+We don't have a perfect measure for what kind of demand is brand versus DR, per se, because someone doesn't have to input that into the system when they come in. We have lots of things we do to try to find surrogates for that, and are happy to see that using some of that data we are seeing nice growth across the various segments. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [26]
+--------------------------------------------------------------------------------
+
+    On video ads, video represents a really big opportunity, really driven by consumer behavior. Smartphones are getting better and faster, and more people have phones that can provide a great video experience. So, you are seeing consumers do a lot more on video. There's also a lot more video going through News Feed that consumers are putting in, and that creates an opportunity for us, both on the consumer side and the ad side. 
+We have a current product in the market. It's a click to play video ad. It's part of a page post. You can post a video. Those are sold both CPM and CPC. And those are going really well, and I think explains some of the growth we're seeing in our ads business. 
+We also have been in early conversations with some clients about what would be a CPM auto play video ad. In terms of the expectations for that, we really want to see auto play video ads be something that's pretty common in the News Feed experience based on consumer usage before we push very hard in the ads business. 
+So, we remain long term very excited. We do expect that product to demand a premium product. But as I said in my remarks, we won't see a material contribution from it this year. 
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney with RBC. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [28]
+--------------------------------------------------------------------------------
+
+    On those autoplay videos, as an average Facebook user, I've noticed them more and more in my News Feed, and I think they're really neat. I think all my friends love watching videos of my kids play basketball. The question I'd have for you is what have you seen internally in terms of engagement. I assume that since I'm seeing more, other people are too, and that users like having them in. But is there any way you could quantify or maybe talk broadly about the impact that's having on usage? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [29]
+--------------------------------------------------------------------------------
+
+    Our goal is to make News Feed as engaging as possible. I think we look at the engagement we have on mobile, we are getting 20% of mobile time on Facebook in the US. And growing globally, as well. I think you see that that engagement is great. 
+I'm sure your friends love seeing your kids play basketball. I think they'd probably like to see more of those. And when and if we deliver a really great ad experience, and ads that you love, something you're interested in, I think you're going to like that just as much. We look forward to the growth. 
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+    Justin Post with Merrill Lynch. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [31]
+--------------------------------------------------------------------------------
+
+    I have a couple questions. On the app installs, can you help us at all understand what -- I know you gave us the number of total apps, but maybe how that revenue as a percentage of total, how important it is to you? And then there's a lot of competitors targeting that market with new products. Maybe you could outline some of Facebook's competitive advantages in that market. 
+And then one for Dave. We will miss you. Maybe you could talk a little bit about maybe some things Facebook could do to offset some of the dilution from the acquisitions, if anything. Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [32]
+--------------------------------------------------------------------------------
+
+    On mobile app ads, we've seen really strong adoption. And this is a very nascent but growing market. I think people sometimes think that a lot of our mobile ad revenue is coming from this one type of ad. And our mobile ad revenue is very broad-based. We know what you see in News Feed, and what we see, are ads from brand marketers, direct response, SMDs and developers. So, we are pretty distributed there and pretty happy about that. 
+I think it's not surprising that other people are entering this space. It's obviously growing. It's one that performs well. I think we continue to be excited by the results we are seeing for marketers and developers, the results we are seeing from consumers. And we think the fact that we've already been investing and learning and growing puts us in a great position to continue to have a very strong product offering, even in a more competitive space. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [33]
+--------------------------------------------------------------------------------
+
+    Justin, on the acquisitions, the most important thing we will do to, really, I would say, justify the dilution will be to make those acquisitions successful, and over time ensure that the unique assets that we are buying contribute to Facebook's success and to our cash flows over time. The business is obviously in healthy shape right now in terms of the cash it's generating. We look forward at the moment to really continuing to prioritize, where it's appropriate, investing that in the business to drive future growth. 
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+    Youssef Squali, Cantor Fitzgerald. 
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    David, can you talk a little bit about the ad load during the quarter? We saw noticeable increases here in the holidays and through Q1 versus that 5% or 6% you mentioned back on the Q3 call. Is the new ad load we are seeing sustainable, do you think, going forward? 
+And, second, maybe Mark or Sheryl, can you just talk a little bit about timing for monetization of Instagram? Are there any thresholds, either in terms of users, user engagement, whatnot, before you can ramp that advertising, or advertise on that platform? I think, David, you were talking earlier about maybe reaching 1 billion, but I think that was a general comment. Thanks. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+
+    As Mark alluded to earlier as it relates to ad load, what we're trying to do is optimize across multiple variables that really produce the best experience for people who use the network and help us to grow the business. Ad load is one of the variables that we look at. Of course, we also look at things like the size of the ads, the prominence of the ads, and, of course, the quality of the ads. What we are trying to do is continually really tweak all of those variables, and then measure what impacts we are having on engagement, on feedback from people, on revenue, and trying to optimize using that data and the changes that we've made. 
+I think the story there is a really good one. Things continue to go very well, obviously in terms of revenue which you see, but also in terms of engagement, in terms of feedback we get from people when we survey them. So we think we remain in a really very strong position in that way. 
+I actually would not validate the assertion that you gave that the ad load increased dramatically in the timeframe you described because that's not consistent in aggregate with our data. What I can say is that every person who uses Facebook has their own experience. The experience, including the ad experience, is personalized based on the other content we have available, based on how much they've engaged with ads we've shown in the past, et cetera. Ideally, we'd like to personalize not just the organic content that you see, but also your ad experience in a way that's really optimized for you and your interests. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [37]
+--------------------------------------------------------------------------------
+
+    On Instagram, Instagram is a great product. I think that's why you see so much engagement from people who are using it, and the growth passing 200 million. It's also a great advertising product. And there's just tons of demand because the pictures themselves are so visually appealing, and also there's so much consumer engagement. 
+We are in really early days. We have seen some great results. Just to mention one, Levi's is running an ad which is basically pictures of people wearing denim in really beautiful outdoor spaces. They targeted people 18 to 34 in the United States, reached over 7 million people. And importantly, they drove a 24-point lift in ad recall, which was 3 times the control group. 
+I think that shows that just as people engage with the consumer pictures on Instagram, they're going to engage with the right pictures for marketers. That said, we are very focused on consumer growth and we move slowly and deliberately in monetization. So, we don't see the need or the urge to ramp this as quickly as we possibly could, but really want to grow it slowly, grow it deliberately, and continue the growth on the consumer side and the great returns for marketers. 
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+    Colin Sebastian with Robert Baird. 
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Co. - Analyst    [39]
+--------------------------------------------------------------------------------
+
+    The first one is, I wonder if there's any way we can generalize or correlate around the growth in mobile monetization with the shift to 4G LTE, and whether this could be a driver, as well, of improving monetization internationally, as those higher-speed networks are deployed in new markets. And then, secondly, regarding Nearby Friends, just wondering how you plan to tie that feature and data set into more of a commercialized local offering for businesses, whether that's geo targeting or other related services. Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [40]
+--------------------------------------------------------------------------------
+
+    A lot of what we are trying to do with internet.org is make it so that everyone has the cellular networks that they need to be able to get on the Internet and access basic services, which we think are text-based communication services, whether it's things like social networks or messaging or email or search. Whether it's stock prices. Basic stuff like that, that people use on a day-to-day basis but don't require a huge amount of data. 
+We are pretty happy with the early progress that we've made. We have a multi-year initiative to work with operators around the world to roll out a program where folks can have free basic services. As I mentioned before, a lot of the initial work, the initial partnerships were in the Philippines and Paraguay. 
+What we are really pleased with, even just a few months of work, we were able to help almost 3 million people get access to data for the first time. So, there's no doubt that going from having no access to data to having some access is a huge jump in terms of the activity in business that we see that's available from people. 
+Moving towards things like LTE later on in the funnel will be helpful as we move towards richer types of content, like higher resolution photos and videos, because that will be important, especially as the mix of content that people share moves towards richer media. But we are really focused on both. And we have a huge investment, as well, in the Internet.org, just making sure that everyone in the world gets connected. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [41]
+--------------------------------------------------------------------------------
+
+    On Nearby Friends, it's a great new feature. It's an optional feature we just rolled out last week. I don't know if people have had a chance to try it yet. It's rolling out slowly but it's a great product experience, one we are excited to be able to offer. We use information like this to enhance all the services we provide, make things more relevant including relevant ads. 
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+
+    Brian Wieser with Pivotal Research. 
+
+--------------------------------------------------------------------------------
+Brian Wieser,  Pivotal Research Group - Analyst    [43]
+--------------------------------------------------------------------------------
+
+    First of all, I was wondering, with regard to the WhatsApp acquisition, I was wondering if you could update us on the status, if the current situation with Russia poses any issues given the development team space there. And then, separately, I was wondering if you could talk Nielsen and the use of OCR with respect to advertisers' interest in using OCR tools. Do you find that that's making a difference at the present time in terms of brands spending money with you, in general? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [44]
+--------------------------------------------------------------------------------
+
+    On the first, their development team is located in Mountain View, not in Russia. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [45]
+--------------------------------------------------------------------------------
+
+    They are doing extremely well. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [46]
+--------------------------------------------------------------------------------
+
+    Yes, they're doing really well. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [47]
+--------------------------------------------------------------------------------
+
+    The deal hasn't closed so we don't have anything to share. But I would just point you to a blog post that Jan wrote, I think it was yesterday, announcing that they had just helped connect half a billion monthly actives. They are growing very quickly. 
+I think that's up to about 460 million monthlies just a couple of months ago when we announced the deal with them in the first place. And I think that Jan specifically called out a few countries, including Russia and Brazil, and I think India, as some of the fastest growing markets for WhatsApp. I'd just direct you to that statement, and you should probably go read that for more information on how they're doing. And we will update you more when the deal closes. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [48]
+--------------------------------------------------------------------------------
+
+    On Nielsen OCR, anything that helps advertisers measure their spend is really important. I've talked on the call a bunch about how measuring online and in-store sales really matters. It also matters to marketers to be able to measure their spend compared to other investments they can make. 
+What OCR has done is given advertisers and marketers comparability between TV and digital and our spend. I think in those comparisons we do very well and I think that is part of the shift that's happening. And it's part of why we see growing interest from clients. 
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+    Ross Sandler with Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [50]
+--------------------------------------------------------------------------------
+
+    Just two quick questions. Facebook's on pace to represent around 20% of global display advertising or non search advertising in 2014. Do you view that as your addressable market? And, if so, what do you see as the potential market share you guys can capture relative to the -- I think, Sheryl, you said it is 23% mobile consumption, ex-China, globally today. 
+And then the second question is, there's been some press recently that Facebook is looking at building peer-to-peer money transfer services. Is that a market that you view as an opportunity? Would that fit into Messenger or potentially a standalone app? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [51]
+--------------------------------------------------------------------------------
+
+    We've had a payments business for a while and we continue to have one, and nothing new to announce there. On the first question, I think our addressable market is much bigger than digital. And you see that in the trends. 
+The big trend that's happening is the shift from consumer time. Last year was the very first time those lines crossed, and consumers spent more time in digital, which is mobile and desktop, than they did on TV. That continues to grow. So, where we are right now is, the average US consumer, as an example, spends 4.5 hours per day on TV, but 5.75 on digital. And that's largely being driven by mobile. 
+That means that as consumer time and attention shifts, we think ad budget shifts, as well, particularly if you have good mobile ad products and you can measure results. So, we definitely believe there will be, and continues to be, a shift happening. I talked about a print shift happening with the example of Sport Chek in Canada. 
+But we see this across the board, that marketers are looking for the highest ROI they can find. And they should be comparing us and everyone else across. And they do that not just across digital but across print, across radio, across TV, across any other vehicle they can. 
+I think our investments in measurement really pay off here. We say to our clients all around the world -- we want to earn your business because we want to be the best dollar and the best minute you spend. Because both their dollars and their time are so valuable. We want them to compare us to the other investments they could make, to see who can drive the most value to their bottom line. And that's what we are focused on, and that goes way beyond digital. 
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+    John Blackledge with Cowen and Company. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [53]
+--------------------------------------------------------------------------------
+
+    Just wondered if you could discuss how Facebook's potential mobile ad network would provide additional value to advertisers than other existing mobile ad networks. And then just a second question for David. I don't know if you could help quantify what meaningfully lower year-over-year ad revenue growth is, or just give us a sense of how to think about it for modeling purposes. Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [54]
+--------------------------------------------------------------------------------
+
+    On the ad network, we are in very early testing for mobile ad network. We do see a big opportunity, here. We think because we are people-based we have an opportunity both to provide greater reach for marketers and developers who are working with Facebook across other platforms, but also improve the relevance of the ads people see, both on and off Facebook. 
+I think that has been our core advantage and will continue to be. That said, it's really early days and we're in the early testing phase. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [55]
+--------------------------------------------------------------------------------
+
+    John, obviously the Q1 ad revenue growth rate was 82%, which is fantastic and a real tribute to the team and the platform. One of the things that contributed to that growth rate is the ramp-up of News Feed ads, that in Q1 of last year we were still really early in that part of the journey. And, so, the comparison between the state of News Feed ads in the Q1 we are reporting now and a year ago is meaningfully different. 
+As you'll remember from last year, News Feed ads really ramped up in the second quarter, and revenue growth ramped up, as well. So, that's just going to impact the comparisons in the subsequent quarters of the year. 
+Having said that, there's lots of things that we are focused on that will continue to drive our ad revenue growth, including more users and critically more marketer demand. So, bringing more marketers into the system, improving our products and tools to increase their returns and their ability to measure those returns, and generally improving the quality and relevance and value of the ads. Those are the things that we will stay focused on. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director IR    [56]
+--------------------------------------------------------------------------------
+
+    Great. Thank you for joining us today. We appreciate your time and we look forward to speaking with you again. 
+
+--------------------------------------------------------------------------------
+Operator    [57]
+--------------------------------------------------------------------------------
+
+    This concludes today's conference call. You may now disconnect. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2014-Apr-24-AMZN.OQ-140443160996-Transcript.txt

@@ -0,0 +1,674 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2014 Amazon.com Inc Earnings Conference Call
+04/24/2014 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Tom Szkutak
+   Amazon.com Inc - CFO
+ * Dave Fildes
+   Amazon.com Inc - Senior Manager of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Scott Tilghman
+   B. Riley Caris - Analyst
+ * Andrew Boone
+   JMP Securities - Analyst
+ * Ben Schachter
+   Macquarie Equities Research - Analyst
+ * Kerry Rice
+   Needham & Company - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Greg Melich
+   ISI Group - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Mark Miller
+   William Blair & Company - Analyst
+ * Aram Rubinson
+   Wolfe Research - Analyst
+ * Brian Nowak
+   SIG - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+ * Mark May
+   Citi - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day ladies and gentlemen and welcome to the Amazon.com Q1 2014 financial results teleconference. At this time, all participants are in a listen-only mode. But following the presentation, we will conduct a question and answer session. In addition, today's conference is being recorded. And now for opening remarks I will turn the conference over to the Senior Manager of Investor Relations, Mr. Dave Fildes. Please go ahead sir.
+
+--------------------------------------------------------------------------------
+Dave Fildes,  Amazon.com Inc - Senior Manager of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello and welcome to our Q1 2014 financial results conference call. Joining us is 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 April 24, 2014 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 2013. Now I'll turn the call over to Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Dave. I'll begin with comments on our first-quarter financial results. Trailing 12 month operating cash flow increased 26% to $5.35 billion. Trailing 12 month free cash flow increased to $1.49 billion. Trailing 12 month capital expenditures were $3.85 billion.
+We continue to make additional investments in support of business growth, consisting of investments in technology infrastructure, including Amazon Web Services and additional capacity to support our fulfillment operations. Return on invested capital is 9%, up from 1%. 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 476 million shares compared with 471 million one year ago.
+Worldwide revenue grew 23% to $19.74 billion, or 23% excluding the $10 million favorable impact from year-over-year changes in foreign exchange. Media revenue increased to $5.47 billion, up 8%, or 8% excluding foreign exchange. EGM revenue increased to $13.02 billion, up 27%, or 27% excluding foreign exchange. Worldwide EGM increased to 66% of worldwide sales, up from 64%. Worldwide paid unit growth was 23%.
+Active customer accounts exceeded 244 million. Worldwide active seller accounts were more than 2 million. Seller units represented 40% of paid units.
+Now I'll discuss operating expenses excluding stock based compensation. Cost of sales was $14.06 billion or 71.2% of revenue, compared with 73.4%. Fulfillment, Marketing, Tech and Content, and G&A combined was $5.18 billion, or 26.2% of sales, up approximately 240 basis points year-over-year. Fulfillment was $2.24 billion or 11.3% of revenue, compared with 10.8%. Tech and Content was $1.82 billion or 9.2% of revenue, compared with 7.9%. Marketing was $843 million or 4.3% of revenue, compared with 3.8%.
+Now I'll talk about our segment results, and consistent with prior periods we do not allocate to segments our stock based compensation or other operating expense line item. In the North America segment, revenue grew 26% to $11.86 billion. Media revenue grew 12% to $2.82 billion, or 13% excluding foreign exchange. EGM revenue grew 28% to $7.83 billion, representing 66% of North America revenues, up from 65%. Other revenue grew 60% to $1.2 billion. North America segment operating income increased 23% to $562 million, a 4.7% operating margin.
+In the International segment, revenue grew 18% to $7.88 billion; adjusting for the $24 million year-over-year favorable foreign exchange impact, revenue growth was 18%. Media revenue grew 4% to $2.64 billion or 4% excluding foreign exchange, and EGM revenue grew 27% to $5.19 billion, or 26% excluding foreign exchange. EGM now represents 66% of international revenues, up from 61%. International segment operating loss was $60 million, compared with $16 million loss in the prior period.
+CSOI increased 14% to $502 million, or 2.5% of revenue, down approximately 20 basis points year-over-year. Excluding the favorable impact from foreign exchange, CSOI increased 10%. Unlike CSOI, our GAAP operating income includes stock based compensation expense and other operating expense.
+GAAP operating income decreased 19% to $146 million, or 0.7% of net sales. Our income tax expense was $73 million. GAAP net income was $108 million or $0.23 per diluted share, compared with $82 million and $0.18 per diluted share.
+Turning to the balance sheet. Cash and marketable securities increased $771 million year-over-year to $8.67 billion. Inventory increased 24% to $6.72 billion and inventory turns were 9.1, down from 9.5 turns a year ago as we expanded selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 19% to $10.59 billion and accounts payable days were 68, consistent with the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends we've seen to date and what we believe to date to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy and consumer spending. It's not possible to accurately predict demand, and therefore, our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as settling intercompany balances and foreign currencies amongst our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rates could all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, record any further revisions to stock based compensation estimates, and that foreign exchange rates remain approximately where they've been recently.
+For Q2 2014 we expect net sales of between $18.1 billion and $19.8 billion, or growth of between 15% and 26%. This guidance anticipates approximately 160 basis points of favorable impact from foreign exchange rates. GAAP operating income or loss to be between $455 million loss and $55 million loss, compared to $79 million in income in the second quarter of 2013. This includes approximately $455 million for stock based compensation and amortization of intangible assets.
+We anticipate consolidated segment operating income, which excludes stock based compensation and other operating expense, to be between $0 million and $400 million, compared to $409 million in the second quarter of 2013. We remain heads down focused on driving a better customer experience through price, selection, and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks, and with that Dave, let's move to questions.
+
+--------------------------------------------------------------------------------
+Dave Fildes,  Amazon.com Inc - Senior Manager of IR    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question.
+
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    Mark Miller, William Blair.
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair & Company - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Hi Tom, I was hoping you could maybe just lay out for us what do you think the main reasons are for the acceleration in growth here in the first quarter versus the fourth quarter. And then I have a specific question on Prime Pantry. Is one of the motivations to get the customer on that program, it might make it easier to convert them to AmazonFresh? And if so, would you want to run this operation as a breakeven like you do with Kindle to enable a bigger business? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [3]
+--------------------------------------------------------------------------------
+
+    In terms of growth we did -- we saw very solid growth, good growth in Q1, up 23% on a local currency basis. North America we saw similar growth rates in Q1 as we saw in Q4 of last year, as well as Q1 of last year all at 26%. In International we saw the growth accelerate a little bit on an exchange adjusted basis from 15% to 18% from Q4 to Q1.
+But what we're really seeing is we're pleased with the overall fundamentals. We continue to add new customers, in-stocks continue to be healthy. Third-party units as a percentage of units are about 40%, so still very strong. FBA adoption continues to be strong around the world, continue to add new selection. We saw strong growth in many different areas including Web Services, and so again a lot of different areas contributed to the growth rate that we saw in Q1.
+In terms of Prime Pantry, we just think it's an exciting option for Prime members. It's available only to Prime members, so that they can get their everyday non-bulk items in one box, and we think that's interesting for customers. And again, it's a great way that we can add the selection and have the selection for those customers.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+    Aram Rubinson, Wolfe Research.
+
+--------------------------------------------------------------------------------
+Aram Rubinson,  Wolfe Research - Analyst    [5]
+--------------------------------------------------------------------------------
+
+    Thanks for taking the question. On the famous drone interview that Jeff had with Charlie Rose, he said something that caught my attention, which was that every elasticity study that you do says that Amazon should be raising prices.
+I have two questions around that. The first is does that equation also work in reverse? Meaning that if higher questions don't dampen demand, does it also mean that lower prices don't stimulate demand like they used to?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [6]
+--------------------------------------------------------------------------------
+
+    In terms of pricing we've been very consistent. We want to offer great value to customers, and so we work very hard to make sure that we can offer and afford to offer great prices for customers. And so that's something that we've been working on very hard over the years. That's certainly one of the reasons why you've seen the growth rates that we've experienced along with getting closer to customers from a shipping perspective, making sure we have great in stocks and other service attributes.
+In terms of price increases, we certainly have increased the price on Prime, but again that was after many years of not raising the price even though the cost of -- transportation costs certainly have gone up, and the fact that we have certainly added a lot of selection, going from a little over 1 million items in the first year to over 20 million items. So it's still an incredibly great value for customers, and that's why we did that. So again we're all about making sure we have great values for customers and we'll continue to do that.
+
+--------------------------------------------------------------------------------
+Aram Rubinson,  Wolfe Research - Analyst    [7]
+--------------------------------------------------------------------------------
+
+    Okay, thanks for that.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+    Carlos Kirjner, Sanford C Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [9]
+--------------------------------------------------------------------------------
+
+    I have two quick questions about AWS. First I think everyone would agree that AWS is a vast opportunity. So given how large the opportunity is, why is it that you are not hiring more people, launching more products, and growing faster? What are the limiting factors for growth of AWS?
+Second, you have a long history of cutting prices for a few specific AWS products, but you did something somewhat unusual in late March when you cut prices across EC2 and S3 products in one shot. Why did you only cut your prices after Google cut theirs? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [10]
+--------------------------------------------------------------------------------
+
+    In terms of AWS, the team is doing a fantastic job. We are adding a lot of resources. We've grown our employee base there dramatically over the years and continue to add people there. And that's the way we've been able to launch all the new services that we've had over the past several years. And we continue the pace of acceleration in terms of new things that we're doing is increasing and we've published a lot of statistics around that.
+In terms of pricing, we think this is our 42nd price increase that we've had in AWS, sorry price decrease in AWS, and we're very excited on behalf of our customers to be able to do that. The team works very hard to be able to afford those lower prices, and we're excited to do that. And so in terms of the timing of when we launch these price decreases that come at different times and it happened to come in a presentation that we were giving around that time. But again we're very excited about the opportunity and we continue to invest in that business given the big opportunity that we have there.
+
+--------------------------------------------------------------------------------
+Operator    [11]
+--------------------------------------------------------------------------------
+
+    Ben Schachter, Macquarie.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Equities Research - Analyst    [12]
+--------------------------------------------------------------------------------
+
+    Can you walk us through the process on how you think about and how you model how much you're willing to pay for exclusive content such as video or video game content? And then another question, is it fair for us to assume that the business model of the Kindle Fire TV is similar to what Bezos has said regarding selling other hardware at roughly breakeven, and then making money only if consumers use it? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [13]
+--------------------------------------------------------------------------------
+
+    In terms of video content, the team does a very nice job of various modeling, certainly we're trying to estimate what the usage is of all the content that we launch, and we have a number of different ways that we do that. We do have certainly for some of the content that we've been selling, both in terms of physical format as well as selling on the transactional side, we certainly see what the -- what those sales are -- what those unit sales are, so we have that as a benchmark.
+We also have other models to look at that could help us guide to what we think the usage will be of those. But again, the team has done a nice job looking at different ways to model that, and I expect that we'll continue to refine that over time as well.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Equities Research - Analyst    [14]
+--------------------------------------------------------------------------------
+
+    Then on Kindle Fire TV?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [15]
+--------------------------------------------------------------------------------
+
+    In terms of Fire TV, I can't talk about the economics of the device itself. But what I can say is it's very early and we're extremely pleased with what we see in just the few weeks here, and the team certainly made what we think is a killer product. And we're -- the team is very hard trying to keep in stock on that product.
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+
+    Mark May, Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citi - Analyst    [17]
+--------------------------------------------------------------------------------
+
+    Wondering if you noticed any change in signups or conversions in the few weeks here since you've rolled out the Prime price increase for new customers, and if you could maybe comment on what may have contributed to the deceleration in year-on-year growth in Media sales in North America. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [18]
+--------------------------------------------------------------------------------
+
+    In terms of Prime, it's early but we're encouraged with what we see so far. Just over the last several weeks our Prime subscribers continue to grow week over week. New trials, the adoption of new trials again post the increase, are growing very nicely. So those customers accepting new trials is growing very fast.
+We only have a few days of information related to conversion and we're encouraged by what we see there. So overall, we're very encouraged. The reason why is that customers we believe are responding to just a great service, and so we're continuously being reminded of that from customers in terms of the offering we have on the physical side, as well as the offerings that we have on the digital side as well, so very encouraged there.
+In terms of the North American media, we did see a -- from a growth standpoint it's 13% year-over-year for North American Media. That compares to 14% in Q1 of last year. It is down a little bit sequentially from Q4, the Q4 keep in mind we do have video games and video consoles in that number in Q4, there's certainly a number of different factors. But that's certainly one that's impacting the Q4 numbers, and it's certainly seasonal as you would expect, but there's some great launches of consoles in Q4 that are impacting that number.
+
+--------------------------------------------------------------------------------
+Operator    [19]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [20]
+--------------------------------------------------------------------------------
+
+    Thanks for taking the question. Tom, I was just hoping you could give us your view on units growth and how you think about that going forward. How important of a metrics it is, because we're seeing somewhat of a decoupling here as revenue and gross profit reaccelerated, but units obviously decelerated as media came down. Can you talk a little bit about that? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [21]
+--------------------------------------------------------------------------------
+
+    Sure, as you mentioned unit growth was actually decelerated a little bit from Q4, and also from last year it was 23% year-over-year in Q1.
+One thing to keep in mind is that our Web Services business is growing at a faster rate. We don't incorporate any units from AWS in that metric. But overall, you're right. We continue to from a growth standpoint we had a small acceleration of growth from Q4 to Q1 from a revenue standpoint, again on a local currency basis going from 22% to 23%. We're very pleased with a lot of the fundamentals that I talked about earlier that's impacting that growth rate.
+Overall we're pleased and again, we think that we see a nice growth rate, and third-party units as a percentage of total units is 40%, which was consistent with what we saw last year. So third-party growth continues to be very strong as well.
+
+--------------------------------------------------------------------------------
+Operator    [22]
+--------------------------------------------------------------------------------
+
+    Brian Nowak, SIG.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  SIG - Analyst    [23]
+--------------------------------------------------------------------------------
+
+    I have two. The first one, just Tom to go back to the unit question, even if we exclude North America and International Other from gross profit. Gross profit held in there pretty steady at 28%. Just kind of curious, is there anything that we should think about of why gross profit growth and unit growth is decoupling? And is unit growth a really good way to measure the health of the business?
+And then the second one is on International Media. One of the factors you guys have flagged in the past holding back International Media is more limited local language content. Can you just help us better quantify the difference in English language digital content compared to foreign language? And what steps are your taking to improve that?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [24]
+--------------------------------------------------------------------------------
+
+    In terms of -- I'll take the second part of the question first about International Media. The growth rate was 4% in the quarter, and as I've talked about in prior quarters, certainly one of the things that's happening is we see a conversion from physical to digital.
+And for example in North America, we're now selling North America Media, we're now selling more digital units than physical units. So in the past 12 months we've sold more digital units than physical units. We're not at that point yet in International. And so certainly that's an opportunity for us as we look at growing International Media. It's again, it's certainly something that we're working very hard on and certainly a good opportunity for us.
+In terms of unit growth, it's certainly just one measure that we thought has been helpful. And that's why we've continued to provide it. It is just one metric. We have many different metrics that we're sharing. But there's not much more I can add to that, but again it's a metric. Was there another -- was there a third part to the question?
+
+--------------------------------------------------------------------------------
+Brian Nowak,  SIG - Analyst    [25]
+--------------------------------------------------------------------------------
+
+    Are there any other puts and takes we should think about in units as we go throughout the year where there are tough compares or easy compares of units from a digital unit perspective or anything?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [26]
+--------------------------------------------------------------------------------
+
+    There's not that I can think of at the minute. But just keep in mind when you think about our revenue growth, always be thinking about there's certainly a volume component. We have a third-party component. We have a mix component. We're continuously trying to lower prices for customers. All of those factor into the revenue growth rates that you see for each of the revenue metrics that we provide to you.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  SIG - Analyst    [27]
+--------------------------------------------------------------------------------
+
+    Okay, great. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+    Brian Pitz, Jefferies and Company.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [29]
+--------------------------------------------------------------------------------
+
+    Regarding Fulfillment, does it make sense for you to bring some of the components in-house? We've been hearing talk of your own fulfillment network. Can you make any comments on this? And just to follow up on your digital units point, can you comment on any impact of recent shifts in music and video consumption to subscription based models, from download to own on your Media business? Is that having any impact? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [30]
+--------------------------------------------------------------------------------
+
+    In terms of Fulfillment, there's not a lot I can comment on in terms of your specific question. What I would say though is we continue to work to be as we have over the years to become closer and closer to customers. And so we've certainly done that in a number of different ways, just the footprint we have from a fulfillment capacity standpoint enables us to be closer to customers and getting great selection even closer to customers.
+So we continue to work. Certainly Prime was another way to get a faster delivery speed to customers, and so we'll continue to work on our capabilities there to make it even better over time. In terms of the digital units question, I apologize. There's not a lot I can comment in terms of your specific question there.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [31]
+--------------------------------------------------------------------------------
+
+    All right. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+    Justin Post, BofA Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [33]
+--------------------------------------------------------------------------------
+
+    Tom, we look back at your model and we go back to '08 and '09 in the middle of a pretty bad global recession, you were able to put up 7.3% and 7.4% operating margins in Europe, I'm sorry International. And now it looks like you're losing money and maybe for the whole year.
+Could you talk about some of the drivers that are driving the losses this quarter internationally? What the company's patience for losses are internationally. And when you come out of this, how your business will be different and what your margin outlook is for the International profits. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [34]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of what you're seeing in Q1 and you've been seeing this certainly for a few year period here is we're investing very heavily in International. And we're doing that in a number of different ways. Certainly from a geographic standpoint, we continue to invest in new geographies, and Italy and Spain were certainly the most recent. And you should assume we are investing in those geographies.
+We continue to invest in China and certainly that's in investment mode. And then also as we've continued to grow in International, we've invested in terms of capacity, both fulfillment capacity as well as infrastructure capacity to support those.
+What you saw, you will see some certainly variation over time in the period that you're talking about. We certainly had particularly coming out of -- going into late 2008 and also 2009 we had extra capacity globally. We still did continue to invest but not near the rates that we're investing now. And that's why you saw some of the results that you've seen. But again, one of the things that you see not only in International but in our total results is we continue to invest very heavily into the business because of the opportunities that we see.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+    Greg Melich, ISI Group.
+
+--------------------------------------------------------------------------------
+Greg Melich,  ISI Group - Analyst    [37]
+--------------------------------------------------------------------------------
+
+    Hi, thanks. I wanted to ask on the decision process that you went through when raising the Prime membership fee. I know you talked about potentially doing $20 to $40. What factors did you look at in deciding on the $20? And related to that, with the deleveraging of shipment costs happening a little bit, was weather an impact on that or is that just the business and how it's trending?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [38]
+--------------------------------------------------------------------------------
+
+    There was a number of different factors that we looked at in terms of when we looked at the price increase. But the biggest one is we had built -- we think we've built a great service, and we saw that just the particularly the transportation costs since inception had grown dramatically. We just hadn't done any price increase during that long time period, and that's really the big reason why we decided to do that.
+We launched the program with over 1 million items and we have over 20 million items now. Customers are using that service in addition to having the transportation costs being higher, they're using that service more and that's really what led to it. And beyond that there's not a lot I can comment.
+
+--------------------------------------------------------------------------------
+Greg Melich,  ISI Group - Analyst    [39]
+--------------------------------------------------------------------------------
+
+    Just on the shipment costs deleveraging in the first quarter a little bit. Did weather or something else have an impact, or is that just the trend of the business given the growth rate of shipments?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [40]
+--------------------------------------------------------------------------------
+
+    There's many different factors that go into that and certainly weather would have been one of those.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+    Ronald Josey, JMP Securities.
+
+--------------------------------------------------------------------------------
+Andrew Boone,  JMP Securities - Analyst    [42]
+--------------------------------------------------------------------------------
+
+    Hi, guys, thanks for taking the question. This is Andrew on for Ron. A quick question around streaming volumes in UK and Germany now that Lovefilm is bundled with Prime. Do you have any comment?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [43]
+--------------------------------------------------------------------------------
+
+    Unfortunately, it's probably a good question for future quarters, it's just so early. And again, what little data we have so far is very encouraging, but it's very early so I think that's a good question for future quarters.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+    Heath Terry, Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [45]
+--------------------------------------------------------------------------------
+
+    Great, thanks. Obviously, a lot of focus on pricing in AWS. But you're clearly still seeing accelerating growth despite those cuts. Could you provide some context on the volume side of that equation? Whether it's just growth in customers or workloads or some way to sort of frame the other side of things outside of just pricing in AWS.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [46]
+--------------------------------------------------------------------------------
+
+    No, it's a good question and I think that's something we can certainly work on to try to be helpful. The price change, the most recent price change is certainly recent. And what we're commenting on is certainly the Q1 results.
+But that's something that we'll think about and try to be helpful on that as we go forward, but certainly usage has been -- this is not something recent. Usage has been very, very strong. And as we've continued to lower prices over time, this is the 42nd price decrease that we've had and we've had great usage growth over time.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [47]
+--------------------------------------------------------------------------------
+
+    Great. And just on the AWS side with the sort of nationalistic concerns that we're seeing around stored data, does that change at all the way that the AWS team is thinking about infrastructure needs for that business or the way that you might be thinking about capex.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [48]
+--------------------------------------------------------------------------------
+
+    I think the best way to say it is, and hopefully this answers your question. The team focuses on many different aspects, but certainly the operational aspects of being up and running, being a very secure, reliable set of services, those are something the team is very focused on and spends a lot of time working on. And so beyond that, I'm not sure I can add to it.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [49]
+--------------------------------------------------------------------------------
+
+    Great. Thanks Tom.
+
+--------------------------------------------------------------------------------
+Operator    [50]
+--------------------------------------------------------------------------------
+
+    Youssef Squali, Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [51]
+--------------------------------------------------------------------------------
+
+    Thank you very much. Two quick questions please. First, the HBO deal seems like a seminal event for Prime Video in terms of quality and probably the price bit as well. Is this the first of many potentially large deals you're intent on getting for the platform? Or was this more of an opportunistic transaction that just came your way. And second, just on the P&L can you just clarify where that $60 million in investment gains came from, please?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [52]
+--------------------------------------------------------------------------------
+
+    Sure. The answer to the second question which is down below in Other relates to a gain primarily from LivingSocial. They sold their Korean business and that's reflected in that line item.
+In terms of the content question. The way I would think about it is this. We've continually since we launched the service, we've continually added -- tried to add great content, and I think we've been pretty successful in doing that. And this is just another contract that we've launched into that's multi-year to do that. And we think it's -- we think it's a great for customers. We're extremely excited to offer this to customers. And we'll try to keep making the service even better over time.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [53]
+--------------------------------------------------------------------------------
+
+    Is exclusivity an important consideration for you now?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [54]
+--------------------------------------------------------------------------------
+
+    There's a number of factors, certainly we have a number of different arrangements where we have exclusive content, and we think that's great for customers, and we've also supplemented with other content that's not exclusive.
+And we're obviously as you know, we're working on original content as well that is exclusive. So those are the things that we're working on, and we see the customer response to all of those, and we're -- we like what we see.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [55]
+--------------------------------------------------------------------------------
+
+    Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [56]
+--------------------------------------------------------------------------------
+
+    Scott Tilghman, B Riley.
+
+--------------------------------------------------------------------------------
+Scott Tilghman,  B. Riley Caris - Analyst    [57]
+--------------------------------------------------------------------------------
+
+    Hi Tom, wanted to really ask two related questions. First following up on the international discussion from before. I was wondering if you could prioritize where the investments are going on the international side between fulfillment, media buildout, geography buildout, et cetera. And then related, I haven't seen any discussion on what's happening on the domestic fulfillment buildout this year. I was wondering if you could comment on that as well?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [58]
+--------------------------------------------------------------------------------
+
+    Yes, in terms of the priority, I'm not sure what to add there, but I would say that we're investing heavily in China and we have been for some time, and certainly that's a factor. We're investing in new geographies, most notably Italy and Spain. We're investing in as I mentioned in fulfillment centers and infrastructure to support that growth. So again, not a lot to add there. The other part of your question?
+
+--------------------------------------------------------------------------------
+Scott Tilghman,  B. Riley Caris - Analyst    [59]
+--------------------------------------------------------------------------------
+
+    Let me ask it a different way, if you look at pricing, if you look at infrastructure, if you look at geography, is there one bucket that tends to trump the others?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [60]
+--------------------------------------------------------------------------------
+
+    Yes, and again we've been pretty consistent how we've talked about it. Again, China you should assume, China is a big investment. In all of our geographies, not just international we're investing on behalf of customers in terms of lowering prices, and so that's having an impact. Volume is having an impact. We continue to invest in a fulfillment capacity not only for our retail customers, but also for third parties on behalf of Fulfillment By Amazon, and so we're making investments there. And the others that I mentioned.
+
+--------------------------------------------------------------------------------
+Scott Tilghman,  B. Riley Caris - Analyst    [61]
+--------------------------------------------------------------------------------
+
+    Fair enough. And on domestic fulfillment?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [62]
+--------------------------------------------------------------------------------
+
+    Domestic fulfillment, as we have in past years, we'll continue to update you as we go throughout the year. I don't have any comments today given that we're just coming out of Q1, but we will be adding fulfillment capacity given the growth rates we're experiencing, and we'll update you as we go.
+
+--------------------------------------------------------------------------------
+Scott Tilghman,  B. Riley Caris - Analyst    [63]
+--------------------------------------------------------------------------------
+
+    Okay. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [64]
+--------------------------------------------------------------------------------
+
+    Eric Sheridan, UBS.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [65]
+--------------------------------------------------------------------------------
+
+    Thanks for taking the question. A question about your advertising business. There's been a lot of movement by Google to push PLAs as a product to sellers. I want to know longer term as you guys think about on both advertising on Amazon, and also to give out advertising in a way that would allow sellers to bring traffic back to their own websites that might avail themselves of Amazon's advertising data and user data to help enable those sales. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [66]
+--------------------------------------------------------------------------------
+
+    I can't comment on what we might or might not do in the future. But the team has done a nice job from an advertising perspective and you can see those prominently on our various websites. We view it as another way certainly to help be able to afford lower prices for customers, and again the team has done a very nice job of monetizing those detailed pages to allow us to be able to do that.
+
+--------------------------------------------------------------------------------
+Operator    [67]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney, RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [68]
+--------------------------------------------------------------------------------
+
+    Thanks, Tom. Two questions, please. The International Media you talked about the I guess the digitization catchup or whatever of International Media. Could you break that down a little bit further? Are there certain categories, i.e., books versus videos, versus music, that one of those is dragging internationally.
+What is it that needs to happen for that digital shift to occur? Do you need more rights, do you just need more devices in the market? What is the drag there?
+And then in terms of the operating income guidance you're very consistent how you guided the last couple of years; it seems like you're guiding for more of a sequential decline in operating income in June quarter than you have the last two years. Is that just a different type of seasonality to the business, or are there new near-term investments that you're making in the June quarter? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [69]
+--------------------------------------------------------------------------------
+
+    In terms of the second part of the question related to the guidance, what's reflected in the Q2 guidance has many different factors but we are investing. I mentioned a number of different investments that we're making in International, which related to Q1, also related to Q2. We're investing in content. We're investing in our Web Services business, both from a new services as well as pricing.
+So again, we're investing in a lot of different areas across the company. I'm sure there's a number that I'm not mentioning, so again we're investing. So that's really what you're seeing in the range of guidance that we see in Q2.
+In terms of International Media, we continue to make progress there on our conversion from physical to digital. But we're just not where we are in North America. And it's in many different categories and we'll continue to work on that. And certainly some of the things that you see related to video in Europe, certainly trying to address that part of that. So again we'll continue to work on the various pieces of that for our International business and look forward to doing that.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [70]
+--------------------------------------------------------------------------------
+
+    Thanks, Tom.
+
+--------------------------------------------------------------------------------
+Operator    [71]
+--------------------------------------------------------------------------------
+
+    Ross Sandler, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [72]
+--------------------------------------------------------------------------------
+
+    Hey, guys. If you don't mind I'll beat the dead horse on the international question. But specifically around China, can you just give us an update on the overall strategy for China? Are the levels of investments going into the country accelerating or are they just stable? And then what kinds of milestones in terms of market share or customer adoption do you guys track to identify success or return on that investment? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [73]
+--------------------------------------------------------------------------------
+
+    In China, we're investing a lot and trying to grow the business there. We're certainly investing in our fulfillment -- we have been investing in our fulfillment network to get even closer to customers. We're doing a lot on the retail basics as we've done in other geographies, making sure that we have great in-stock availability. We've making sure that we have had a unique selection.
+So those are -- a lot of the things that we've done, making sure that we have the right pricing in place on behalf of customers. Making sure that our service levels are where we need them to be.
+So those are the things we continue to work on in China. It's a very large opportunity. And we continue to work hard. Is it a large investment? Yes, it is. And that investment has certainly increased over the past several years.
+
+--------------------------------------------------------------------------------
+Operator    [74]
+--------------------------------------------------------------------------------
+
+    Colin Sebastian, Robert Baird and Company.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [75]
+--------------------------------------------------------------------------------
+
+    First just one clarification on the AWS question. Given the comments that customers would see hundreds of millions of dollars of savings in Q2 from the price cuts, I just want to understand or clarify if we should be expecting moderating growth rate in the other segments, at least temporarily?
+And then lastly just Amazon's position on the ability of ISPs to add a toll for fastlane network access. Is this a scenario a situation that would change the company's approach or strategy with regards to video or is this more of a non-factor for you guys? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [76]
+--------------------------------------------------------------------------------
+
+    In terms of the just clarification in Jeff's quote, he mentions that customers will be saving hundreds of millions of dollars over the next several months alone. He didn't say specifically to second quarter. So certainly that's impacting second quarter, and it's reflected in the guidance that you're seeing there. But again, we're very happy to do that on behalf of our AWS customers.
+We've done many different price decreases over time and we think that's great on behalf of customers, and we think our team's and we're positioned very well in that business, and we'll continue to invest in that given the large opportunity that we have there. In terms of your other question, there's not really a lot I can comment there.
+
+--------------------------------------------------------------------------------
+Operator    [77]
+--------------------------------------------------------------------------------
+
+    And ladies and gentlemen, unfortunately we only have time for one more question which will come from Kerry Rice with Needham and Company.
+
+--------------------------------------------------------------------------------
+Kerry Rice,  Needham & Company - Analyst    [78]
+--------------------------------------------------------------------------------
+
+    Just a couple questions. One on customer adds, you didn't add as many new customer accounts as you did in Q1 2013. And so I assume based on your comments that wasn't related to the price increase around Prime, and so I don't know if you can add any context there.
+And then the second question is just around Mobile. Obviously, the mobilization throughout the world is an important trend and you guys haven't talked a lot about it. Wonder if you can give us any context around your strategy there or any metrics.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [79]
+--------------------------------------------------------------------------------
+
+    In terms of Prime, Prime again, over the year-over-year is growing very rapidly. And then also week over week as we look at the metrics over the last several weeks, continues to grow week-over-week. So we're very encouraged by what we're seeing there.
+In terms of Mobile, it's certainly a tailwind for our business. We have a number of different things that we're working on for mobile. And we continue to make it easier and easier for customers to shop from a mobile perspective. Our traffic continues to increase from a mobile perspective, and we're excited about what we see there. And we continue trying to find ways to make that even better from an experience standpoint for our customers.
+
+--------------------------------------------------------------------------------
+Dave Fildes,  Amazon.com Inc - Senior Manager of IR    [80]
+--------------------------------------------------------------------------------
+
+    Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com, and look forward to talking with you again next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [81]
+--------------------------------------------------------------------------------
+
+    And again, ladies and gentlemen that does conclude our conference for today. Once again, we do thank you all for your participation.
+
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
+EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
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+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2014-Jan-29-FB.OQ-139655634314-Transcript.txt

@@ -0,0 +1,585 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2013 Facebook Earnings Conference Call
+01/29/2014 02:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * David Ebersman
+   Facebook, Inc. - CFO
+ * Deborah Crawford
+   Facebook, Inc. - Director, IR
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Eric Sheridan
+   UBS - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Co. - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Jordan Rohan
+   Stifel Nicolaus - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Tom  Forte
+   Telsey Advisory Group - Analyst
+ * Anthony DiClemente
+   Nomura Securities - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Jay and I will be your conference operator today. At this time I would like to welcome everyone to the Facebook fourth-quarter and full-year 2013 earnings conference call. 
+(Operator Instructions) 
+Thank you very much. Ms. Deborah Crawford, Facebook's Director of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director, IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's fourth-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and David Ebersman, CFO. 
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release, our annual report on Form 10K, and our most recent quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. 
+During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now I'd like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Debra, and thanks, everyone, for joining today. This is a great quarter and a great way to end the year. We saw strong growth in engagement around the world and we are very pleased with the growth of our ad business, especially on mobile. 
+Overall 2013 was an important year for us. In 2012 was the year where we turned our core product into a mobile product, than 2013 was the year where we turned our business into a mobile business. I expect 2014 will be the year where begin to deliver new and engaging types of mobile experiences. As of the end of the year, more than 1.23 billion people now use Facebook each month. Last quarter was our first quarter were more than 50% of our ad revenue came from mobile. 
+Looking back at the year, we launched some important products and initiatives, Internet.org, Graph Search, Instagram Video and Messenger 3.0. We also made a lot of improvements to the performance and reliability of all our mobile apps. 
+One important trend from the last year is the continued growth and size and engagement of our community. In 2013, we added 172 million monthly actives and 139 million daily actives. That means that our daily engagement continues to increase. 
+In the last quarter more than 60% of our monthly actives visited Facebook daily. Given the size of our community we are very excited about this pace of growth. 
+We are also seeing people engaging more. On the average day in December, we saw more than 6 billion likes. That's up 59% from 3.8 billion likes a year ago. 
+These trends show that our strategy of improving the quality of our core experiences over the last year has paid off. And we are now in a good position to focus on our longer-term goals of connecting everyone, understanding the world, and building the knowledge economy. 
+Connecting everyone is about bringing the Internet to everyone and giving them the tools to stay connected with the people and things that matter to them. Today more than 750 million people use Facebook every day. 
+While that makes us by far the largest social network in the world we are still a small part of the world's population. Only one third of the world's population has access to the internet today, and for even many of those, their internet experience remains pretty weak. 
+Helping more people get connected is important to developing a global knowledge economy. Once people are connected, they can access tools like basic financial services, health information, and education tools to help them take care of the families and join the worldwide economy. That's why last summer we launched Internet.org, a partnership with industry leaders to make affordable internet access available to everyone in the world. 
+In 2014, we are going to focus on achieving Internet.org's mission by deepening our relationships with mobile operators around the world and working to develop new models for internet access. Our existing partnerships with operators are something we have already invested a lot in over the years and this is an area where we are really excited to build on going forward. 
+Connecting everyone also means giving people the power to share different kinds of content with different groups of people. This is something we focused on by building separate mobile apps beyond the main Facebook app, Messenger and Instagram are examples of this. 
+We launched a new version of Messenger to make the app even faster for mobile to mobile communication. Messenger was among the top most downloaded apps on iOS and Android in December and we see meaningful growth and engagement since launching. 
+The number of people using Messenger grew more than 70% in the past three months. We've seen a large increase in the number of messages sent. We have a lot more coming to Messenger in the first half of this year and I am excited to build on these early results. 
+Instagram also had a busy quarter bringing Instagram to Windows Phone, launching our first ads, and launching Instagram Direct, the new way to send private photo and video messages. We're pleased with the early reaction to all these products. With ads, the team has taken an especially careful approach working closely with a small number of brands that are already important members of the Instagram community to create a great early experience. 
+I'm also excited to report that there are now more than 500 million people using Facebook groups every month. Groups is one of our core products and it provides a private space for sharing with small groups like your family, close friends, or sports team, or for larger communities like schools or even companies. 
+One theme that should be clear from our work on product like Messenger, groups, and Instagram is that our vision for Facebook is to create a set of products that help you share any kind of content you want with any audience you want. We're not just focused on improving the experience of sharing with all of your friends at once, although that is growing quickly too. A lot of the new growth we see is coming from people -- from giving people the tools to share with different sized groups of people. 
+Now moving onto our business, last quarter I talked about our efforts to grow our business through improving the quality of our ads rather than just increasing the quantity. Our goal is to reach a point where the ads are as relevant and timely as the content your friends share with you. 
+To do this we've put a lot of effort into measuring people's sentiment around our ads and seeing how people engage with them. We do some of the broadest surveys in the world. We survey more than 35,000 people every day to see how we are doing and we use the results to drive our product development. Our approach is working. 
+In the second half of 2013, we saw an improvement in sentiment about ads on mobile, even as volume grew during that period. We also saw sentiment on desktop remain stable. Interestingly, even as the volume of newsfeed ads has grown, click through rates have also remained stable. We are very pleased with these results and they suggest our strategy of improving quality is working. 
+Our plan is to continue focusing on improving quality since we think this is the best way for us to improve the experience for people on Facebook, returns for advertisers, and our own revenue, as well as achieving our long-term goal of providing ads which are as relevant as organic content. 
+So that's my update on where we are focusing our efforts in the context of our longer-term goals. It's been a strong quarter and a great year for Facebook. 
+Next week Facebook turns 10 years old. It's been an amazing journey so far, for me personally and for all of us at the company. But what is ahead of us is even more exciting. 
+Many of the successes of the past 10 years have simply been steps on the path to achieving our long-term vision of connecting everyone and improving the world through sharing. Over the coming months and years you'll see us continue focusing on many of the same themes but now with greater scale, ambition, and resources. 
+Finally, I just want to thank everyone who works at Facebook for a great year in 2013 and over the past 10 years. What we've achieved together has been a result of all of your hard work and I'm grateful that so many talented people are a part of our team. Thank you, and now here is Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks Mark, and hi everyone. I am really excited to report earnings this quarter and proud of the teams at Facebook who delivered these results. We ended 2013 with a terrific fourth quarter, continuing the strong momentum we saw throughout the year,. Our total revenue grew 63% year-over-year, led by 76% growth in advertising revenue. 
+Approximately 53% of our ad revenue came from mobile. This is not only the first time we crossed the 50% threshold in mobile but it's also our first $1 billion mobile quarter. In fact, our Q4 mobile ad revenue of $1.25 billion was nearly as large as our total ad revenue in Q4 of last year. 
+This growth continues to be very broad-based. The combination Mark spoke about of our growth in users and engagement, the effectiveness of our ads in newsfeed work together to provide marketers with a powerful way to reach people. It's impact is evident in our results. 
+This quarter we saw healthy increases in every region around the world and positive momentum in all four marketer segments. There are three key drivers propelling our business. First and foremost is strong mobile engagement. 
+Everyday more people around the world are spending more time on their mobile devices and marketers are starting to shift their budgets to reach them. This was especially clear during the holiday season where not surprisingly Black Friday was our single biggest mobile ad revenue day during the quarter. 
+When people are shopping in stores they are on their phones and when they are on their phones they are on Facebook. A recent study by Miller Brown Digital showed that while shopping in the store people who use Facebook do so at four times the rate of any other app or search. And for those people that use Facebook as a source before shopping, over half stated that it was a very influential source of information for them while they were shopping in the store. 
+The second driver of our ads business is a continued growth in the number of marketers using Facebook. Again, this growth is broad-based and diverse across marketers, verticals, geographies. 
+I'll update you briefly on each of our four marketing segments. Demand from direct response marketers was strong in the Q4 holiday shopping period, particularly in e-commerce. These marketers focus on short-term ROI, so the growth we're seeing speaks to our ability to efficiently drive sales for them. For example, online retailer NoMoreRack used Facebook to promote its holiday deals. They hit their aggressive ROI targets and they generated $8 million in revenue on Black Friday alone. 
+We are also making remarkable progress at SMBs, a segment that many in the industry have long considered the holy grail of online advertising, and a segment that I have been particularly focused on throughout my career. In November we reported that more than 25 million SMBs maintain an active page on Facebook. We've made a big investment in simplifying our ad products over the last year and that investment is working to convert these SMBs into advertisers. Of the new SMB advertisers we acquired in Q4, 72% started with our most simple ad products. 
+For developers, mobile apps are generating very healthy revenue growth. We launched mobile app install ads just over a year go and mobile app engagement ads last quarter based on a very simple idea that we can help people find and use great apps. 
+This is working even better than we hoped. We are helping developers attract new customers and keep them engaged. We remain excited about the opportunities in the small but quickly growing category. 
+In addition, last week we announced a small test to show Facebook ads in third-party mobile apps. We won't have meaningful results for a while, but it is an interesting area for us to explore. 
+Finally, we are making steady progress with our brand marketers, particularly in verticals like CPG. We are helping them connect with customers in more dynamic ways, starting a start test of our new video ad product, and measuring our impact on their sales, which is super important to driving their business. 
+The third quarter -- the third driver for both the quarter and the full year has been our investment in product development. We're especially pleased with the improvements we've made to our targeting capabilities and measurement tools. Our goal, as Mark said, is to make our ads as useful as possible for consumers and to generate greater returns for marketers. Eventually making all of our ads as valuable to users as our organic content. 
+Custom Audiences is our most important product in this effort. When we launched it over a year ago it allowed marketers to reach their current customers on Facebook. Since then we've built more targeting capabilities while maintaining user privacy. These include look-alike targeting that lets marketers reach people who are similar to the best customers, partner categories which use third-party data to improve our targeting. 
+Now marketers can reach exactly the people they are looking for, such as people who buy fashion apparel or are in the market for a new car. We have more than doubled the number of partner categories in the US and now offer more than 1,000. And we believe there is still significant opportunity ahead as we continue to improve our targeting capabilities. 
+We are also making major investments in measurement so that we can measure the impact of our advertising on in-store sales. In December we launched off-line conversion measurements. To date our results show that the average return on ad spend for newsfeed campaigns is eight times, a result that is really impressive when compared to other returns marketers have available. 
+As Mark noted, this is the beginning of a new year and our 10th anniversary, so I want to reflect really briefly on where our advertising business and we believe the marketing industry is heading. Before mass media all business was personal. Sales happened customer by customer at the local store or door to door. The evolution of mass media made it possible to sell at scale but business was no longer personal. 
+On Facebook, marketers can do both. We are building the world first global platform that lets marketers personalize their messages at unprecedented scale. This is marketing where you are for who you are. This shift to personalization represents the biggest shift in marketing in generations and it is one that we are uniquely positioned to lead. 
+Facebook is the only place where 750 million people visit every day increasingly on mobile to discover what matters to them. As we continue to leverage our understanding of people to make marketing more personal, and do it at massive scale, we will dramatically improve the quality of ads and drive more personal discovery. Facebook is making business personal again. 
+And like Mark, I want to thank the teams that we get to work with everyday at Facebook who are doing a great job to make this happen. Now I'd like to turn it over to David. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Okay. Thanks Sheryl. Overall 2013 was a great year for Facebook. We performed well against all at our key financial priorities, growing revenue to $7.9 billion, delivering operating profit and free cash flow each of over $2.8 billion, and making investments that position the Company for continued growth. Today's results strengthen our conviction that we're in the early days of capitalizing on a significant opportunity. 
+Let's start with some user and engagement highlights. During the year the population of people using Facebook on a daily basis increased by 139 million to 757 million, and the population of people using Facebook each month grew by 172 million to 1.23 billion. In December, 62% of our monthly users used Facebook on an average day. 
+Mobile continues to drive our growth. When we began 2013, we had more daily users on desktop than mobile. By the end of the year, our daily users on mobile outnumbered desktop by around 200 million. 
+We are also pleased that engagement per user continued to increase in 2013 based on measures such as time spent per user and feedback per user. And none of these stats include Instagram, which doubled its user base over the past year. The network of people who use our products remains the foundation for everything we do and they are the most important audience we are trying to serve and delight every day. 
+Turning now to the financials, in Q4, total revenue was $2.59 billion, up 63% and ad revenue was $2.34 billion, up 76%, for our highest year-over-year growth rate since mid-2011. Exchange rates had no meaningful impact. 
+We continued to experience strong revenue growth around the world. Ad revenue in each of our four reported geographic regions grew by more than 65% in Q4 compared to last year. The key driver of ad revenue growth continued to be the strong performance of newsfeed ads on mobile and desktop, which helped us attract more advertiser demand. Mobile ad revenue increase from approximately $881 million in Q3 to approximately $1.25 billion in Q4, a healthy increase that of course benefited from seasonal effects. 
+In Q4, total ad impressions declined 8% and the average effective price per ad was up 92% compared to last year. The decline in ad impressions was primarily due to the shift in usage towards mobile devices where people are shown fewer as compared to desktop since there's no right-hand column ads on mobile. 
+The significant increase in average price per ad was driven by the mix shift to more newsfeed ads that have much higher engagement and click through rates, increasing the average effective price per ad impression. The price volume trends were pretty similar across our four geographies. 
+Total payments and other fees revenue in Q4 was $241 million, down 6% versus last year, remembering that in Q4 last year we recognized revenue from four months of payments transactions. On a more apples to apples basis, payments revenue from games, which represents the substantial majority of our payments and other fees revenue, grew approximately 8% in Q4 versus last year despite the fact that our payments revenue from games is limited to our desktop users, a population that's declining. 
+Turning now to expenses, our Q4 GAAP expenses were $1.45 billion, up 37% and non-GAAP expenses were $1.13 billion, up 33%. For the full year, our non-GAAP expenses were up 44%, driven largely by growth in infrastructure expense and a 37% increase in headcount over the year. 
+As our revenue has grown we've worked hard to stay disciplined in terms of our expense growth. Focusing on investments where we are most confident of creating value and meaningful ROI. We are pleased with the returns we achieved from many of our investments that we made in 2013, including those to advance our ad products, improve mobile product quality, increase engagement, and drive efficiency improvements in our infrastructure. 
+Our Q4 GAAP operating income was $1.13 billion representing a 44% operating margin and our non-GAAP operating income was $1.46 billion representing a 56% margin, up from 46% last year. As you know, margins are typically the strongest in the fourth quarter given the seasonal strength in our advertising's business. 
+Our GAAP and non-GAAP tax rates for Q4 were 54% and 46% respectively, and for the full year 2013 our GAAP and non-GAAP tax rates were 46% and 41%. The tax rates in Q4 were higher than the rates for prior quarters in the year primarily because of intercompany payments that occurred in Q4 related to our international operations. Also at the end of 2013, we had a tax net operating loss or NOL carry forward of almost $8 billion. 
+In Q4 GAAP net income was $523 million or $0.20 per share and non-GAAP net income was $780 million or $0.31 per share, up approximately 80% compared to last year. CapEx was $483 million in Q4 and $1.37 billion for the full year. 
+Our efficiency investments including the open compute project on the hardware side and proprietary work on the software side has enabled us to significantly increase the amount of data and the number of users we can support with each server we buy, and these investments have saved us over $1 billion over the past three years. We wouldn't be able to deliver the profit and cash flow numbers we are reporting today without the success of these efficiency investments. Our Q4 free cash flow was $748 million and our full-year free cash flow was $2.8 billion, including the benefit from a $419 million tax refund in Q2. 
+Turning to the balance sheet, we ended the year with $11.4 billion in cash and investments. This number includes $1.5 billion from our secondary offering of 27 million shares in December at the time of our inclusion in the S&P 500 index. 
+Now I want to share a few thoughts on 2014. In terms of expenses, we are planning that our total 2014 GAAP expenses, including cost of revenue and including stock comp, will likely grow in the neighborhood of 35% to 40%. And non-GAAP expenses, including cost of revenue but excluding stock comp, will likely grow in the neighborhood of 40% to 45%. 
+We plan to invest with a continued emphasis on technical headcount and product development to take advantage of the opportunities we see to create new experiences and more value for our users, marketers, and developers. 
+On taxes we expect our GAAP and non-GAAP tax rates in 2014 to be roughly similar to our full-year tax rates in 2013, although this could vary widely depending upon acquisitions, our international revenue and expense mix, and other factors. Our tax rate in 2014 and over the next several years will continue to reflect the fact that we're in the early years of investing in our international operations. Longer-term we expect our tax rate to be in line with peer companies who have similar operations and international revenue mixes. 
+We ended 2013 with $2.6 billion diluted shares outstanding including the December stock offering, and we estimate that our diluted share count will increase roughly 2% to 2.5% by the end of 2014, although this may vary depending upon our stock price and new share issuances, for example to support M&A. We anticipate our 2014 CapEx will increase to be in the range of $2 billion to $2.5 billion. The significant year-over-year growth will be driven by an expansion of our Menlo Park headquarters, infrastructure related expenses such as the build out of our Iowa data center, and by our investment plans to support initiatives like Internet.org that are designed to increase internet penetration in the developing world. We'll also continue to make strategic investments to improve capital efficiency. 
+Last, in terms of revenue, in 2014 we hope to build on our success from last year. 2013's strong growth in ad revenue was driven by the rapid ramp-up of newsfeed ads, growth in users engagement and marketers using Facebook, and by the product investments we made that improved the quality, relevance, and performance of our ads. 
+As Sheryl described, we believe we're still early in the evolution of our advertising business and the mobile ad business in general. This makes for a difficult time to forecast near-term revenues with any precision, but it also makes for an exciting time and we're looking forward to capitalizing on this opportunity. 
+To sum up, Q4 was a strong end to a great year for Facebook. Thanks for joining us on the call today. And now let's open for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    (Operator Instructions) 
+Ben Schachter, Macquarie. 
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Congratulations on a fantastic year. Sheryl, I was wondering if you could rank order the four groups of marketers and discuss sort of how SMBs play out over time versus the larger enterprise companies? And then Mark, if you could talk a bit more, expand more on what you mean by standalone mobile apps and really what your vision is there, and I understand your speaking of Mobile World Congress so any update on what we should expect from that. Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [3]
+--------------------------------------------------------------------------------
+
+    We don't break out by segment. But all four segments are growing and we are pleased with the growth there. I'm glad you asked about SMBs because it's a particular focus for us, and some where I'm really proud of our performance, our teams led by Dan Levy and others have just done a great job. 
+There are 25 million SMBs that have pages on Facebook and that's a really good first step, because it's just historically very hard to get small businesses online. What we've done over the last year is we've really worked at simplifying our ad product, and that's working because the way to convert our SMBs who are using our free product into being advertisers are with these really simple ad products. So rather than go to them and say do you want to become an advertiser, you say do you want to promote a post? And that's what's working and we are able to convert them to advertising, and then upsell them from there in large numbers and we are excited about it. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [4]
+--------------------------------------------------------------------------------
+
+    Yes. And in terms of the focus on building new and separate experiences, our theory is that there are all these different ways that people want to share and communicate. Almost any kind of content that you can imagine sharing, text, photos, videos, links, locations, events, games, anytime, a type of content with any type of audience, whether privately on a one-on-one situation or small groups, or with all of your friends or a larger community or publicly, there's an interesting intersection between most of these things. 
+And one of the things that we want to try to do over the next few years is build a handful of great new experiences that are separate from what you think of as Facebook today, that are just kind of helping to explore that place and give people new ways to share. And I you can see that that's something that people want from some of the mobile apps that exist out there today. 
+You can see it from our own offering with, not just Facebook, but also Instagram and Messenger already today. And were probably -- we're going to keep working on this over the next few years. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+    Heather Bellini, Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [6]
+--------------------------------------------------------------------------------
+
+    I have two questions. The first one, there's been a lot of talk about Messenger over the last couple of quarters. I'm just wondering if you could share with us how you see the competitive environment for Facebook in the area of messaging, in particular in regions like Asia, and how do you see Facebook differentiating itself, and maybe changing the user behavior from some of the newer companies that have aggregated a large number of users in the space? And then my second question is just for David in regards to seasonality of ad revenue, it obviously typically declines in Q1, I'm just wondering if we are at the point now where we should see seasonality of mobile ad revenue in Q1. Thanks so much. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [7]
+--------------------------------------------------------------------------------
+
+    So I can talk to Messenger, a bit. If you think about the overall space of sharing and communication, there's not just one thing that people are doing. People want to share, want to have the ability to share any kind of content with any audience. There are going to be a lot of different apps that exist, and Facebook has always had the mission of helping people share any kind of content with any audience, but historically we've done that through a single app. 
+And one of the stats that I shared today is that we now have more than 0.5 billion people using groups every month, and I think that's not something that I think a lot of people are paying attention to, because it was sort of seen as a feature of the Facebook app rather than its own product. So what we're doing with Messenger now, similarly a lot of people are using Messenger every day, but it's a feature of Facebook rather than its own network or standalone thing, and we are making it more of a standalone app. 
+We've actually, in the last quarter we've taken it out of the main app, so that way it gets room to breathe and blossom as its own great experience, and we're going to focus on making that really good and adding to it and adding a lot of new things, and some of the stats that I shared are incredibly promising. In the last few months, 70% more people are using it and a lot of message volume growth, so we are still focused on kind of general growth for Messenger rather than going country-specific at this point in its evolution. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [8]
+--------------------------------------------------------------------------------
+
+    And Heather, this is David. Thanks for your question on seasonality. Of course seasonality is an important factor in an advertising business, and affects Q4 and makes it a typically strong quarter. At this point, given how new we are with the mobile business, I think it's really difficult for us to quantify the impact of seasonality effects. I think I will take some more time before we can understand it better than we do. 
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+    Mark May, Citibank. 
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [10]
+--------------------------------------------------------------------------------
+
+    Thanks for taking my question. Just would love to get some updates on some of the efforts that you are making in terms of brand and real-time conversations. I think on the user side, we'd love to get some interest in terms of the usage and engagement with video content early on and real-time conversations, particularly around entertainment-related content. And then on the advertiser side, kind of early adoption by brand and TV-like advertisers, with some of the brand and video solutions that you have out there. 
+And then for David, given the significant transition that the business continues to go through that is affecting these ad impression and average price metrics, can you give us a sense of the breakdown between the ad impressions between desktop and mobile? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [11]
+--------------------------------------------------------------------------------
+
+    I'll start here on the public content piece and then I think Sheryl will get into some of the specifics, but I just want to put this into the context of the overall strategy here. We were just talking about some of the standalone experiences and Messenger, and public content is part of this overall spectrum of content that people want to share and consume as well. In some ways it's on the opposite -- the complete opposite side of the spectrum from one-on-one messaging, but it's also an area where I think the medium of newsfeed and Facebook works really well. 
+So we've been focused on improving the tools for public discussion, and folks to be able to share public content, including premium content from videos and making it so they can autoplay in feed. And this is an area where just like messaging and some of the other things that we've talked about, and you should expect us to keep focusing on a lot, it's part of the overall space of sharing that we think is quite valuable. I think Sheryl is going to get into some specifics. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [12]
+--------------------------------------------------------------------------------
+
+    Yes. I can start with video, and then go over to the overall brand question you started with. We have a video ads product, it works very well, it's part of what's driving our growth. 
+We also have recently started testing an auto play video ad test, it's a very small test. But overall, we are seeing what Mark has talked about, which is that marketers and users are using video more as they have the technology to do so, and we expect that to continue to grow. 
+In our overall brand effort we're making really good and steady progress as we are with all of our market segments. All of the AdAge Global 100 advertised with us over the past year, and the real key there is proving measurement to our clients. Our team led by Carolyn Iverson, and her people all around the world, really have to go client by client and show them that we can not just increase people's happiness or brand affiliation, but ring the cash register at the end of the door. 
+I think this is part of the big story for us in 2013, which is if you look back a year, we did not have that ability to look at the AB testers who saw our ads, and what the difference in sales is, and now we have that. And we still have a lot of hard work to do client by client ahead of us, but being able to prove that we have really strong ROI, and I think increasingly efficient ROI compared to the other marketing opportunities they have, is what is going to move the brand marketers to Facebook and to mobile. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [13]
+--------------------------------------------------------------------------------
+
+    Mark, yes, your second question about mobile and desktop impressions. As you know, per user, or per unit of time on the desktop, we show a higher number of ads because there's the right-hand column as in addition to newsfeed. But we are extremely pleased with how well the newsfeed ads continue to perform, and that's really what's driving up the average price per ad as I described. So these ads perform well from [others], are still continuing to contribute to the positive user experience that Mark described earlier. 
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+    Anthony DiClemente, Nomura. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities - Analyst    [15]
+--------------------------------------------------------------------------------
+
+    First for David, I wonder if you can comment on the ad load on Facebook. Do you expect it to continue to remain stable or is there a possibility that the ad load creeps up over time? And on Instagram, I know it's a new product, and you guys are taking it slowly at first, but I wondered if you could also talk about how long it might take for Instagram to get to a similar ad load to Facebook levels? 
+And then one last question for Sheryl, I wonder Sheryl, is there a way when you compare Facebook to television for brand marketers, to look at the disparity of ROI, or I should say the improved ROI for Facebook, and sort of extrapolate where you think pricing could go, obviously pricing doubling quite a bit? How much more upside to Facebook newsfeed pricing can we expect to see based on the ROI differential? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [16]
+--------------------------------------------------------------------------------
+
+    I just want to start off here, and then David can get into some of the details on the number of ads and all that. But the strategy has been for the last period, and will continue to be, to primarily focus on increasing the quality of the ads and the experience. And I really think that -- it's easy to look at the model and say okay, well if we ran more ads then the business would grow faster in the short term. 
+But investing in quality is really actually the most important thing because it's what improves the experience for the people who use the products. It drives greater returns for advertisers, and over time it increases the potential size of our business. I think you could say that's a harder path for us to take, but I actually think that the results over the last couple of quarters have really shown that by focusing on improving quality instead of just increasing quantity, we can actually drive pretty incredible business results. So we think that there is more to do here, and that is what we are going to keep on doing. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [17]
+--------------------------------------------------------------------------------
+
+    And I think I can take most of the rest of this. So in terms of ad load, the one piece of context maybe to start with is that the variable we are really focused on optimizing is not ad load per se but it's the user experience, as you can measure that based on engagement or user feedback, et cetera. And ad load is one of the variables that impacts that, but there is relevant variables as well, such as the positioning of the ads, the size of the ads, and of course, critically, the quality of the ads, so ad load only gives a part of the picture. And we are really one or two years into this and we're still learning how to provide the best experience. 
+I think one of the most important pieces of positive news from 2013 was as we ramped up newsfeed ads, they performed as well as they did delivering great value for marketers, having a very minimal effect on the user experience, and enabling Facebook to deliver the kind of results that we reported today. So going forward we'll continue to tweak what we do in terms of trying to find the right balance and optimize the performance of the ads for marketers and for users, but generally, as Mark said, the most important place for us to invest is going to be in improving the quality and relevance of the ads. 
+You asked about Instagram and pricing, so let me just cover those quickly. Instagram, I would just say we're just really early with Instagram, so it's too early to talk about where we are going to be going. We're still trying to learn what the right way to approach that product is, and we're going to move slowly, because we think that's the right thing to do for Instagram. 
+In terms of pricing, it was our expectation that if ads in newsfeed worked well, that they would deliver more value for marketers, be more engaging, and that they would contribute to the average price per ad on Facebook going up. And we also believe looking forward, if we continue to improve the quality and relevance of the ads we show, that that's a critical way that we can drive pricing up in the future. 
+
+--------------------------------------------------------------------------------
+Operator    [18]
+--------------------------------------------------------------------------------
+
+    Douglas Anmuth, JPMorgan. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [19]
+--------------------------------------------------------------------------------
+
+    I just wanted to ask two things. First, you announced an initiative, or perhaps an algorithm tweak I think in early December to have more news stories in users' feeds, and I was just curious what the adoption has been thus far from users there, and what are the implications on usage and engagement, and then also ad load? And then secondly, can you give us an update on teen engagement trends? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [20]
+--------------------------------------------------------------------------------
+
+    Sure. So to start with the public content, the change that we made is basically -- a lot of what our algorithm looks at is straight engagement, so the amount of content that people click, like, comment, and share, in feed. But what we found were that when we asked people qualitatively what they preferred getting, it did not often match up, because a lot of things like memes scored very high in terms of getting a lot of people to like them, but were not necessarily when you asked people what they wanted to see in feed or what they were happy seeing, didn't score that way. 
+So we ended up doing an adjustment to the algorithm which made it so that qualitatively things, and especially public content and news that people rated as higher quality, qualitatively scored more, and that was basically the adjustment to the algorithm. It had really no impact on ads, it was an organic content adjustment that we made to improve the quality of the experience. So I think David can talk about teens. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [21]
+--------------------------------------------------------------------------------
+
+    Sure Doug. In terms of teens, don't have any new data to report today. As you know we take engagement very seriously, and we are focused on building great products that all our users, including teens, will find useful and engaging, and that's the most important thing for us to stay focused on. 
+
+--------------------------------------------------------------------------------
+Operator    [22]
+--------------------------------------------------------------------------------
+
+    Scott Devitt, Morgan Stanley. 
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [23]
+--------------------------------------------------------------------------------
+
+    I had a couple product questions for Mark. The first one on Graph Search, just wondering how users are engaging with the product, how developed the product is in terms of the way, what we can see today relative to what your longer-term aspirations are for the product? 
+And just to follow-up on Doug's question, related to the news flow integration into newsfeed. Another feature that's been added more recently is trending, and attaching trending to news articles and newsfeed as well. So if you could talk more broadly about your interest in real time information and news as it relates to public content, that would be helpful. Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [24]
+--------------------------------------------------------------------------------
+
+    Graph Search. Starting with Graph Search, we are really early in the game on this. And I think you can see that, because we haven't even really rolled out our mobile version of Graph Search yet and we are a mobile company. We started on desktop, and the way that we are thinking about this is, there is just so much content that people have shared on Facebook that simply building the infrastructure to index all of it and start ranking it is a multi-year effort, which we are making our way through. 
+So the first release indexed more than 1 trillion connections between all the people and interests, and events and groups and things that everyone was connected to. The second release that we did recently was around all the updates. There are more than 1 trillion status updates and unstructured text posts and photos and pieces of content that people have shared over the past 10 years, and indexing that was a really big deal, because as the number of people on the team who have worked on web search engines in the past have told me, 1 trillion pieces of content is more than the index in any web search engine. 
+So we're kind of making our way through this. Pretty soon I think you should expect us to roll out the mobile version of this. I think that's going to be an important step because most of the usage and of Facebook overall is on mobile, so we expect that's where engagement will really start to come from on Graph Search over time. 
+But it's also only in English so far and we have to internationalize it, and there's a long road map of things that we need to do that I think is pretty clear, but it's just going to be incredibly useful when it's ready. So we look at this as an investment over a three to five-year period rather than a one to two or shorter kind of period. So that's how I think about that. 
+The other question was about trending topics, and that really ties into the public content push that we have, and we talked a bit about this before. But in terms of -- we're trying to build great experiences for all types of content that people want to share and consume with all audiences. 
+We think public content is great. Folks who are making news or making -- premium content on TV or movies or celebrities and different types of folks are extremely interesting, and produce great content. We want to be a great place for people to share the content, or for people to be able to learn about it and consume it, so trending topics is one step in what you will see is a pretty long road map of things that we're going to do to make Facebook great for public content. 
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+    Eric Sheridan, UBS. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [26]
+--------------------------------------------------------------------------------
+
+    First of all for Sheryl, I would like to get an update on how the company is thinking about mobile retargeting ads, you've seen a lot of success with retargeting on desktop, but how you can think about the evolution of retargeting in the mobile environment as a future product. And then second question for Mark, not a lot of talk on the payments business so far on the call, and just want to understand maybe an update around games or other areas of e-commerce that you think are opportunities for the payments business. Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [27]
+--------------------------------------------------------------------------------
+
+    On retargeting, retargeting has been proven really valuable across all platforms. We've allowed it through FBX, and increasingly we are allowing it through our own products as well as part of our custom audiences suite of offerings. We are offering website custom audiences and mobile app custom audiences and allow -- and these all allow marketers to target ads in privacy safe ways that improve the relevance and improve results. I think when people think about targeting, what they are really thinking about is relevance, and taking the data and using it in a privacy-safe way to increase the relevance of ads to users, and that's something we're working on. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [28]
+--------------------------------------------------------------------------------
+
+    Yes, for payments -- I actually -- we don't think about our business so much as an advertising or a payments business, as much as a way for people to reach -- we build this network, and we help businesses reach people with relevant messages. And payments historically has been a great way for game developers, especially on desktop to -- an efficient way for us to monetize that business because instead of charging them up front for most of the ads, we can charge them only when their business grows because someone is paying for something. On mobile I think the natural evolution of this is for that to move towards app install ads, where we are not running the payment system on mobile, the operating systems are integrated with that. 
+But because a lot of the goods that people are buying in games are no marginal cost, a developer's economic incentive is to advertise to the point where, or to get more people to come into their flow to the point where -- for as many people as they can get to the buy the goods. So even though a game developer might be paying 30% to the operating system maker for payment, we're finding that people also really want to buy a lot of app install ads, and that has grown incredibly quickly and is one of the best parts of the ad work that we did over the last year. 
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+    John Blackledge, Cowen and Company. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [30]
+--------------------------------------------------------------------------------
+
+    Two questions. First, Mark, you referenced 2014 as a year of rolling out new, engaging mobile products. Maybe could you provide some color or highlight the types of products that users can expect, or maybe how you think about improving mobile engagement? And then just on Instagram, could you give us an update on the number of monthly active users ending 2013, and give us a sense of how the beta testing is going with advertisers and when it might be available for all advertisers? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [31]
+--------------------------------------------------------------------------------
+
+    Sure. Before I get into some of the newer types of things, which we've actually touched on most of them already on the call, I also want to take a moment just to emphasize that we are going to start building new experiences, but they're going to start small compared to where the core of Facebook is, right? So most of the results that we are going to see in terms of increasing engagement and sharing in our business are going to come from that core Facebook experience, because mathematically it's just so much bigger than everything else that is out there that the numbers -- these have to be multi-year investments to add up to that. 
+You can look at, for example, comScore puts out these numbers every month or so that reference the amount of time that people spend in different mobile apps, and Facebook I think is almost 10 times bigger, 5 to 10 times bigger than the next app that is out there. So it's going to take a while for any of these things to turn into huge things, but that's -- so some of the things that we are thinking about are all of the different kinds of ways that people might want to share different kinds of content with different audiences. 
+So I mean I talked about groups earlier on the call, that's something that 0.5 billion people are using, it's currently a feature within the Facebook app. Giving experiences like that room to breathe and really develop to be their own brand I think is a huge and valuable thing. It's not necessarily the next thing that we're going to go do, but it's kind of an example of the type of audience and type of content that people might want to share. 
+Examples of things that we have done are Messenger, is a really big focus for us and we are focusing on that as a standalone experience. Instagram is a different kind of community than Facebook. We just launched Instagram Direct within Instagram, which is one-on-one or small group photo and video sharing, and you can kind of view that as the kind of experience that we're going to be rolling out, but there's a lot of space here for a lot of different kinds of things. 
+And what I think you should take away from this is that while the core business growth is going to come from the main app that exists, just because the numbers are so much bigger than everything else today that's just going to be where most of the momentum comes from, you should also expect us to start building a few of these other things that we'll focus on over a long period of time and hopefully build into meaningful things like Messenger and Instagram are today. 
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+    Brian Pitz, Jefferies. 
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [33]
+--------------------------------------------------------------------------------
+
+    Mark, last week on the Facebook developers blog there was an entry that noted you were testing placement of ads in third-party mobile apps. Just wondering if you could provide an update on how these tests may be going? And then separately, it appears that the growth on desktop ads reaccelerated during the quarter. Can you talk a bit about the drivers of that here? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [34]
+--------------------------------------------------------------------------------
+
+    On the Facebook ads in third-party mobile apps, it's a small test we just started that aims to show Facebook ads off of Facebook for mobile apps, so we don't have results yet. We are very excited about the mobile apps space in general. If you look at our mobile app installation ad, we've really done a great job working with developers to help users discover and download their apps. 
+,And the product we rolled out last quarter, which is the engagement ads, then help developers get people engaged or reengaged in their apps. And so it's a small, important and growing space and we feel really good about the progress we've made with those ads on Facebook. When you look at off Facebook, really early test. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [35]
+--------------------------------------------------------------------------------
+
+    This is David, in terms of desktop, I'd say the two trends that really benefited desktop in the fourth quarter were similar to what we described earlier. One was just the holiday strength that we saw the business, and the second was the strong performance of newsfeed ads, which we show on both mobile and desktop, so that worked well for us in the fourth quarter. Just recognizing still that the user numbers on desktop continue to sort of decline modestly overall, and that's obviously an important headwind for the revenue from that part of the business. 
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+    Ross Sandler, Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [37]
+--------------------------------------------------------------------------------
+
+    Mark, I had a follow from one of the previous questions on closing the loop in mobile. You guys have made a lot of progress improving the total mobile ad experience, yet there is still a lot of friction in downloading apps and making purchases today. You guys have recently rolled out some new ad formats, and you have some partnerships with the likes of Braintree and Stripe, and some of the other payment guys. 
+So what's your vision for removing some of this friction for marketers, and do you envision a scenario where users can buy physical or digital products within the Facebook mobile apps? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [38]
+--------------------------------------------------------------------------------
+
+    I can take this. Obviously the mobile app world is a new world and not just the functionality in ads are still developing, but the functionality of what then people can do. You can do a lot more on the desktop in many ways than you can on mobile. 
+I think the best role we play is to help connect consumers with marketers, and with companies and services, and I think reducing the friction there is really important. We don't have any plans to go into the direct e-commerce market, because the advertising products we provide I think are the best thing we can provide to help grow this market. 
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+    Tom Forte, Telsey Advisory Group. 
+
+--------------------------------------------------------------------------------
+Tom  Forte,  Telsey Advisory Group - Analyst    [40]
+--------------------------------------------------------------------------------
+
+    Congrats on a great quarter. On contextual advertising, this is essentially the holy grail for Facebook, and I think you understand this. Can you talk about where we are as far as innings are getting contextual ads, and can you talk about the role that Instagram plays with visually appealing ads, and the role that video plays? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [41]
+--------------------------------------------------------------------------------
+
+    As I said and I've talked about each quarter targeting is a huge issue for us, and a huge opportunity and challenge. Our goal is in a privacy-safe way to get information we can about what consumers want and then help connect marketers, so that the ad experience is great for users, we're serving relevant ads. Whether that information comes from the kind of things people like on Facebook or other websites they visit, or contextual statements they might make in their status updates, our goal is to use that information in a privacy-safe way to improve the targeting of the ads on Facebook. 
+To take one example, if you look at what's happening with our direct response business, which has been a very strong segment for us, if you look at people trying to find consumers, we offer the opportunity to get people before they search. We can judge interest based on other things, other things they are interested in, and give people the opportunity to find consumers before they search, so that they can then move them all the way down the funnel into purchase. 
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+
+    Jordan Rohan, Stifel. 
+
+--------------------------------------------------------------------------------
+Jordan Rohan,  Stifel Nicolaus - Analyst    [43]
+--------------------------------------------------------------------------------
+
+    I'm curious if you could help me understand the international market development and monetization for Facebook's ad platform? Specifically can you speak to the build out of the international direct sales force, the channel partners, the number of international markets in which FBX is operational, and the extent of geographic rollout of the cost per install ad units in the newsfeed? Is that available everywhere? Where are we compared to the US? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [44]
+--------------------------------------------------------------------------------
+
+    The build out globally is going well. We've always been pretty conservative. We wait until we have a very strong user base in other countries, and we wait until there's a developed ad market, but we're growing. We have a PMD ecosystem which now covers 45 countries. 
+I was actually in Turkey at the beginning of last week, and had a chance to meet with our advertising partners there, and they are increasingly using our platform to reach consumers. We are growing our offices, we are growing our offices in Asia particularly this year, and we've rolled out offices across Europe as well. In terms of rolling out products, we tend to roll out products in our most developed markets first, and as we extend those products, we then extend them to the rest of the world. 
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+    Colin Sebastian, Robert Baird and Company. 
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Co. - Analyst    [46]
+--------------------------------------------------------------------------------
+
+    I just had a couple of questions. The first one on app install ads, if you could quantify how much those are driving growth in newsfeed advertising, and if not specifically, maybe on a relative basis to other mobile ad formats. And then second, Mark, the company has made some interesting hires in the area of machine learning, and I'm curious if you would characterize how important this initiative is for the Company, and how you think that AI will help Facebook over time? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [47]
+--------------------------------------------------------------------------------
+
+    On the first, we are excited about our mobile app install ads and our mobile app engagement ads. It's a small but growing category. We don't split out by segment. 
+But one thing that's really important to note is that our mobile ad strength is very broad-based. Our mobile ads are not just bought by people who are looking to drive engagement or usage of mobile apps, but is very broad-based. We're being used by SMBs, brand advertisers, and direct response advertisers as well. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [48]
+--------------------------------------------------------------------------------
+
+    Yes, and I can speak to some of the deep learning work. In the last quarter, Yann LeCun, one of the, really, the earliest folks, and one of the founders of deep learning and a professor at NYU, joined us to lead our AI Group. And this is a long-term research group that we have that -- it's going to fit into our strategy over a longer -- maybe a 5 or 10-year period. 
+And their goal is really just to try to understand how everything on Facebook is connected, right, by understanding what the posts that people write mean, and the content that is in the photos and videos that people are sharing, and help people with tasks. Like if you're sharing a voice clip in Messenger, being able to transcribe that for people so that they can receive it more easily. 
+So these are some pretty big tasks in AI that are things that we have teams that are working on that will need to be researched over time and will have obvious implications for the products that we do. But over time the real value will be if we can understand the meaning of all of the content that people are sharing; then we can just provide much more relevant experiences for people across everything that we do. 
+So I think you can kind of think about this, internally we talk about our strategy and if there's a 3-year strategy, a 5-year strategy, and a 10-year strategy, and the 3-year plan is really all about building new kinds of expenses for sharing like so many of the questions on this call have been about. The 5-year approach is really mostly about helping people use their network to answer interesting questions or solve problems that they have. And that's where all the Graph Search work, and the open graph work, and some of the early parts of the AI work that we're doing you're going to start to see over that period of time. 
+And then over a 10-year period I think you'll really start to see a lot of the impact of some of the Internet.org work that we're doing where, hopefully, we'll see some impact a lot sooner than that as well. But over a 10-year period, if we can get a lot more of the world on the internet, that's going to really mean a quite different world in terms of what folks in a lot of developing countries have access to, in terms of some of the things I've said in my opening remarks around basic financial services, and people can get credit to start businesses and buy homes, really life changing stuff, or get access to health information, or education materials, which I think are just a really big deal. And over the long-term we've always wanted to help out with that, and I think that's where we are going to go on that. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director, IR    [49]
+--------------------------------------------------------------------------------
+
+    Operator, we have time for one last call -- one last question. 
+
+--------------------------------------------------------------------------------
+Operator    [50]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney, RBC. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [51]
+--------------------------------------------------------------------------------
+
+    David, could you just talk about the sustainability of the gross margins that you had in the quarter, seemed pretty high? And then Mark, I know this question, hopefully this isn't redundant, when you think about the potential for ad quality at Facebook over the next three to five years, and you've gone through a lot of learnings over the last many years, or I guess two years on ads quality, how do you think about what the upside is? 
+I know that is a broad general question, but you think about all the different drivers, have there been certain moments when you've seen real gap opportunities? Are there any proxies out there that you see that you say well this is where Facebook could be, any thoughts on how much higher, how much better over the years ad quality could be on Facebook? Thank you. 
+
+--------------------------------------------------------------------------------
+David Ebersman,  Facebook, Inc. - CFO    [52]
+--------------------------------------------------------------------------------
+
+    So Mark, I'll start with the question on gross margins. I think in Q4, as you know, gross margins tend to be seasonally strong because revenue goes up in the fourth quarter, and the costs associated with operating our infrastructure don't go up accordingly with the seasonal strength in advertising revenue. So directionally, I think it's important to note we really had a great year in 2013 in terms of the efficiency investments that we made, but going forward, this is a compute-heavy service that we provide. It requires a lot of data centers and servers and infrastructure, we're going to continue to invest in those things, and we do expect to increase our infrastructure costs over time while trying to do that as efficiently as possible. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [53]
+--------------------------------------------------------------------------------
+
+    And in terms of quality, I just think that there is a lot of room to grow here. I said in my opening remarks that we have this long-term goal of making the advertising quality or content as good, and as relevant and timely, as the content that your friends are sharing with you. And at first blush, I think that seems kind of crazy, and that your friends' stuff will obviously always have the advantage of being immediately socially relevant to you, but at the same time, a lot of the folks who are advertising really invest in the quality of the content that they're producing and putting into their ads, and improving the targeting of their ads to deliver the right messages to the right people. And I don't think that there's a single step function that we're going to see here, although there are things like the video formats that really enable new kinds of rich experiences that folks who invest in building those can really benefit from. 
+But at the same time, I think a lot of this is going to be incremental. So as we make improvements, more advertisers come into the system, and as more advertisers come into the system, we have more options of relevant content to show to people, and that improves the quality as well. So this is just going to be something that we are going to focus on for a while, and there's a long way to go before we get to the quality level that we want, but I think over a multi-year period we can get there or at least very close. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [54]
+--------------------------------------------------------------------------------
+
+    And it's a nice way to end the call because one of the really big opportunities we have is to make these ads at scale more personal. So just as we can have social context obviously from the user content, we put social context into ads. So we can take these ads that marketers can deliver at scale, improve the targeting, and give them social context, which will help drive the kind of opportunities Mark is talking about to make the ads as relevant as the user content. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director, IR    [55]
+--------------------------------------------------------------------------------
+
+    Thank you for joining us today. We appreciate your time, and we look forward to speaking to you again next quarter. 
+
+--------------------------------------------------------------------------------
+Operator    [56]
+--------------------------------------------------------------------------------
+
+    This concludes today's conference call. You may now disconnect. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2014-Jan-30-AMZN.OQ-141027717464-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2013 Amazon.com Inc Earnings Conference Call
+01/30/2014 02:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Tom Szkutak
+   Amazon.com Inc - CFO
+ * Dave Fildes
+   Amazon.com Inc - Senior Manager, IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Robert Coolbrith
+   CRT Capital - Analyst
+ * Tom Forte
+   Telsey Advisory Group - Analyst
+ * Scott Devitt
+   Morgan Stanley - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Greg Melich
+   ISI Group - Analyst
+ * Chad Bartley
+   Pacific Crest Securities - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * Douglas Anmuth
+   JP Morgan - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Gene Munster
+   Piper Jaffray & Co. - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Ronald Josey
+   JMP Securities - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Susquehanna Financial Group - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Mark May
+   Citi - Analyst
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Thank you for standing by. Well, good day, ladies and gentlemen, and welcome to the Amazon.com Q4 2013 financial results teleconference.
+(Operator Instructions)
+Today's conference is also being recorded.
+Now for opening remarks, I will turn the call over to the Senior Manager of Investor Relations, Dave Fildes. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Dave Fildes,  Amazon.com Inc - Senior Manager, IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q4 2013 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, January 30, 2014 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 2012.
+Now I will turn the call over to Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Dave.
+I will begin with comments on our fourth quarter financial results. Trailing 12-month operating cash flow increased 31% to $5.47 billion. Trailing 12-month free cash flow increased to $2.03 billion. Trailing 12-month capital expenditures were $3.44 billion. The increase in capital expenditures reflects additional investments in support of continued business growth, consisting of additional capacity to support our fulfillment operations, and investments in technology infrastructure, including Amazon Web Services.
+Return on invested capital was 13%, up from 4%. 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 476 million shares, compared with 470 million shares one year ago.
+Worldwide revenue grew 20% to $25.59 billion, or 22% excluding the $258 million unfavorable impact from the year-over-year changes in foreign exchange. Media revenue increased to $7.23 billion, up 11% or 13% excluding foreign exchange. EGM revenue increased to $17.13 billion, up 23% or 24% excluding foreign exchange.
+Worldwide EGM increased to 67% of worldwide sales, up from 65%. Worldwide paid unit growth was 25%. Active customer accounts exceeded 237 million. Worldwide active seller accounts were more than 2 million. Seller units represented 39% of paid units.
+Now I will discuss operating expenses excluding stock-based compensation. Cost of sales was $18.81 billion, or 73.5% of revenue compared with 75.9%. Fulfillment, Marketing, Technology and Content and G&A combined were $5.9 billion or 23.1% of sales, up approximately 210 basis points year-over-year. Fulfillment was $2.84 billion or 11.1% of revenue, compared with 10.3%. Tech and Content was $1.69 billion, or 6.6% of revenue, compared with 5.7%. Marketing was $1.11 billion or 4.3% of revenue, compared with 3.9%.
+Now I will talk about our segment results, and consistent with prior periods we do not allocate the segments or stock-based compensation, or other operating expense line item. In the North America segment revenue grew 26% to $15.33 billion. Media revenue grew 21% to $3.51 billion. EGM revenue grew 25% to $10.65 billion, representing 69% of North America revenues, down from 70%. Other revenue grew 52% to $1.17 billion.
+North America segment operating income increased 19% to $725 million, a 4.7% operating margin. In the International segment, revenue grew 13% to $10.26 billion. Adjusting for the $244 million year-over-year unfavorable foreign exchange impact, revenue growth was 15%. Media revenue grew 3% to $3.71 billion, or 6% excluding foreign exchange, and EGM revenues grew 19% to $6.48 billion, or 21% excluding foreign exchange. EGM now represents 63% of International revenues, up from 60%.
+International segment operating income increased 116% to $151 million, a 1.5% operating margin. Excluding the unfavorable impact from foreign exchange, International segment operating income increased 119%.
+CSOI increased 29% to $876 million or 3.4% of revenue, up approximately 20 basis points year-over-year. Excluding the unfavorable impact of foreign exchange, CSOI increased 28%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income increased 26% to $510 million, or 2% of net sales. Our income tax expense was $179 million, resulting in a 40% tax rate for the quarter, and a 32% rate for the full-year of 2013. GAAP net income was $239 million, or $0.51 per diluted share, compared with $97 million and $0.21 per diluted share.
+Now I will discuss our full year results. Revenue grew 22% to $74.45 billion, or 24% excluding the impact of foreign exchange. North America revenue grew 28% to $44.52 billion, and International revenue grew 14% to $29.94 billion, or 19% growth excluding year-over-year changes in foreign exchange. Consolidated segment operating income, or CSOI, increased 20% to $1.99 billion, or 21% excluding the unfavorable year-over-year impact from foreign exchange, and the operating margin was 2.7%, consistent with the prior year. GAAP operating income increased 10% to $745 million or 1% of net sales.
+Turning to the balance sheet, cash and marketable securities increased $1 billion year-over-year to $12.45 billion. Inventory increased 23% to $7.41 billion, and inventory turns were 8.9, down from 9.3 turns a year ago, as we expanded selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 14% to $15.13 billion. Accounts payable days decreased to 74, from 76 in the prior year.
+I will conclude my portion of today's call with guidance. Incorporated into our guidance, are the order trends that we have seen to date, and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable, and may be materially affected many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy, and consumer spending. It is not possible to accurately predict demand, and therefore our actual results could differ materially from our guidance.
+As we have described in more detail in our public filings, issues such as settling intracompany balances, and foreign currencies amongst those subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rates can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructuring, or legal settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they been recently.
+For Q1 2014, we expect net sales of between $18.2 billion and $19.9 billion, or growth of between 13% and 24%. This guidance anticipates approximately 30 basis points of unfavorable impact from foreign exchange rates. GAAP operating income or loss to be between a $200 million loss and $200 million income, compared with $181 million income in the first quarter of 2013. This includes approximately $350 million for stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income which excludes stock-based compensation and other operating expense to be between $150 million and $550 million, compared with $441 million in the first quarter of 2013.
+We launched Prime in the US nine years ago, with free, unlimited two-day shipping on 1 million items, and an annual membership price of $79. Today Prime selection has grown to over 19 million items. Even as fuel and transportation costs have increased, the $79 price has remained the same. We know that customers love Prime, as their usage of the shipping benefit has increased dramatically since launch. On a per customer basis, Prime members are ordering more items, across more categories, with free two-day shipping than ever before.
+With the increased cost of fuel and transportation, as well as the increased usage among Prime members, we are considering increasing the price of Prime between $20 to $40 in the US. We remain heads down focused on driving a better customer experience through price, selection, and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.
+Thanks. And with that, Dave let's move to questions.
+
+--------------------------------------------------------------------------------
+Dave Fildes,  Amazon.com Inc - Senior Manager, IR    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+    Absolutely, Mr. Fildes.
+(Operator Instructions)
+Our first question will come from Mark May with Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citi - Analyst    [2]
+--------------------------------------------------------------------------------
+
+    Thanks for taking my questions. The unit growth in the quarter, I believe, was around 25%, which was a deceleration, notable versus the last couple of quarters, I believe the comp even got a little easier. Any -- can you give, provide any color as to the dynamics in the quarter that may have drove that?
+And then, try to get a sense of how to think about the magnitude of the Prime price increase? Maybe if you could give us a sense of the base of subscribers that that would be applied to? And then lastly, on shipping demand, is there anything that Amazon will do differently next holiday season to try to smooth out the pace of demand late in the holiday shopping season?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [3]
+--------------------------------------------------------------------------------
+
+    First, the unit growth, you are right. It was 25% year-over-year, it is a deceleration, a small deceleration from the last couple quarters. Keep in mind, that it is our -- certainly, our biggest quarter, the most seasonal. And so, both from a revenue and from a unit standpoint, you saw a deceleration from Q3 to Q4 of 2012 also. And so, we saw a deceleration, not of the same magnitude we saw back in 2012, from Q3 to Q4. But if you take a look at the total growth, it is 25% on a unit basis, 22% ex exchange on a revenue basis.
+We saw very good growth in North America, up 26%. This is again, on a revenue basis. It is down sequentially a little bit in the last couple quarters, but certainly up from Q4 last year where we grew 23%. In the International, the revenue was up about 15% ex exchange. If you look at the pieces, certainly one of the biggest things you are seeing is -- if you look at the Media growth, and our digital categories within Media and International it is growing very fast.
+But as we have been talking about for quite some time, certainly a shift going from physical to digital. You see that reflected in our North America Media growth rates. The reason why you don't see it as much in our International is because we are at the very early stages of that. So that is what you are seeing, in terms of the differential up, certainly one of the key differentials between the International Media growth rate, and the North America growth rate. Also keep in mind, in other revenue, the AWS revenue which is growing very fast, is recorded in the North America segment.
+In terms of the Prime -- in terms of impact, I am sorry, I can't help you with the impact on the US. What we have said is, globally, we have tens of millions of customers, and we certainly have been offering Prime in the US longer than International. And both segments are growing very fast from a Prime perspective, if that is helpful. And then, from a customer standpoint during Q4, we worked very hard on behalf of customers to make sure that we can service them. I think the team did a very nice job. We will continue to work on that to get even better in future quarters, and in future Q4's going forward.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+    Our next question will come from Neil Doshi with CRT Capital.
+
+--------------------------------------------------------------------------------
+Robert Coolbrith,  CRT Capital - Analyst    [5]
+--------------------------------------------------------------------------------
+
+    Good afternoon. This is actually Robert on the call for Neil. A couple questions. If you could maybe talk a little bit about the impact of refunds or incentives given to customers to make up for some of the goods that arrived late in the holiday season? Also on Prime, with respect to the increase, would you consider phasing that in, applying to perhaps just the new members at first? And also, would you consider giving an installment option to maybe soften the blow? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [6]
+--------------------------------------------------------------------------------
+
+    Yes in terms of the refunds, we did give some in the form of gift certificates, as well as refunding some shipping fees where fees were incurred by customers -- for that subset of customers who were impacted. So that is reflected in the Q4 results that you see today.
+And in terms of details of how we would roll out the Prime price increase that we are considering, you will have to wait on that. But certainly, it is, as I have mentioned it is something that we haven't had any increase in the nine years. Customers certainly love Prime. The available units for shipment have grown dramatically from 1 million to over 19 million. Over the last nine years, we haven't had any price increase.
+Customer usage on a per customer basis has gone up pretty dramatically, given the selection and the convenience of the service. So that is why we are considering -- of course, during this nine year period, shipping costs have gone up a lot. Fuel costs have gone up a lot. So that is certainly the basis for us taking a look at it. But in terms of the details, we will be back when we make those decisions back to customers.
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+    Moving on to Douglas Anmuth with JP Morgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JP Morgan - Analyst    [8]
+--------------------------------------------------------------------------------
+
+    Great, thanks for taking the question. Just want to follow-up on Prime as well, and was hoping, Tom, that you could give us some color on how newer Prime members -- you have obviously added a lot of them over the recent quarters, but how newer cohorts of Prime members act relative to older cohorts? And in particular, if they convert sort of as quickly, and if they are spending on a similar kind of early trajectory as your more tenured Prime members? And then also, can you just comment on the -- I believe the constrained sign-ups in 4Q on Prime? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [9]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of details, I can't really give you a lot of color on the more recent versus the Prime members who have been with us for a long time, except to say that there is a lot of similarities, in terms of what we are seeing. So in other words, customers, when we launched Prime nine years ago, one of the things that we hoped for, was customers would do a lot more cross-shopping, that they would buy more from us. And we are seeing that trend also in more recent Prime additions again. So we are -- the program is growing very fast. We are very, very pleased with it, and we think it is great for the business as we look forward as well. In terms of -- what was the second part of the question again?
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JP Morgan - Analyst    [10]
+--------------------------------------------------------------------------------
+
+    4Q, I think you talked about sign-ups being constrained in the quarter?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [11]
+--------------------------------------------------------------------------------
+
+    Yes, it -- again, we had very fast growth. We put a couple statistics out in our holiday, our release on the 26th, that you can refer to. But we had very strong growth, and we -- it did constrain it a bit, and customers like it. And again, there is a lot of demand for the service, and we are going to continue to make sure that we can satisfy customers there. And we thought it was appropriate to do so, to do that during Q4.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JP Morgan - Analyst    [12]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+    We will move on to Scott Devitt with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [14]
+--------------------------------------------------------------------------------
+
+    Hi, Tom. A couple questions starting with -- I will continue the trend with Prime questions first. You mentioned higher shipping costs being a driver of potentially higher prices in the US. The US Prime service is also the only one that has Kindle Lending Library and video, and was just wondering if potentially those additional services have led you to think about increasing price as well, to potentially further bolster either or both?
+And then secondly, International CSOI has been on a glide path lower over the last few years. And as has that happened, the organic International growth rate has moderated during the same period. And I am just wondering, going back to the decision to embark on the International investment cycle, if you anticipated the current revenue growth rate that you are experiencing? And if not, where are the areas in the business where you could point to, that we would begin to see growth that is not yet evident in International business? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [15]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of the first part, we have added a lot of new services to Prime, beyond our -- the shipping benefits. You mentioned Kindle Owners' Lending Library, certainly video, Prime Instant Video, we are investing very heavily, and so those are certainly costly. Those aren't the reasons for the price increase that we are contemplating. Those are -- that decision again is just based on, we haven't done a price increase in nine years. Shipping costs have gone up, if you look back very considerably over the nine-year period. Customers like the service. They are using it a lot more. We have a lot more selection. They are using it a lot more. And so, that is the reason why we are looking at the increase.
+In terms of International growth -- we -- the growth was solid, with revenue ex exchange at 15%. The unit growth was considerably faster than that, primarily because third-party growth was very strong, and certainly FBA is a component of that. And when you think about the capacity that we built it for, not only for our retail, but also for our third-parties, and we are able to offer our FBA items through Prime as well. So we are very happy with the capacity that we have built across the world, including our International operations, and that is reflected in the results that you are seeing. Certainly, one of the reasons why you are seeing the growth of operating income, up over 100% in Q4 for International, is because of the mix of third-party, certainly helping that. So it is a combination of a number of factors, but certainly that is one that is a significant call out.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Morgan Stanley - Analyst    [16]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+    Our next question comes from Justin Post with Bank of America Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [18]
+--------------------------------------------------------------------------------
+
+    Great. A couple things, I was hoping you could talk about your initiatives with AmazonFresh, what you are seeing in the Bay Area, and Los Angeles so far? Are you seeing more units per customer? And then, maybe talk a little bit about the International Kindle Stores. Could you start to see better Media results, as you have built out that infrastructure? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [19]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of Fresh in LA and the Bay Area, it is very, very early. We like what we see. Customers like the service. There has been good adoption. There has been good conversion from the Prime trials. And so, we are very pleased with what we are seeing there. But it is still very early. And so, we will have to -- you will have to stay tuned on that one. But again, it is very early, but we like what we see.
+In terms of International Kindle Stores, yes, absolutely -- we are, to be very clear, if you look at the Kindle content growth in Q4 in International, it is very strong. It is just again, we are at the early stages of this cycle, from physical to digital. So the growth rate is very strong, and we saw similar type things, when we look back at the US, in terms of trends. But it is, again, it is -- we are at the earlier part of the cycle on that conversion.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [20]
+--------------------------------------------------------------------------------
+
+    Great. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+    We will now hear from Brian Nowak with Susquehanna.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Susquehanna Financial Group - Analyst    [22]
+--------------------------------------------------------------------------------
+
+    Thanks. It looks like 1P gross margins, ex shipping expanded nicely year-on-year again. I was wondering if you could talk to some of the margins of -- what some of the drivers of 1P gross profitability getting better? And how should we think about the sustainability of that over time? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [23]
+--------------------------------------------------------------------------------
+
+    We are not breaking out the first party margins, if you will. So I can't talk to the specifics of that. But our retail business is very good, it -- the combination of our retail business and our third-party business on our platform works for us. We think it is very important have both offerings for a number of reasons.
+One is, from a customer experience standpoint, we like the fact the customers come to our detail pages on our respective websites around the world, and they see competitive offerings. They know that we are very excited about making sure we get great values for customers, and we price our products appropriately, competitively low. And so, having third parties on our website certainly helps do that. It also adds additional selection that we don't have.
+And so, it is a combination of being able to make sure we have a competitive marketplace, as well as add great, unique selection from both retail offerings and third-parties that make it work. And so, that is why we don't talk necessarily about first-party or third-party in terms of margins, but it is the combination of those working together on a platform that makes it work.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Susquehanna Financial Group - Analyst    [24]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+    We will now hear from John Blackledge with Cowen and Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [26]
+--------------------------------------------------------------------------------
+
+    Great. Thank you. I have a couple questions, with the potential price change of Prime in US, would Amazon consider offering Prime Instant Video separately? And in terms of Prime Instant Video, can you discuss the change in marketing spend for the service on a year-over-year basis, 4Q 2013 versus 4Q 2012? And then, just in the North American electronics and other goods segment, could you call out any particular categories that drove the growth? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [27]
+--------------------------------------------------------------------------------
+
+    In terms of Prime, there is not a lot I can help you with there. We certainly have -- it is a great offering for customers. I wouldn't speculate what we would do or not do, going forward. But we like the service that we have. We continue to invest in our Prime offering, and it comes in a number of different forms. We will continue to add unique selection that is Prime eligible. We have a great pattern of doing that over the nine-year period.
+We have also offered other services as you mentioned, in terms of Prime Instant Video, as well as Kindle Owners' Lending Library. So it is a great value for customers, and we plan on keeping that a great value for customers, even with the price increase that we are considering in the US.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [28]
+--------------------------------------------------------------------------------
+
+    Great, thanks. And the North American and electronics and other goods segment, just wondering if there are any particular categories that drove the growth?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [29]
+--------------------------------------------------------------------------------
+
+    Yes, it was very broad in terms of growth. We are very fortunate that we saw very good growth across many different categories. Certainly, if you call out the Softline categories, were very strong. Consumables were very strong, again a number of different areas, those certainly, a few call outs.
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+    Mark Mahaney with RBC Capital Markets has the next question.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [31]
+--------------------------------------------------------------------------------
+
+    Yes. I will just stick with the EGM category in North America. It looked to us like it decelerated relatively sharply. I thought you were going to call out some areas of weakness there. Is there anything that caused that growth rate you would call out, that caused growth rate to decelerate on an easy comp? And then, Tom, did you want to call out anything related to weather or UPS, or did you think that those impacts were immaterial to the business in the quarter? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [32]
+--------------------------------------------------------------------------------
+
+    Well, again, if you look at -- you were talking about -- I think your question was around EGM in North America? A good 25%, you are right, it did decelerate from Q3. Keep in mind that a number of the categories within EGM, there is certainly a seasonal impact. If you look back to last year, Q4, our growth rate in North America was 24%. So we actually saw an acceleration from Q4 last year to Q4 this year, up slightly. And so, that is -- and then, sorry, Mark, the second part of your question was related to?
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [33]
+--------------------------------------------------------------------------------
+
+    Did you want to call out anything related to weather and UPS?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [34]
+--------------------------------------------------------------------------------
+
+    No. I mean, I think certainly some of the UPS issues were documented in the press, and from our standpoint, our team did a very good job of serving customers. We did have the issue that you are describing. But again, we will continue to work on behalf of customers, to make sure we improve that experience over time, where we didn't serve them well. We certainly did give some GCs to customers. We also reimbursed them for shipping costs, where they incurred that, and we will continue to make that better and better for customers over time.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [35]
+--------------------------------------------------------------------------------
+
+    Thanks, Tom.
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+    Moving on to Carlos Kirjner with Bernstein Capital
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [37]
+--------------------------------------------------------------------------------
+
+    Thank you. Two quick questions. Your CapEx was just slightly higher than last year same period if you correct for the real estate purchase, even though the business overall grew 22%, and you said AWS grew very fast. Does this relative decrease in CapEx signal an expectation that AWS is going to grow slower?
+And secondly on, again the Prime price increase, if you have tens of millions of Prime users that increasing price at least $20 with no incremental expense. That's quite a good chunk of money. Do have specific plans to reinvest that money? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [38]
+--------------------------------------------------------------------------------
+
+    The first part of your question, do we expect -- is this is an indication that AWS is slowing down? No, it is not. Actually, we are very pleased with the AWS business. It is growing very fast. The team is doing a fantastic job, from a product and service standpoint, and we are very excited about that business. So I wouldn't form any opinions about what about what CapEx might be in the future, related to the growth rates in AWS. It is going very, very well.
+And then, the price increase on Prime, anything that we would invest would be an independent decision from that again. I think in the in opening remarks, I talked about the rationale as to why, and that is really what is driving that decision. And then, our investment decisions would be independent of that.
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+    Greg Melich with the ISI Group has the next question.
+
+--------------------------------------------------------------------------------
+Greg Melich,  ISI Group - Analyst    [40]
+--------------------------------------------------------------------------------
+
+    Thanks, Tom. Going back to Prime, as you consider the price increase, do you think the brand is such that you would be willing to price-tailor it or tier it, based on the value that is offered, and the sort of services you provide to certain customers? And then second, on the categories, I believe you called out a few quarters earlier, that Clothing in particular was one, and third-party Clothing had picked up a lot. Did you see that this holiday, just given the importance of that core category in the season?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [41]
+--------------------------------------------------------------------------------
+
+    I will take the second part first. Softlines was very strong in Q4, which Clothing is a piece of that. And in terms of tiers on Prime, I wouldn't speculate on what we might or might not do in the future. But we like the Prime program, where we have invested very heavily in it. We continue -- you should expect us to continue to make it even better over time.
+
+--------------------------------------------------------------------------------
+Greg Melich,  ISI Group - Analyst    [42]
+--------------------------------------------------------------------------------
+
+    There is no prohibition to that, but you sort of like it the way it is?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [43]
+--------------------------------------------------------------------------------
+
+    Yes, we like it the way it is. But again, we are -- if you look back at what we have done -- can't speculate what we might do going forward. But certainly, we have had in the US Prime in place for nine years. We have added massive selection during that time period.
+We have also added, this is on the physical side -- and we have also added digital content as well to the service in the US, with Kindle Owners' Lending Library, as well as Prime Instant Video. And so, it is a great value for our customers. We see the customers love it, and we are going to continue to try to make that even better for customers over time.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+    Moving on to Ron Josey with JMP Securities.
+
+--------------------------------------------------------------------------------
+Ronald Josey,  JMP Securities - Analyst    [45]
+--------------------------------------------------------------------------------
+
+    Great. Thanks for taking the question. So I wanted to follow-up on AWS, and talk a little bit on pricing. And while it is certainly coming down, and efficiency has improved. But I believe AWS is sold in hour increments. I think Google's complete solution is sold on a per minute of use. So I was wondering if you thought about maybe changing the way AWS is charged to maybe per minute?
+And then a quick follow-up on just fulfillment centers. If you could just remind us what you ended the year with, and if you have any plans for this year? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [46]
+--------------------------------------------------------------------------------
+
+    Sure. In terms -- I will take the second part first. The fulfillment centers, we opened seven on a net basis. So that is the net adds, and but on a -- if you take that as a percentage of our total fulfillment centers, you will get a number. But our square footage actually grew at quite a bit faster rate than that. Keep in mind that -- I think we have talked about in previous calls, we did have some smaller, older facilities that we consolidated into larger ones. And so, it is a net seven, and again the square footage growth is higher than that.
+In terms of pricing on AWS, the team is doing a fantastic job, looking at the best way to run that part of our business. And I wouldn't want to speculate what they would or wouldn't do related pricing. But they are certainly making sure they are have -- offer great services to customers, and they are great values to customers as well, and we are very excited about that part of the business.
+
+--------------------------------------------------------------------------------
+Ronald Josey,  JMP Securities - Analyst    [47]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+    We will now hear from Chad Bartley with Pacific Crest.
+
+--------------------------------------------------------------------------------
+Chad Bartley,  Pacific Crest Securities - Analyst    [49]
+--------------------------------------------------------------------------------
+
+    Hi, thank you. Two quick questions, how much of the slowdown in revenue and unit growth was a function of the shorter shopping season in Q4? And then in terms of raising the price on Prime, how much of that might be based on customers reaction behavior, after recently raising the threshold for free shipping to $35?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [50]
+--------------------------------------------------------------------------------
+
+    In terms of the shorter period for shopping, it is hard to tell. Honestly, it is hard to know. It definitely was a shorter period from post-Thanksgiving to the holiday, and but again, hard to know. And then in terms of your -- sorry, the other part of your question?
+
+--------------------------------------------------------------------------------
+Chad Bartley,  Pacific Crest Securities - Analyst    [51]
+--------------------------------------------------------------------------------
+
+    I am curious if the potential price increase on Prime, and your confidence in doing that, and that it wouldn't impact the adoption of Prime, how much of that is tied to the early results of raising the shipper saving threshold to $35 from $25?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [52]
+--------------------------------------------------------------------------------
+
+    They were independent decisions. They weren't related.
+
+--------------------------------------------------------------------------------
+Chad Bartley,  Pacific Crest Securities - Analyst    [53]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [54]
+--------------------------------------------------------------------------------
+
+    Thomas Forte with Telsey Advisory Group has the next question.
+
+--------------------------------------------------------------------------------
+Tom Forte,  Telsey Advisory Group - Analyst    [55]
+--------------------------------------------------------------------------------
+
+    Great. Thanks for taking my question. So when we think about shipping costs, I know you are talking about raising the rate on Prime. But you just indicated that you added seven fulfillment centers in 2013 on a net basis. As you get closer to the consumer, and you shorten the ship miles, how should we think about the benefit on shipping expenses, from just having more fulfillment centers closer to the consumer?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [56]
+--------------------------------------------------------------------------------
+
+    Yes. There is no question that we get -- as we grow our footprint, we get closer and closer to customers with additional selection. And that has certainly helped us not raise prices, or look at raising prices before this. And so, certainly we will continue to roll out our footprint. We will try to make -- we are trying to make our network as efficient as possible.
+And that is -- even with this price increase that we are looking at, it still enables us to make sure we that have Prime at a great value to customers. And that is something that is very important to us, because we know it is very important to our customers.
+
+--------------------------------------------------------------------------------
+Tom Forte,  Telsey Advisory Group - Analyst    [57]
+--------------------------------------------------------------------------------
+
+    Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [58]
+--------------------------------------------------------------------------------
+
+    Moving on to Brian Pitz with Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [59]
+--------------------------------------------------------------------------------
+
+    Great, thanks. In terms of digital content, how are exclusive titles and original series driving user growth in Prime memberships? And any color on what kind of engagement dynamics you are seeing across the different platforms? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [60]
+--------------------------------------------------------------------------------
+
+    Hello? Could you repeat the question, please?
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [61]
+--------------------------------------------------------------------------------
+
+    Sure. In terms of digital content, I am just trying to figure out how some of your exclusive content and titles are driving user growth in Prime memberships? And any color just on, what type of engagement you are seeing across the different platforms via PC, tablet, et cetera?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [62]
+--------------------------------------------------------------------------------
+
+    We are seeing customers like the digital content. We are seeing great engagement. We are not breaking out -- in terms of the form, but again, we are seeing great engagement. We do track very closely the Prime customers that come from free trials, for example, for -- that come through the pipeline for digital content from a free trials standpoint. We track those conversions, and we see that is growing very nicely.
+We do look at customers that use our Prime Instant Video, how they -- what their shopping patterns look like outside of digital content? Do they buy, excuse me, beyond the free content that we have on there? Do they buy more digital content? And certainly, we are seen nice growth in digital content because of that, because they do. They also do a lot of shopping in physical categories as well. So those things we are tracking very closely. And it is a great pipeline for us, as customers look at the total value proposition for Prime, including digital content.
+
+--------------------------------------------------------------------------------
+Operator    [63]
+--------------------------------------------------------------------------------
+
+    Heath Terry with Goldman Sachs has the next question.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [64]
+--------------------------------------------------------------------------------
+
+    Great, thanks. Tom, you mentioned the strong growth in AWS. Looking at the deceleration in the North America and other line, how should investors think about the relative growth of AWS versus the advertising and financial partnership that are -- that make up the rest of that segment? And then, just on the Fresh with LA and San Francisco's fulfillment centers carrying a number of non-perishable SKUs, what does Fresh do for your same-day fulfillment capabilities in those markets?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [65]
+--------------------------------------------------------------------------------
+
+    In terms of AWS, I think the best way to think about it is, a number of things that are in other, other than AWS can be lumpy. And you should assume when you look at the North America growth for Q4, that our AWS revenue is growing at a faster rate than other. And then in terms of Fresh, it certainly, when you look at those two, look at the new offerings that we have in the Bay Area and in the LA area, it is certainly helping our same-day delivery, and they work hand-in-hand. So in other words, we have -- we have increased our capability, both for Fresh, as well as for our non-Fresh part of our business there in those locations.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [66]
+--------------------------------------------------------------------------------
+
+    Great. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [67]
+--------------------------------------------------------------------------------
+
+    We will now hear from Yousef Squali with Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [68]
+--------------------------------------------------------------------------------
+
+    Thank you very much. Two questions, please. First, have you seen any impacts from the use -- from the rise of the Google's PLA this quarter? And second, are you using Kiva's technology in the -- your food distribution centers, particularly for perishables -- for perishables, excuse me? Our understanding that it is not optimized for that, but is that true? And if not, are there any other solutions outside of Amazon that do that optimally? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [69]
+--------------------------------------------------------------------------------
+
+    In terms of Kiva, it is very early, we have a -- we are early in our installations there. That is really all I can say. We have it in a few facilities. It is going very well, very pleased with having Kiva as part of the Amazon family, if you will, and we are excited about the opportunity that brings us going forward.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [70]
+--------------------------------------------------------------------------------
+
+    And on the PLAs?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [71]
+--------------------------------------------------------------------------------
+
+    I can't comment.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [72]
+--------------------------------------------------------------------------------
+
+    Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [73]
+--------------------------------------------------------------------------------
+
+    Our next question will come from Ross Sandler with Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [74]
+--------------------------------------------------------------------------------
+
+    Thanks, Tom. Just a quick high-level question. So consumers in smartphone markets are spending about half their time on mobile these days, and a lot of that is coming off of PC. And I am sure that is a great kind of new customer acquisition channel for you.
+But in terms of existing Amazon customers, are you seeing purchase frequency for physical products go up, because of having phones with you all day? Or is it just swapping off of PC and into these newer channels? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [75]
+--------------------------------------------------------------------------------
+
+    I kind of view -- just having the more connected devices is just a tailwind for our business, and it is additive. It is certainly helping our business grow. So whether that is phones or tablets, it is just a tailwind for our business, and we think it will continue to be so. So it is -- customers will certainly still purchase from their desktop or their laptop. And so, the tablet and mobile will not be completely additive, but it will certainly be a tailwind for our business. It is just, anytime customers have easier access to be able to purchase, that is good for us.
+
+--------------------------------------------------------------------------------
+Operator    [76]
+--------------------------------------------------------------------------------
+
+    Now ladies and gentlemen, we have time for one additional question from Gene Munster with Piper Jaffray.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [77]
+--------------------------------------------------------------------------------
+
+    Good afternoon. Could you just remind us, on just -- from a kind of a high-level philosophy, the trade-off between revenue growth and earnings? We -- I think investors typically think that you see this as very -- all of your markets as nascent, and profitability is kind of a distant thought. Is that still the case? And any guidance in terms of how to think about that over the next 2, 5, 10 years? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [78]
+--------------------------------------------------------------------------------
+
+    Sure. We track a lot of our investments on a discrete basis as best we can. We are looking to maximize -- can you hear me okay?
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [79]
+--------------------------------------------------------------------------------
+
+    Yes.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com Inc - CFO    [80]
+--------------------------------------------------------------------------------
+
+    We are looking to maximize free cash flow in those investments over time. And so, we have some investments that certainly start to pay off and become profitable in a three to five year period. We have others that have been a bit longer. But again, we are monitoring those investments very carefully. Our goal is to maximize free cash flow for investors over time. That is clearly our goal, and that is something that we are working towards.
+All that being said, we are investing a lot of the business right now. You can see that when you look at our results. And the reason why we are doing that is because of the very large opportunities that we see. And we do go in cycles, as you have seen in our historical results. From time to time, we will pull back to make sure the model is working, and we have done that. And I am sure you will see that going forward at times as well. But again, we are focused on making sure that we have a great customer experience, and we maximize free cash flow over the long-term.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [81]
+--------------------------------------------------------------------------------
+
+    Got it. Thank you.
+
+--------------------------------------------------------------------------------
+Dave Fildes,  Amazon.com Inc - Senior Manager, IR    [82]
+--------------------------------------------------------------------------------
+
+    Great, thanks, Tom. Thank you all for joining us on the call today, and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com, and look forward to talking with you again next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [83]
+--------------------------------------------------------------------------------
+
+    And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.
+
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
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exam/original-files/Problem_1_Sample/2014-Jul-23-FB.OQ-137343825744-Transcript.txt

@@ -0,0 +1,536 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2014 Facebook Inc Earnings Call
+07/23/2014 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Dave Wehner
+   Facebook, Inc. - CFO
+ * Deborah Crawford
+   Facebook, Inc. - Director of IR
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+ * Mark Zuckerberg
+   Facebook, Inc. - Chairman & CEO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Ken Sena
+   Evercore Partners - Analyst
+ * Neil Doshi
+   CRT Capital - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Arvind Bhatia
+   Sterne, Agee & Leach - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Co. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Brian Nowak
+   Susquehanna Financial Group - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon, my name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook Second Quarter Earnings Conference Call. (Operator Instructions) Ms. Deborah Crawford, Facebook's Director of Investor Relations, you may begin.
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's second quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements and actual results may differ materially from those contemplated by these forward-looking statements.
+Factors that could cause these results to differ materially are set forth in today's press release and our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures.
+A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.FB.com. Now, I'd like to turn the call over to Mark.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah, and thanks, everyone, for joining today. This was a good quarter for us and a good end to the first half of the year. We've continued to grow our community in size and engagement with 1.32 billion people now connecting on Facebook each month and 63% of them visiting daily. Our momentum remains especially strong on mobile.
+There are now 829 million people using Facebook everyday, with more than 650 million people using our services on mobile everyday. One thing that's exciting is that there's still so much room to grow. On average, people on Facebook in the US spend around 40 minutes each day using our service, including about one in five minutes on mobile. This is more than any other app by far, but overall, people in the US spend nine hours per day engaging with digital media on TVs, phones, and computers.
+So, there's a big opportunity to improve the way that people connect and share across how we all engage with the rest of media as well. When it comes to our business, we continue to be pleased with our growth. This quarter, our total revenue grew to over $2.9 billion and advertising revenue grew by 67% from a year ago. Mobile now accounts for 62% of our advertising revenue, which is a good sign of how the growth of our community on mobile is also producing better business results for our partners.
+The results this quarter show our continued focus on improving our core products and business. We're going to continue investing aggressively in areas that are important for our mission and long-term strategy, but we're also going to stay focused on our core products and business. This is the best way for us to continue creating value for our community. Now, let's talk about how we're making progress on our three big company goals: connecting everyone, understanding the world, and building the knowledge economy.
+Our strategy for connective everyone has two basic approaches. Our first approach is internet.org, our effort to bring affordable internet access to every person in the world. Our second approach is about giving everyone more tools for connecting so they can share all of the different kinds of content they want with the right people. Instagram, Messenger, and our Creative Labs apps are a part of the second approach.
+With internet.org this quarter, we've continued to deepen our partnerships with mobile operators and lay the foundation for running tests in more countries. Already, our initial partnerships in the Philippines, Paraguay, and Tanzania, have helped around 3 million people connect to the internet who had no access before. We're really proud of these early results.
+In June, we acquired Pryte, which has a lot of expertise bringing affordable internet access to communities by partnering with mobile operators, app developers, and content providers. Later this year, we expect to launch a broader set of free basic internet services in a number of other countries, as well. In our app efforts, we're continuing to build momentum with messaging.
+People now send more than 12 billion messages a day on Facebook, and in April, we reached 200 million monthly actives on Messenger. Last month, we announced that David Marcus will be joining us from PayPal to lead our messaging efforts. We expect David to continue growing Messenger, building out new experiences to serve our community, and ultimately, to build Messenger into an important business.
+Instagram continues to make great progress in giving people new ways to share their stories through photos and videos. Last month, we made one of the biggest updates ever to Instagram, by adding new creative tools that allow people to refine exactly how their photos look and feel. This is an important part of building out Instagram's capabilities as a platform and serving the creativity of the Instagram community.
+Next, let's talk about understanding the world. As of last month, on average, more than 1 billion search queries are made every day on Facebook. This is a great milestone and it shows we're in a unique position to answer a lot of questions for people. But this is just the start and over the next few years, as we make progress on building out search and our broader efforts in artificial intelligence, I expect us to deliver even greater utility for people.
+Our progress on public content is also very promising. As part of helping people better understand the world, we want to help you connect around important public moments and personalities. Now, nearly 800 million people on Facebook are connected to public figures. These connections are driving conversations at a huge scale. During the World Cup, over 350 million people made over 3 billion interactions on Facebook.
+To enable even more of these conversations, we've improved the ranking of videos and News Feed and launched new APIs to help TV and media organizations use Facebook content in their productions. Public content will continue to be a growing focus for us over the coming months and we plan to invest in building more great products and partnerships in this area.
+Now, building great social experiences to serve our community isn't something we do alone. Supporting developers is a key part of our strategy and at our f8 conference in April, we announced new ways to help mobile developers build, grow, and monetize their apps. Over 1 billion people use Facebook on their phones every month and more than 80% of the top apps on iOS and Android now use Facebook log-ins. We think we're in a great position to be the cross-platform platform, that let's developers build great apps across every platform.
+So far, we're very encouraged by the reaction from developers. App Links, our new method of deep linking to specific content in any app, is now being used by hundreds of apps across iOS, Android, and Windows phones, with links to more than 1 billion individual destinations in these apps.
+We also launched our Audience Network, our first big effort to help developers monetize on mobile and we've received a lot of interest from developers. We're rolling out the Audience Network gradually, but we're going to continue to ramp this up over the coming months and are excited by the opportunities ahead.
+Finally, let's talk about our efforts to build the knowledge economy. This has been a strong period for us and we've reached some new milestones as a business. Now, more than 30 million small businesses use Facebook pages to connect with their customers and more than 1.5 million of them are active marketers on Facebook.
+To continue delivering the best returns for marketers, we've been very focused on improving the quality of the ad experiences for our community. Our goal here is to make ads as interesting and useful as your friends' content on Facebook. We're investing heavily in this area and this quarter, we launched a number of efforts to improve the quality and relevance of our ads, including new ads preferences tool, interest-based advertising, and improvements to News Feed designed to reduce low quality content.
+In some countries, our surveys indicate that our ads get close to the quality level of organic content, but in most developed countries, we still have a lot to do. We expect to continue focusing on this for a long time.
+That's my update on how we've been executing over the last quarter. It's been a quarter with good performance and continued momentum. I want to thank everyone who works at Facebook and is part of our community, including our shareholders and partners.
+Because of your efforts, we're continuing to make progress towards our mission to help connect the world and we're improving hundreds of millions of people's lives everyday. I'm grateful for your support and to have the chance to work with all of you. Thanks. Now, here's Sheryl.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hi, everyone. As Mark said, we had a strong second quarter. Ad revenue grew 67% year-over-year to more than $2.6 billion. Mobile ad revenue grew 151% year-over-year and now makes up 62% of our ad revenue. We continue to focus on three key areas in investment: capitalizing on the shift to mobile, growing the number of marketers using Facebook, and building our ad products.
+These investments continue to generate broad-based growth. All geographies and all marketer segments performed well this quarter. Our team has a really strong belief in what we're building; the world's first ad platform that delivers personalized marketing upscale. While we believe it is still early days, we're pleased with the progress we're making and I want to join Mark in congratulating our global teams on their continued execution.
+Today, I'm going to focus on two key marketer segments: small business and brand marketers, as well as cover some of the investments we're making on the product and ad tech fronts. We believe that personalized marketing of scale can drive results for all types of marketers. Just a few weeks ago, I was in India and I hosted our first India SMB round table. One of the entrepreneurs I met, Vivek Prabhakar, sold his house just a few years ago to raise the money to start his and his wife's dream business, Chumbak, a company that makes India-inspired products.
+Facebook is Chumbak's leading marketing channel and is responsible for 35% of online revenue and 38% of their website traffic. Their Facebook ads deliver a 5x return on advertising spend and have helped the company grow to more than 150 employees in three offices. We have more than 30 million active small business pages and over 19 million of these are active on mobile.
+We think we have a big opportunity to help SMBs like Chumbak grow their businesses. And I'm pleased to announce today that we have over 1.5 million active advertisers. We're also ramping up our engagement with this community. In the US, we're hosting Facebook Fit workshops in cities like New York, Chicago, and Miami to help small businesses and we're doing this globally, including forming our first European SMB council.
+We're also making great strides in our work with larger brands who increasingly recognize how our scale, targeting, and measurement capabilities can drive great results. For example, P&G's Gillette works with us and agencies, IBS and MediaCom, to launch its Vector 3 razor to men in India. 80% of the 100 million Facebook users in India are on mobile and a majority of these are using feature phones. This was our first feature phone-only Facebook campaign in Asia. It reached 60% of Gillette's target audience and generated significant lift in both message and ad recall.
+As we work with brand marketers around the world, we focus on how they can leverage our technology platforms to build their brands through creative storytelling. We saw many great examples of this at the recent Cannes Lions Festival. We were excited that campaigns that made Facebook a key part of their efforts took home prestigious awards.
+The World Cup also provided a great opportunity for brand building on Facebook. Facebook was an important part of this global event, with 350 million people joining the conversation, generating 3 billion interactions. The final was the single-most talked about sporting event in Facebook history, generating 280 million interactions from 88 million people. Brands such as Visa, Nike, Ford, and McDonald's capitalized on this global conversation.
+McDonald's worked with agencies, OMD, Framestore, and ARC sponsorship, as well as Facebook's Creative Shop, to produce 30 videos that used French fries as players. FryFutbol recreated the most spectacular World Cup moments and ran them as videos the very next day with the French fries acting as the players. This campaign reached 125 million people in 158 countries.
+We also remain committed to investing in product development to drive higher returns for all of our marketers. Our custom audiences capabilities, which enable better targeting, are being adopted quickly and are now being used by 91 of the Ad Age 100.
+Earlier this year, we launched website Custom Audiences, which enable marketers to target recent visitors to their websites. This is like retargeting, but it's even more effective because it works across both web and mobile. We're pleased with the early reaction from marketers.
+We also introduced premium autoplay video ads this year. Video on Facebook helps brands extend their TV investments by combining traditional reach focus campaigns with our unparalleled targeting abilities. To date, we run about a dozen campaigns and the early data show promising results. We'll continue to roll this product out slowly and carefully.
+Similarly, we're seeing positive early demand from marketers for ads on Instagram and we're rolling these ads out carefully as well. In all of this, we remain focused on the transition to mobile. Our recently launched Audience Network lets advertisers use Facebook targeting, while extending their campaigns beyond Facebook. This can improve the relevance of ads people see both on and off Facebook and we're encouraged by the early response.
+Finally, earlier this summer, we announced the acquisition of LiveRail, a leading online video advertising platform that enables customers like MLB.com and A&E networks to monetize their video inventory efficiently. We have a lot to do here, but with LiveRail, we're investing in tools that can improve the relevance of video ads across the web.
+In summary, we're pleased with our performance and the progress we're making. We're the first platform that can deliver personalized marketing at scale and marketers are increasingly recognizing the great results we can drive for them. Staying focused and executing will remain a major theme for us moving forward. Our teams know that our future success depends on our continued execution and our plan is to stay focused. Thanks and now, here's Dave.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. Q2 was a good quarter for us across our key operating and financial metrics. We generated strong revenue growth in operating margins and delivered $872 million of free cash flow. We continued to make investments to drive our core business, as well as to support our long-term strategic priorities.
+Let's start with a review of our network. We are executing well on our ongoing mission to connect everyone. 829 million people used Facebook on an average day in June, up 130 million from a year ago. This represents 63% of the 1.32 billion people who used Facebook during June. Mobile continues to be a strong driver of our growth, with over 1 billion people using Facebook monthly on mobile.
+At the same time, we're enabling more ways for people to connect and share beyond the core Facebook app. For instance, both Instagram and Messenger have each passed over 200 million MAU and continue to grow nicely.
+Turning now to the financials, total revenue in the second quarter was $2.9 billion, up 61% or 59% on a constant currency basis. Total ad revenue was $2.7 billion, up 67% or 65% on a constant currency basis. Ad revenue growth was strong around the world, with each of our four geographic regions growing by over 60%.
+Mobile ad revenue was approximately $1.66 billion or 62% of ad revenue compared to approximately $660 million or 41% of ad revenue last year. Desktop ad revenue was up 8% year over year. In Q2, the average effective price per ad increased 123% compared to last year, while total ad impressions declined 25%. The decrease in ad impressions continues to be driven by the shift towards mobile usage, where people are shown fewer ads compared to desktop.
+The increase in the average price per ad was primarily driven by an increase in their percentage of our ads being served in News Feed. The price volume trends were generally consistent across all four reported geographic regions. Total payments and other fees revenue was $234 million, up 9% versus last year.
+As we have noted in the past, we believe the more meaningful comparison that better reflects the organic growth rate of the payments business, comes from looking at payments volume from games specifically, which was up 1% in Q2 versus last year. Our current games payment revenue comes entirely from desktop usage and we are seeing declines in number of people using Facebook on desktop, a trend that will make this business challenging going forward.
+Turning now to expenses, our Q2 GAAP expenses were $1.5 billion, up 22%, and our non-GAAP expenses were $1.2 billion, up 18%. Note that cost of revenue grew 2% on a GAAP basis and 1% on a non-GAAP basis, mainly driven by unusually high expenses in 2013 related to the transition out of certain lease data centers. This flatness in cost of revenue was the primary reason overall expenses grew relatively slowly.
+Operating expenses, excluding cost of revenue, grew 33% on a GAAP basis and 31% on a non-GAAP basis. We ended Q2 with 7,185 employees, up 36% from last year. Our Q2 GAAP operating income was $1.4 billion, representing a 48% operating margin up from 31% last year.
+Our non-GAAP operating income was $1.7 billion, representing a 59% non-GAAP operating margin up from 44% last year. Our GAAP and non-GAAP tax rates were 43% and 36%, respectively. GAAP net income was $791 million or $0.30 per share and non-GAAP net income was $1.1 billion or $0.42 per share.
+In Q2, we spent $469 million on CapEx and generated $872 million of free cash flow. We ended Q2 with approximately $14 billion in cash and investments. This excludes the impact of the Oculus acquisition, which was closed earlier this week and included an approximately $400 million cash payment.
+Now, looking forward, let me start by noting that the forward-looking comments I'll share today for 2014 include the impact from the recently closed acquisition of Oculus, but exclude, except where otherwise noted, the impact from WhatsApp, which we continue to expect will close later this year. In terms of expenses, we expect that our total 2014 GAAP expenses, including cost of revenue and stock compensation, will likely grow in the neighborhood of 30% to 35% and that our total non-GAAP expenses, including cost of revenue but excluding stock compensation, will grow at a similar rate. These rates are slightly lower than our prior expectations due to efficiencies in areas like cost of revenue and G&A.
+However, we believe that we are still in the early days of building out all of the services to maximize Facebook's impact on the world and we intend to continue to invest aggressively in people, products, and infrastructure in the second half of 2014 and beyond. Though it is premature to give a specific outlook for 2015 expenses, I wanted to note that we expect significant stock-based compensation and amortization expenses, as well as substantial incremental operating costs related to the acquisitions of Oculus and WhatsApp.
+These will add to our overall expenses in 2015 and subsequent periods. These costs will be incremental to core Facebook expenses, which will continue to grow significantly in 2015, as we ramp investments in people, products, and infrastructure. For taxes, we expect GAAP and non-GAAP rates for the rest of 2014 to be similar to our Q2 rates, although these could very widely depending upon our international revenue and expense mix and other factors; most notably, the impact from acquisitions, including the expected closing of WhatsApp later this year.
+We continue to anticipate the 2014 CapEx will be approximately $2 billion to $2.5 billion. We expect shares outstanding to grow from around $2.6 billion at the end of 2013 to approximately $2.9 billion at the end of 2014; again, assuming WhatsApp closes by the end of the year.
+Turning last to revenue, as we saw in Q2, our year-over-year growth rate declined from 72% in Q1 to 61% in Q2, or 59% on a constant currency basis. This is consistent with our comments on the Q1 call when we indicated that, over the course of 2014, the year-over-year growth rates in revenue would decline meaningfully as the comps became more difficult. We expect this trend to continue over the course of the second half of the year.
+While we are excited about the long-term potential of our ads initiatives like Instagram, autoplay video, and the Audience Network, we are still in the early days of building these businesses and expect their revenue contribution to remain small in the near term. We remain optimistic as ever about the long-term opportunity to grow revenue by improving the quality and relevance of our ads and increasing the value we bring to marketers through our products, tools, and technologies.
+In summary, we're very pleased with our overall performance in Q2 and in particular, the continued growth of our mobile audience, the strength of our apps business, and the investments we're making to build long-term shareholder value. With that, Jay, let's open up the call for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) Eric Sheridan, UBS.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Sheryl, one on Audience Network and LiveRail, maybe you can give us a little better sense of the depth of the conversations with advertisers and what that might do to the platform longer term, 2014 and beyond, in terms of broadening out Facebook's advertising effort? Second question, Dave, on the Oculus and WhatsApp, is there any way to get a sense of employee counts at the companies or the pressure that we might see from OpEx going forward?
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [3]
+--------------------------------------------------------------------------------
+
+          One of the goals we have  talked about in all of these calls is to make ads more relevant for people and marketers and increasingly, with the Audience Network, we have a goal to do that for publishers, as well. Video is really important, it's one of the fastest ad mediums out there on both desktop and mobile. LiveRail has the leading online video advertising platform and we think we can use it to effectively expand video ads to marketers and to publishers outside of Facebook and offer greater audience reach and ability to sell to video advertisers.
+When you look at the Audience Network, we're still in really early days and we only have some publishers in our network, but we see this as an opportunity to provide greater reach for Facebook marketers and developers, again, to improve relevance of the ads people see, both on and off Facebook.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Eric. On Oculus and WhatsApp, we're very much in investment mode on our overall business and we expect to continue to ramp investments in the core business through 2015. Like I said, we'll be layering on top of that costs related to Oculus and WhatsApp. But we're not getting into more specifics on the exact head counts on those, but we believe those are significant opportunities in the long run, and so we're going to be investing aggressively, accordingly.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Heather Bellini, Goldman-Sachs.
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          If you could share with us any qualitative commentary about the breadth of mobile ad revenue, there's always a lot of debate back and forth about how big mobile app installs are, and if there is anything you can share with us about how the breadth of these, the breadth of mobile has been changing over the last year or so.
+The follow-up question would just be related to how your conversations with advertisers are changing as people start to think collectively about their TV and video budget together? I'm just wondering if you're starting to see your conversations with big TV advertisers start to change somewhat over the last six months or so? Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [7]
+--------------------------------------------------------------------------------
+
+          When you think about mobile ads, and I'm really glad you asked this question, I do think sometimes people think that mobile app install ads are all of the revenue or a great majority of the revenue and they're not, they're only part of the mobile ads revenue. Our mobile ads revenue is broad-based. We have large brand advertisers, small SMBs, direct response advertisers, as well as developers using our mobile ads.
+The mobile app install ads, which are run not only by developers, but also by large companies that want to get people to install apps, are growing. They remain a good part of our mobile ads revenue and we're excited about the opportunities there, but we see our opportunities in mobile ads as much broader than just installing apps.
+To the second question, I do think one of the things that's happened in the last year, year and a half on Facebook is people understanding how strong the creative opportunity is. We've built out the technology platform and made our product investments, and we've really created, particularly with the move to mobile on our ads and News Feed, an opportunity to do great creative storytelling.
+A great recent example is the Progressive baby ads, if you've seen them. They're really engaging and really fun, but they're making a really important point, which is people should be buying their own insurance. But the ability for them to do that ad is based on the technology we've created and also the great work they've done with Arnold Worldwide, their agency, on the creative part.
+I think, for a long time, people have thought TV was for creative storytelling and online ads were for more targeted tech space results. I think we're seeing that change, which means that the way people approach TV, they'll also approach Facebook and are starting to, which makes those budgets work much better together.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+          Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [9]
+--------------------------------------------------------------------------------
+
+          Mark, there's been talk, and I know it was on your blog, about testing a buy button within the platform. I was hoping you could talk about how important you think commerce is to Facebook going forward and then perhaps also payments, as well. And then secondly, Sheryl, you mentioned some of the major brands that advertised during the World Cup. Can you talk about how you get the follow-through from those brands now that major event has passed and how you keep those ad dollars on Facebook? Thanks.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [10]
+--------------------------------------------------------------------------------
+
+          On the buy button, we launched a small test in the US only, which enables people to hit a buy button and on pages or in page post ads on Facebook, it streamlines the process of buying from our clients. No one's buying from us, we're just streamlining the process of buying from our clients. I think commerce is really important and is a growing important part of our business, as all marketer segments are growing, but I don't think people should confuse that with Facebook selling things directly.
+The more people buy online, the more people buy things they discover through their mobile phones, the more people discover things from a News Feed and go on to purchase, the more important we are in driving eCommerce and I think we are increasingly important. That doesn't mean we're going to or have to sell products.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [11]
+--------------------------------------------------------------------------------
+
+          I'd just add to that, because some of the question was about payments, that we will clearly do work in payments to accept payments for advertising and on platform and other things that we do, but just because we'll do that doesn't -- we still basically view ourselves as a partner to other companies in the payment space, rather than trying to compete directly for that. Our main business is advertising and I think we're mostly, to the extent that we do payments, it's going to be supportive to that.
+I wanted to make one more point related to that because I think some of the questions around payments are connected to what we're planning on doing in the other apps outside of Facebook, so things like Messenger and WhatsApp over time when that closes and Instagram. I really do just want to emphasize that there's a lot of work to set up the foundation for having a good business community and ecosystem in those that we think is going to be years of work before those are huge businesses for us.
+I liken where we are now on something like Messenger to where we were on Facebook in like 2006 or 2007, where it was primarily a consumer product at the time where you really only communicated with friends and a bunch of people asked us and said that we should put ads in. But before we did that, we wanted to create really good organic consumer experiences for people to interact with different entities, so we created pages so people could interact with organic businesses.
+In order to make it so that businesses and public figures and folks would create pages, we offered insights and different products. We gave all those away for free. Pages were free and continue to be free and that's partially why we have 30 million businesses today using pages on the platform and insights we gave away for free in order to enable more folks to use pages. But only after we had a good organic interaction that people could and would want to interact with these different businesses and entities, did we really layer ads on top of that and start to build the business that we have today.
+I just think it's worth emphasizing this because we've said in a number of comments that we think that some of these newer initiatives are going to ramp over time. We really do mean that. We're serious about doing this the right way and building out these ecosystems. I think for some of these other apps, we're just going to build all the infrastructure that we need to make it be something that's scalable over time, rather than trying to have this be an impact that you'll notice in the next short-term period of time.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [12]
+--------------------------------------------------------------------------------
+
+          To the World Cup part of your question, brands certainly use the World Cup and big events like this to launch things that they continue those ad campaigns. They also have other big events that come along, as well as their own events around product launches. We think, obviously not every day is  a World Cup, but there are lots of opportunities throughout the year and through the product cycle to work with brand advertisers in big ways.
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          Ross Sandler, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          I had one question for Mark on the product side, and one for Dave. Mark, App Links just launched, but if you go out a few years, how much do you think something like deep linking could increase engagement or add effectiveness for Facebook? For those 1 billion links that you have up and running already, what are you seeing in those early tests?
+Dave, we know you don't break out the price versus volume metrics for mobile, but just directionally, could you give us some color on how the ad impression growth in mobile compares with the 31% MAU growth in mobile? Thanks.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [15]
+--------------------------------------------------------------------------------
+
+          Sure. I don't have much color that's useful to share here on App Links. It's still early. People have marked up a bunch of apps with this meta data that allows us to search for it, but Search for Facebook is going to be a multi-year voyage. There's just so much content that is unique to the Facebook ecosystem that we can answer questions for you that really no other service can.
+The other day I was curious about finding out which of one of my friend's friends worked at a company. I don't know any other service where you can just go do that query, but on Facebook, you can. The secret to this is going to be basically just over a long period of time, indexing all of the different content that's on Facebook in every different way. We started off with people, because obviously you need to be able to find people in order to use the product and add friends and just have our core ecosystem work.
+We're indexing more of the connection, and now we're getting into more of the content and it's a huge amount of content. There is more than a trillion posts, which some of the search engineers on the team like to remind me, is bigger than any web search corpus that is out there. But that's just one part of the data and we're going to keep on doing more and more. We're going to start off focusing on stuff that's unique to Facebook, that you couldn't really answer those questions elsewhere.
+App Links, by definition being outside of Facebook, are not going to be unique to Facebook. We'll get to that over time. I think it will be a valuable part of the ecosystem, but honestly, we're mostly interested in that to enable value for other developers and pushing distribution to them than we are for our own search.
+It's going to enable interesting ways for a developer to be able to make it so that people and their apps can share content on Facebook and link directly to the right part of the app, it'll enable some engagement ads, so that way a developer can say a person was using my app and they were going to buy something, but they dropped out of the check-out flow, so now we're going to have an ad that helps them link right back to the check-out flow so they can complete their conversion. You want deep linking to be able to enable things like that, but it's going to take a while to play out in the search.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [16]
+--------------------------------------------------------------------------------
+
+          Ross, on your question on mobile ads, mobile DAU is ramping nicely at 39% growth and we're seeing it grow nicely across all of our geographic regions. Of course, mobile ads are ramping as well. In terms of pricing, we don't break it out, but on the reported pricing trend, as I think I made clear, the 123% increase in price was driven by mix shift with a higher percentage of News Feed ads. News Feed ads are really effective for marketers and that includes mobile News Feed ads as well.
+They deliver a lot of value for marketers, that's why they're getting a higher price in the auction. The price of ads correlates to the value that they create. We continue to focus on making those ad units better and better, more relevant and targeted for the people who use Facebook, as well as for marketers. We're seeing good results. Marketers are getting good ROIs and they're coming back and spending more with us, so we're pleased about all of that.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Justin Post, Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          I'd like to follow a little bit on the ad pricing, obviously up 123%. Sheryl, maybe you can comment a little bit about the organic growth, like for like ads there, and do you see opportunities to continue to see nice pricing growth as you look out the next couple of years? And then, as you think about the new ad formats, video and other things, would you think that could continue to drive pricing higher, meaning new ad formats could drive even more value than the existing ads that you have on Facebook. Thank you.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+          Justin, it is Dave. In terms of the pricing, as I said, it's really about the mix shift towards the News Feed ads is what's driving the overall reported pricing trend, but we are focused on making our ads all better and driving better returns for our marketers, and we see that reflected in the price. There's other things. For instance, we're making our right-hand column ads more effective by changing the format of those.
+Those will be higher value to our marketers because they'll drive more engagement, but there will be fewer of them. That will impact pricing. But everything that we're doing is about trying to drive more value for our marketers, as well as trying to drive more relevant ad experiences for the people who use Facebook. If we're successful in doing that, we'll drive ROI for the marketers, we'll drive good experiences, and we'll get good pricing.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney, RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          Anything you could share with us with regards to China and efforts to develop more of a presence there? On David Marcus coming over, somebody with a huge payments background running the Messaging product, it's kind of like hiring, signing Messi up to the Miami Heat, like it's a little of an odd transition. Are we looking at it wrong? Is there any particular reason why he wouldn't be more focused on payments? Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [22]
+--------------------------------------------------------------------------------
+
+          I'll talk about China. Our mission is to enable everyone in the world to share and connect. We've been studying and learning about China for a number of years and we remain very interested. We are seeing Chinese-based companies use Facebook to reach a global audience and we think we have an important opportunity, just with their export market, and we're focused on that for now.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [23]
+--------------------------------------------------------------------------------
+
+          On Messenger and David, I think he is just a real talented product generalist and he's done a number of different things, including in his past, he ran and built a messaging company. Most recently, clearly, he ran a very important company and I think it was pretty successful in helping get really good results there. Messenger will have, over time, there will be some overlap between that and payments.
+But what I'm trying to say is two things. One is, the payments piece will be a part of what will help drive the overall success and help people share with each other and interact with businesses, but we're really focused on the interactions overall, rather than the mechanism and David shares that view. The second thing is just that there's so much groundwork that we need to do in order to make it so that people are communicating with businesses and public figures and entities in these other apps that we're building, which is part of the business ecosystem.
+I really can't underscore this enough that we have a lot of work to do and we could take the cheap and easy approach and just try to put ads in or do payments and make some money in the short-term, but we're not going to do that. To the extent that any of your models or anything reflect that we might be doing that, I would strongly encourage you to adjust that, because we're not going to. We're going to take the time to do this in the way that we think that's going to be right over multiple years.
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+          Arvind Bhatia, Sterne Agee.
+
+--------------------------------------------------------------------------------
+Arvind Bhatia,  Sterne, Agee & Leach - Analyst    [25]
+--------------------------------------------------------------------------------
+
+          On WhatsApp, I realize it hasn't closed yet, but can you give us any indications on the user trends and engagement, et cetera. Sheryl, you mentioned India where we see a lot of usage coming out of there for WhatsApp, in particular. Any comments there would be helpful.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [26]
+--------------------------------------------------------------------------------
+
+          No, the deal hasn't closed. We have nothing to say.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          Neil Doshi, CRT Capital.
+
+--------------------------------------------------------------------------------
+Neil Doshi,  CRT Capital - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Sheryl, I think attribution could be big opportunity, especially for local businesses to help them realize ROIs or if people are going from online to offline. With 30 million businesses now on Facebook, how are you helping those businesses realize the online to offline conversion through Facebook in order to drive more dollars going to local businesses? Thanks.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [29]
+--------------------------------------------------------------------------------
+
+          I agree strongly that this is a huge opportunity. Our goal with all of our clients from the biggest to the smallest is to drive their business results and that's usually selling a product, sometimes online, but often in stores. We've done a lot of work over the last year or two on measurement. We talk about measurement in all of these calls and that's because investing in measurement and connecting, not just from online to online, but online to offline is super important.
+Because if we can prove those results to our marketers large and small, they will continue to invest. We think we have a real advantage here that we have real identity, we have real identity across the desktop and across mobile and we have found ways in very privacy-protective ways to work with third parties, third party users of data to connect offline sales to online ads and those investments remain a very big focus for us.
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          Ken Sena, Evercore.
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore Partners - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          You mentioned over 1 billion users, 80% of app developers use the Facebook log-in on iOS and Android. When we think about Facebook as a platform, can you provide any stats on the number of developers who are starting to build their experience on Facebook? How integrated do they need to be to see things like app linking, data formats, autoplay video, or other? Thanks.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [32]
+--------------------------------------------------------------------------------
+
+          We've shifted to this model on mobile where developers aren't really building their apps inside Facebook. We're not an operating system. We had a little bit more of this dynamic with Canvas on desktop, but now we've shifted the strategy to helping developers with three things: build, grow, and monetize their apps. We have a number of services that developers can plug into their apps to help out with all three of those.
+For example, we have -- and for helping people build their app, we do things like log-in and we have services like parse that help developers build apps more easily, that stuff is all great for helping folks build social apps in a way that's faster than they could have otherwise. In terms of growth, we offer tools like sharing and messaging so that a developer can enable their users to be able to organically spread the app.
+We have things like app installs and engagement ads to make it so that developers can pay to increase that. On the monetized side, we are rolling out the Audience Network and on Canvas, we have things like payments to help developers monetize and that's an increasing focus, as well. Audience Network is new and it's just getting started, so, again, it's one of these things that will be pretty slow for a while because we really want to do it right, but that's going to be an important part of this, as well.
+That's how you want to think about developers and right now, we're really proud that 80% of the top developers see value in touching a part of our platform. We obviously want to get the last 20%, but we're excited about the progress so far.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [33]
+--------------------------------------------------------------------------------
+
+          In terms of those developers using our different ad products, as we say, we roll out slowly and slowly usually means we pick a handful of advertisers to work with. That's certainly what we've been doing on autoplay video ads. Over time, our goal is to make our ad products available to all of our marketer segments and that's what we'll work on. Over the long run, any developer, any small or large business, whether they're using other parts of our platform or not, would be able to purchase any type of our ads.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Brian Nowak, SIG.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Susquehanna Financial Group - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          The first one is on video ads. You mentioned it's the early days on video advertising. I was wondering if you could talk to some of your early learnings, what you're pleased with, and where you see areas for improvement and which metrics you're gauging to determine when to undergo a broader rollout. Secondly, I think you mentioned the larger, higher quality rail desktop ads. There's been some changes in experimentation around that inventory.
+How has the advertiser receptivity been to those ad units compared to the old right rail? Where are those dollars coming from? Is that new dollars to the platform or are they shifting from old sponsor stories or old right rail? Thanks.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [36]
+--------------------------------------------------------------------------------
+
+          I'll talk about video and then Sheryl can answer on the right hand column. The biggest thing that we want to make sure is that quality is really good as we roll this out and that's going to be the same on all of these different initiatives. One of the reasons why we're optimistic about autoplay specifically as a format for both organic and paid content, is that you're strolling through feeds and if the content catches your eye and you like it, then it's playing and it's loaded and you can just easily continue watching it.
+Or otherwise the person has complete control and if they don't like it, they can just keep on going through it, so the content has to be really good and we think that's going to be a really high quality experience. There are still a number of things that we really want to prove and make sure that we're doing well here. We want to make sure that when people see an autoplay video, that's not only paid content, we want a lot of that to be organic content, as well.
+We're trying to ramp up the amount of good public content and common content that people share at the same time as we're ramping up the autoplay video ads. We also want to make sure that this doesn't consume a lot of people's data. We're just being really careful about how we handle that and getting that really right across different markets. That's going to be a different thing that we want to be really sensitive to.
+It really just, in a word, this all comes down to quality and we're more focused on just making sure that this is the right and best thing over time than something in the near term. That, I think, is a theme of the lot of the areas that we've talked about, whether it is the new apps that we're building, things like Messenger or Instagram and what we're doing there, or things like Audience Network, which we just announced, or video adds.
+There are just a lot of things that we're super excited about. We, obviously, will talk about them publicly because we're working with partners and we're excited to talk about them here as well because we do really think that these are going to be great things to help build businesses over time. But we want to make sure that we don't want to get ahead of ourselves, because these things are early and quality is the most important thing for growing this the right way over time.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [37]
+--------------------------------------------------------------------------------
+
+          On the right-hand column redesign, the redesign was driven by making the ads more consistent with News Feed, which results in fewer but larger ads. But they just don't come from any one place. When you think about Facebook's growing part in the ad ecosystem, you really have to think about ad dollars shifting online as the majority of the driver of budget shifting and ad dollars coming on to mobile.
+We are pleased that we see higher engagement rates from the people who are shown the new ads compared to the old, which makes us optimistic that these are more valuable.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+          Brian Pitz, Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Maybe a question in a different direction regarding privacy and maybe you could just walk us through your current thoughts? The reason I ask is because Facebook recently introduced the anonymous log-in product at f8 this year and new services like Save are hidden from friends unless users specifically opt-in. Can you just give us a sense, is this kind of a change of strategic shift in thinking or tone with regards to privacy? Thanks so much.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [40]
+--------------------------------------------------------------------------------
+
+          It's a really important question, I think something that's misunderstood about Facebook. One of the things that we focused on the most is creating private spaces for people to share things and have interactions that they couldn't have had elsewhere. If you go back to the very beginning of Facebook, rewind 10 years, there were blogs and things where you could be completely public and there were email, so you could circulate something completely privately, but there was no space where you could share with just your friends.
+It wasn't a completely private experience, but it's not completely public in that it's 100 or 150 of the people that you care about. Creating that space, which was a space that had the kind of privacy that no one had ever seen before, was what enabled and continues to enable the kind of interactions and the content that people feel comfortable sharing in this network that don't exist in other places in the world.
+We're constantly looking for new opportunities to create new dynamics like that and open up new different private spaces for people where they can then feel comfortable sharing and having the freedom to express things that you otherwise wouldn't be able to. It's one of the reasons why I'm personally so excited about Messaging, because right now, at some level, there are only so many photos that you're going to want to share with all of your friends.
+We still think that there's more to do there. The amount of messaging and how quickly we see that growing is crazy. There is just a lot more that people want to express and that they need the tools to express with smaller groups of people, not just one person at a time, but smaller groups, as well. Things like anonymous log-in totally unlock different behaviors.
+How many times would you want to sign into an app, but you don't necessarily want to share a lot of information with that app, but if you can do it anonymously, we think that's going to unlock a lot of different interactions and experiences that people want to have. We view our jobs as very fundamentally providing people with these spaces and tools, which, I think, is very different from how a lot of people think about what Facebook is. But it's an important thing to think about how we do our product development.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          Colin Sebastian, Robert Baird.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Co. - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          On mobile advertising and ad loads, just curious what you're seeing in terms of the ad load thresholds is that you're at the point now where the relevancy and quality of ads means that you can tick that up, perhaps, a little bit. On Oculus and virtual reality applications, how should we think about the pace of development of this technology and the potential integration with Facebook's applications? Thank you.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [43]
+--------------------------------------------------------------------------------
+
+          I can take care of the mobile ad load question. Ad load is really one of dozens of factors that we focus on. Others are, of course, the quality, the relevance, and then the prominence of the ads.
+We monitor the sentiment and engagement of people engaging in News Feed. We're really pleased with the strength of sentiment and engagement as we've ramped up News Feed ads. We feel like we're in a good position, given where we are with that, to continue to grow the advertising business while driving good user experience. We're in a good place on that.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [44]
+--------------------------------------------------------------------------------
+
+          Yes. I can talk about Oculus. We're really excited about this. The acquisition just closed earlier this week and we're real excited to welcome that team. They're extremely talented and have pulled off something that people had been talking about for a really long time and now it's possible, given the technology that this team has developed.
+This hits on a different part of our strategy, which the way that I organize my remarks every quarter are around these 10-year goals and themes that we have for the Company: connecting everyone, understanding the world, helping to build the knowledge economy, and these future platforms. When I'm talking about how I think things like the businesses that we're talking about are further out than you think, I think that this stuff is actually even further out than that.
+But there are huge opportunities to build the next generation of computing platforms. When mobile was getting defined, we were basically just getting founded; in 2004, the first SmartPhone came out in 2003. We've mostly been a company that has played on top of the different mobile foundations that other companies have built. One of the things I care really deeply about, on kind of a 10-year arc for the Company, is having a different relationship to whatever the next set of computing platforms are and investing accordingly now to make sure when the next set of computing platforms get defined, we can help define of what the next generation of computing is going to be.
+I think virtual reality, augmented reality, vision, some of the AI work that we're doing is all going to play into this in an important way. I just think, while I was emphasizing that we're early on some of those businesses and we're not going to rush those, the flip side of the coin is to emphasize that we're also going to spend a lot and invest very heavily in a bunch of these things to do it right over the long term.
+Dave pointed out that we expect to continue investing heavily and that our costs will increase and I just want to underscore that, as well, because I expect that to continue to be true. It's not that we're necessarily going to go out and have a lot more new strategic priorities, but we expect to go very deep on the priorities that we have to make sure that we completely nail them all, whether it's a 5-year or 10-year timeframe.
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+          Ben Schachter, Macquarie.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [46]
+--------------------------------------------------------------------------------
+
+          Mark, you talked about a focus on public content. Does that include a focus on exclusive content and should we expect that you'll pay for or have revenue share agreements with the content with some key public figures? Separately, on search, I think you still have quite a large team working on improving search, but from our vantage point, we haven't seen many changes since the original beta graph search product launch.
+When should we expect to see those improvements and how would you rank search in terms of you priorities? Finally, just a quick housekeeping question, David, the D&A continues to trend down over the past few quarters. Why is that happening and should we expect that to continue? Thanks.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [47]
+--------------------------------------------------------------------------------
+
+          I can take the D&A question first, if you'd like. Ultimately, depreciation is going to track more closely against the CapEx. In the first half of the year, we've been aggressively investing in the things we want to invest in and that includes infrastructure. CapEx is up 40% in the first half of the year. There are some investments that we're making, notably in the Iowa data center, also the new headquarters we're building where those facilities have not gone into service, so they're not hitting depreciation yet.
+We're making the big investments in CapEx that will ultimately flow through in depreciation. In short, the answer to your question is we'll see depreciation come up as those things come online.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Chairman & CEO    [48]
+--------------------------------------------------------------------------------
+
+          I can answer the others. On public content, we actually do get a lot of exclusive content. We don't pay for it. This week, for example, I think Shakira hit her 100 million fans moment on Facebook. Part of the reason why some of these public figures and political leaders and folks have such big followings is because they're constantly providing insight into their lives and unique types of content that other folks -- that you can't get anywhere else.
+There's a format that I think makes sense for Facebook. You're not going to come to Facebook to watch a movie or watch a full TV show, that's really long form stuff. But in the mode that we have today in our service, that kind of attraction is the best place for a number of types of content like this that we're starting to see that we get.
+We're mostly focused on driving success for partners, whether they're news organizations that are publishing content that people share or public figures and individuals who are engaging directly on Facebook. Our view is that the more success from distribution and engagement we can drive for them, the better the content and the quality that they're going to invest in building for Facebook.
+Type of search, I mentioned in my opening remarks that this quarter, I think for the first time, we are over, on average, 1 billion searches a day, which is awesome and it's something that we're really proud of and have worked a lot on, especially given that we generally found that people search a little bit less on average on mobile. We went through a period where in order to have that increased, we had to do some really good work and make it a lot faster and improve ranking and do a lot of the basic things that needed to get done.
+There is just so much more content that needs to get indexed. If you want to go find that Shakira video that I was just talking about, I don't know if today the product fully delivers on that, but we will soon and in the next six months, we're going to be able to do that if we do well and then a year later, we're going to have more content in the system and be able to index that better.
+It's an ongoing thing. There's huge potential. There are a lot of questions that only Facebook can answer that other services aren't going to be able to answer for you.
+We're really committed to investing in that and building out this unique service over the long-term and I think at some point, there's going to be an inflection where it starts to just be useful for a lot of use cases. But that may still be years away, but we're just committed to doing this investment and making this right.
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director of IR    [49]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us today. We appreciate your time and we look forward to speaking with you again.
+
+--------------------------------------------------------------------------------
+Operator    [50]
+--------------------------------------------------------------------------------
+
+          This concludes this conference call. You may now disconnect.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2014-Jul-24-AMZN.OQ-138703384359-Transcript.txt

@@ -0,0 +1,555 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2014 Amazon.com Inc Earnings Call
+07/24/2014 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Tom Szkutak
+   Amazon.com, Inc. - CFO
+ * Phil Hardin
+   Amazon.com, Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Neil Doshi
+   CRT Capital - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Greg Melich
+   ISI Group - Analyst
+ * Benjamin Schachter
+   Macquarie Research - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Mark Miller
+   William Blair & Company - Analyst
+ * Brian Nowak
+   SIG - Analyst
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+ * Kaizad Gotla
+   JPMorgan - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day and welcome to the Amazon.com Q2 2014 financial results teleconference.
+(Operator Instructions)
+Also, today's call is being recorded. For opening remarks, I'll be turning the conference over to the Director of Investor Relations, Phil Hardin. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q2 2014 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 24, 2014, 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 2013. Now I'll turn the call over to Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Phil. I'll begin with comments on our second quarter financial results. Trailing 12-month operating cash flow increased 18% to $5.33 billion. Trailing 12-month free cash flow increased to $1.04 billion. Trailing 12-month capital expenditures were $4.29 billion. The increase in capital expenditures reflects additional investments in support of continued business growth consisting of additional capacity to support our fulfillment operations and investments in technology infrastructure including Amazon Web Services.
+Return on invested capital was 6% up from 2%. ROIC 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 480 million shares compared with 474 million one year ago. Worldwide revenue grew 23% to $19.34 billion or 22% excluding the $237 million favorable impact from year-over-year changes in foreign exchange rates.
+Media revenue increased to $4.84 billion up 10% or 9% excluding foreign exchange. EGM revenue increased to $13.28 billion up 27% or 26% excluding foreign exchange. Worldwide EGM increased to 69% of worldwide sales up from 66%. Worldwide paid unit growth was 23%. Active customer accounts exceeded 250 million. Worldwide active seller accounts were more than 2 million. Seller units represented 41% of paid units.
+Now I'll discuss operating expenses excluding stock-based compensation. Cost of sales was $13.4 billion or 69.3% of revenue compared with 71.4%.
+Fulfillment, Marketing, Tech & Content, and G&A combined was $5.54 billion or 28.6% of sales up approximately 260 basis points year-over-year. Fulfillment was $2.28 billion or 11.8% of revenue compared with 11.2%. Tech and Content was $2.02 billion or 10.4% of revenue compared with 9.1%. Marketing was $911 million or 4.7% of revenue compared with 4.1%.
+Now I'll talk about our segment results and consistent with prior periods, we do not allocate to segments our stock-based compensation or other operating expense line item. In the North America segment, revenue grew 26% to $12 million. Media revenue grew 13% to $2.46 billion or 14% excluding foreign exchange. EGM revenue grew 29% to $8.37 billion representing 70% of North America revenues, up from 68%. Other revenue grew 38% to $1.17 billion. North America segment operating income increased 7% to $438 million, a 3.7% operating margin.
+In the International segment, revenue grew 18% to $7.34 billion excluding the $246 million year-over-year favorable foreign exchange impact, revenue growth was 14%. Media revenue grew 7% to $2.38 billion or 4% excluding foreign exchange. And EGM revenue grew 25% to $4.91 billion or 20% excluding foreign exchange. EGM now represents 67% of International revenues, up from 63%. International segment operating loss was $34 million compared to zero in the prior period.
+CSOI decreased 1% to $404 million or 2.1% of revenue, down approximately 50 basis points year-over-year. Excluding the favorable impact from foreign exchange rates, CSOI decreased 9%. Unlike CSOI, our GAAP operating income or loss includes stock-based compensation expense and other operating expense.
+GAAP operating loss was $15 million compared to operating income of $79 million in the prior-year period. Our income tax expense was $94 million and this includes approximately $90 million of discrete tax items primarily attributable to audit related developments. GAAP net loss was $126 million or $0.27 per diluted share compared with a net loss of $7 million and $0.02 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $523 million year over year to $7.99 billion. Inventory increased 23% to $6.64 billion and inventory turns were 9.1, down from 9.4 turns a year ago as we expanded selection, improved in stock levels, and introduce new product categories. Accounts payable increased 16% to $10.46 billion and accounts payable days decreased to 71, from 73 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe to date to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending. It's not possible to accurately predict demand and therefore our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as settling intercompany balances and foreign currencies amongst our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rates, can all have material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, record any further revisions to stock based compensation estimates, and that foreign exchange rates remain approximately where they have been recently.
+For Q3 2014, we expect net sales of between $19.7 billion and $21.5 billion or growth between 15% and 26%. This guidance anticipates approximately 120 basis points of favorable impact from foreign exchange rates. GAAP operating loss to be between $810 million loss a $410 million loss compared to a $25 million loss in the third quarter of 2013. This includes approximately $410 million for stock-based compensation and amortization of intangible assets.
+We anticipate consolidated segment operating income or loss, which excludes stock-based compensation and other operating expense, to be between a $400 million loss and $0 compared to $267 million of income in the third quarter of 2013. We remain heads down focused on driving a better customer experience through price, selection, and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks, and with that, Phil, let's move to questions.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions)
+We'll hear first today from Carlos Kirjner with Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Hi. Thanks for taking my question. Two if I may. Tom, you mentioned in the past that China is an area of investment. Can you say little bit about what are the main drivers of investment there, whether it's marketing pricing fulfillment? And how would you decide on any given year how much you invest in China just given the size of the potential market and opportunity?
+And secondly, we saw a material deceleration in the North America Other revenues. Was this primarily driven by AWS deceleration, and is this deceleration a meaningful contributor to the losses implied in your next quarter guidance? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Sure. I'll take the second part of the question first. Yes, North America Other includes a number of things including Amazon Web Services. Amazon Web Services is the largest part of North America other. You know, as we talked about on last call, we had very substantial price reductions for customers starting in second quarter. They range from 28% to 51% depending on the service.
+But AWS continues to grow very strongly. In Q2, we had usage growth close to 90% year-over-year for the quarter. So the team's doing a fantastic job, and we put in some price reductions that were very substantial that are saving customers hundreds of millions of dollars over the next several months as we mentioned 90 days ago. But again, we love that business. It's doing great and we are very pleased to have the opportunity to invest in it.
+The team is innovating very quickly, in fact so far year-to-date, they've released 250 significant services and features. And that's at a pace that's much, much faster than last year's pace which was faster than the year before. So again, they are continuing to innovate on behalf of customers, and so we're investing. So that's certainly impacting both the pricing decisions we've made. It's certainly impacting the guidance.
+Also the large amount of CapEx and infrastructure for that business is certainly impacting the guidance, along with a number of other things across the business that we're investing in. But we're very pleased to do that. In terms of China, you know we are continuing to invest on behalf of customers there. Obviously trying to make the experience even better for customers in terms of improved in-stock levels.
+We've spent -- certainly added a lot of fulfillment capacity over time in China. And we're doing a lot of interesting things to better serve customers in China. In terms of some of the other parts of your question, there's not much more I can add to that.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [4]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          We'll hear next from Neil Doshi with CRT Capital.
+
+--------------------------------------------------------------------------------
+Neil Doshi,  CRT Capital - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Tom, can you talk a little bit about the deceleration in the units and then also in terms of the third-party dollar, it looks like you're kind of trending on 40% for a while. It ticked up a little bit to 41%. So if we adjust for Digital, how should that trend be looking? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+
+          In terms of unit growth, we had 23% unit growth year over year. It is down from last year's growth rate but it's consistent with what we've seen recently, including last quarter. And in terms of the unit -- the third-party units as a percentage of total units, you're right, that's 41% this quarter. It's up about 100 basis points, you know, and we are not breaking out the Digital versus Physical on that. But again, very strong third-party growth. Number of factors but certainly FBA is helping third-party growth.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+          And we'll go next to Eric Sheridan with UBS.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [9]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. When looking through the expense lines, Tech and Content seem to have an upward pressure in the quarter. Wanted to maybe get a little more granularity on what was driving that upward pressure and whether that's sort of a new run rate of expense as we saw in the first half of this year. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [10]
+--------------------------------------------------------------------------------
+
+          There's a number of things that are going into the Tech and Content line. But you're right, we're one of the ones that I just mentioned. We are investing, you know, in various parts of the business but certainly for Amazon Web Services, that's both from an infrastructure standpoint to support the very fast usage growth that we are experiencing.
+Again, we have usage growth close to 90% year-over-year in the second quarter for web services. In addition to that, we've -- over the past year, we've added thousands of people in web services. So again, ramping that up. And then across a number of different other investment areas, we continue to add great technical resources to do the things we're doing in Digital and many other parts of the company.
+So again, we have a lot of opportunities to invest in as you can see from a lot of the releases that we've had over the past, you know, 12 months and you're certainly seeing that reflected in our actual results as well.
+
+--------------------------------------------------------------------------------
+Operator    [11]
+--------------------------------------------------------------------------------
+
+          And next from JPMorgan we will go to Douglas Anmuth.
+
+--------------------------------------------------------------------------------
+Kaizad Gotla,  JPMorgan - Analyst    [12]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. This is Kaizad Gotla in for Doug. I was wondering if you could just talk about the deceleration in your international EGM line. And then separately, now that you've had the Prime price increases in effect for about three months, wondering if you could just talk about any changes you have seen in sign-ups or conversions there. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [13]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of international EGM, and this would really relate to total international growth as well, we saw 18% growth on a dollar basis, 14% growth on a local currency growth basis, which is down a little bit sequentially from what we saw in Q1. You know, obviously, there's variability from quarter-to-quarter in each of the geographies that we operate in.
+You know, one call out which impacted certainly EGM and our total international growth rate is Japan. We saw on April 1 the consumption taxes increased from 5% to 8%. Leading up to that in the latter part of Q1, we certainly saw accelerated growth in -- so that was reflected in the Q1 results. In Q2, we saw some corresponding softness in Q2 following that.
+Hard to know how much was related to consumption growth but certainly as you've probably read elsewhere that others are seeing that too so it's not -- probably reflects the consumption tax increase. But if you take out Japan out of both Q1 and Q2, the growth rates on a local currency basis were very similar, within approximately 100 basis points of each other.
+In terms of Prime, Prime subscribers are growing very nicely year-over-year. In fact, we added more Prime subscribers in Q2 of this year than in Q2 of last year. So we're very pleased and customers are responding to -- continue to -- we continue to get new subscribers as well as existing customers responding to the great value they're getting out of Prime.
+
+--------------------------------------------------------------------------------
+Kaizad Gotla,  JPMorgan - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Helpful. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [15]
+--------------------------------------------------------------------------------
+
+          And from Citi we'll go to Mark May.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my question. Common sense based on sort of what you've talked about in the disclosures around the price -- the amount of the price decreases. But common sense would suggest that all, if not most, of the CSOI margin decline that you posted in Q2 year on year is related to the AWS price changes.
+And common sense would also suggest that given the significant volume gains that you are seeing in that business that Q2 might be the most impacted quarter from that yet the third quarter guidance suggests that it's having an even greater impact on Q3.
+Just wondering if you could help us think through that. Is there some timing issue related to the impact of that, or is there something else going on within the core retail business or maybe some other one-time items that might be impacting your Q3 outlook? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [17]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of we are not quantifying the impact of the price changes on our Q2 and Q3. But it is fair to say that the impact has certainly did impact our Q2 results in a meaningful way, and that's reflected in the actual results that you're seeing.
+Another thing to keep in mind as you look out related to AWS is we're continuing to invest in that business. And with the great strong usage growth rates that we're seeing, we're also investing in CapEx and infrastructure to support that growth. So again, the team is doing a fantastic job innovating on behalf of customers, and as I mentioned earlier, the new releases both from a service and feature perspective was about 250 year to date which is at a pace that's much faster than we've seen over the last few years with very high bark given all the innovation that's happened from that team in that space.
+So again, those are certainly things that are impacting Q3 guidance. There's a number of other things. When you look at Q3, keep in mind if you look back over the last several years, we're getting ready for our Q4 seasonal quarter. And when that happens, if you look back certainly, you've seen our CSOI usually has been at the lowest point for the year during Q3, particularly during these high-growth years.
+And so we've added -- or announced that we are adding six net new fulfillment centers, and we've also announced that we'll have 15 or more sortation centers. The sortation centers helps us get closer to customers so that we can have fastest delivery speed as well as deliver on Sundays, which is the big deal for us in the US so we're very pleased to be able to do that.
+On top of that, other investment areas that are certainly impacting our Q3 guidance is we like what we see on the content side, so video content, for example. We're ramping up the spend from Q2 to Q3 significantly. And then so be it also be a significant growth year over year.
+Keep in mind we have two types of content. We have licensed content and we also have original content. A lot of you have probably seen a lot of the announcements that we've green lighted a number of pilots. We are going to be in heavy production on those pilots during -- sorry, in those series that a been green lit during Q3. We've also announced a number of pilots that we'll be in production on and so that original content, that's a portion of our total content, will be over $100 million in Q3.
+Keep in mind that just as a reminder, that we do not capitalize that portion of our content -- of our original content. It's expenses incurred. So that's over $100 million in Q3, and again, that's ramped up considerably both on a sequential and on a year-over-year basis. Other areas that we're investing in, certainly with the launch of some new devices, more recently over the past couple quarters between Fire phone and Fire TV and others.
+Over time, we've invested in devices so that's certainly an area we are investing in. We're investing in a lot of different areas including geographic expansion. We talked about China on one of the earlier questions, but certainly India we are investing very heavily. We are seeing some very positive results there. The team's doing a fantastic job. We're also investing in other geographies as well, like Italy and Spain and others.
+So again, we're encouraged by just the sheer magnitude of opportunities we have and we're investing in those opportunities.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Appreciate the added detail.
+
+--------------------------------------------------------------------------------
+Operator    [19]
+--------------------------------------------------------------------------------
+
+          We'll move next to Brian Pitz with Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [20]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for the questions. First question on FBA. Any insights on the penetration of third-party sellers using FBA? Maybe you could comment just directionally. Is the number trending up or down? And separately, it's been less than a week but can you comment on early feedback to Kindle Unlimited by customers and publishers? Do you expect this to be the model for digital book consumption in the future? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [21]
+--------------------------------------------------------------------------------
+
+          In terms of FBA, it's doing great. I can't provide any -- a specific percent. But it's continued really since the time we've launched, continued to increase as a percentage of total third-party units, and so the service has been -- has done very well. The team continues to work on making it even better on behalf of sellers and customers. In terms of Kindle Unlimited, it's very early but we're extremely pleased with what we see. There's been a great reaction to it, and we are pleased to offer that to customers.
+
+--------------------------------------------------------------------------------
+Operator    [22]
+--------------------------------------------------------------------------------
+
+          We go next to Heath Terry with Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [23]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. I was just wondering, you mentioned that you were happy with the results that you are seeing from the video content. I was wondering if you could give us a sense of how that manifests itself, whether it's more Prime subscribers, whether it's more consumption of downloadable video content within the ecosystem.
+And then, Tom, to the extent that you're talking about AWS volume increases on a year-over-year basis, can you give us a sense of how that may have trended over the course of the quarter as your AWS customers were able to sort of adapt to the price reduction in March?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [24]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of content, we've seen just more and more customers are streaming, more and more Prime members are streaming free content. We're seeing through our pipeline as customers join Prime, we're seeing that we have more and more customers taking free trials and then converting. Those customers are great customers.
+In addition to streaming free content, they have great purchasing patterns. Doing a lot of cross shopping on physical products as well as converting to paid digital video and other digital products as well. We are very pleased with what we are seeing there, and when you look at the service that we have today it's improved dramatically over the past 12 to 24 months. We really think it's a great service and that's why we are investing in it.
+In terms of AWS, there's not much I can help you with on that. But again, just to reiterate we saw very strong growth during Q2. And with usage growth rates close to 90% year-over-year for the quarter. And we're extremely happy with what we see there and the team is doing fantastic job and continuing to innovate on behalf of customers.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [25]
+--------------------------------------------------------------------------------
+
+          Great. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+
+          We'll hear next from John Blackledge with Cowen and Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [27]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. Just a couple of questions. First on AWS. Just wondering your take on the competitive environment in public cloud. Has it intensified over the past 6 to 12 months and just given the investments in AWS, how do you view AWS's competitive positioning?
+And then if you could just touch on the key drivers of EGM growth in North America and are those the same drivers of growth internationally or are there different drivers on North America versus International? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [28]
+--------------------------------------------------------------------------------
+
+          In terms of AWS, there's not a lot in terms of talk to -- long-standing practice of not talking about other companies and what they're doing in environment. You know the team is certainly used to operating in a very competitive environment. They work hard to be able to afford lower prices for customers. That's something that is instilled in all of Amazon and it's something certainly that's instilled in our web services team.
+And they're focused on what they do best which is innovating on behalf of customers, operating these services at the highest quality levels. And they'll continue to work on getting more efficient so that we can have great prices for customers. That's what the team's focused on and they're doing a great job. In terms of EGM growth, between North America and international, there's not a lot I can call out there. It has many different categories across many different geographies, many different ASINs, both first-party and third-party, so it's hard to comment.
+The only thing I would call attention is the comment I made earlier around international growth rates related to EGM and that was the consumption tax increase in Japan that we saw a lead-in in Q1 were we saw very strong growth leading up to that point, and it softened after the rates went into effect. But other than that, there's not a lot to call out.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [29]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          We'll now go to Macquarie's Ben Schachter.
+
+--------------------------------------------------------------------------------
+Benjamin Schachter,  Macquarie Research - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          When you mentioned that AWS is growing 90% year over year, what exactly is growing 90%? Is it storage? Is it something else? And then on the phone itself, are there any key differences in how we should be thinking about that piece of hardware versus other hardware you've done in the past where Jeff has discussed the notion of essentially wanting to break even.
+And then just a follow-up on that, how are you modeling the impact of the phones on the P&L in 3Q? Is it going to be more or less than the original content initiative? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [32]
+--------------------------------------------------------------------------------
+
+          In terms of AWS, it's really a aggregation of usage across all of our services year-over-year. I think that it's almost a proxy similar to unit growth on our retail business. It's a proxy to say how fast physical volume is growing, and so that's what it's a proxy for. In terms of the phone, there's not a lot I can help you with on that. We are extremely pleased to get it in customers' hands.
+We think it's a premium product. And it also is -- it's also a great value too. You get a 32 gigabyte phone, premium product, one year free subscription to Prime, along with all the other features that I'm sure you've read about. So again, we're very pleased to get it to customers and start shipping, and customers have started to receive those today.
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+
+          And from William Blair, we'll go to Mark Miller.
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair & Company - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          Good afternoon. Many investments one area looks like where you are getting a return is in the gross margin. If I take out AWS, it looks like you are up nearly 200 basis points. What are the drivers of that eCommerce margin increase? Are you seeing it primarily on the first-party margin expansion, and if so, why and how much is coming from third-party unit increase? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [35]
+--------------------------------------------------------------------------------
+
+          Yes, we don't actually focus on total company gross margins because of the mix of the business, we focus more on operating profit and obviously, ultimately free cash flow dollars. But in terms of things that would be impacting, you know, COGS as a percentage of revenue and that change to be helpful. You mentioned AWS is certainly having an impact there.
+Our third-party business continues to have an impact there. We have offsets as we lower prices to customers having an impact there. Just mix of products, our various products and geographies has an impact on those results. Again, a large number of items that are impacting that.
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+          And Justin Post with Bank of America Merrill Lynch has our next question.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [37]
+--------------------------------------------------------------------------------
+
+          Thank you. Tom, it might be a little bit of a disconnect when we've seen prior investment cycles such as distribution buildout or devices with say the Kindle reader, we did see the impact on units and accelerating growth in some of the categories. This time around, you've been investing for a couple years and I guess we are not really seeing the acceleration that some are looking for.
+Maybe you could talk about what gives you confidence in investing in devices like the Fire TV and the phone and all the content you are doing and are seeing some underlying signs that say activity is picking up. Maybe you could walk through that.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [38]
+--------------------------------------------------------------------------------
+
+          Sure. Just a couple things to call out. One is when we look at our unit growth, you hear the 23% unit growth. Keep in mind that there are parts of our business that are not included in that unit growth. So when we talk about investing in web services and the usage growing close to 90%, that number is not included in the 23%, so that's obviously a large investment area for us that we are excited about that is not included in that.
+The other is think about the base of business that we have versus where we were just a few years ago. And so you've seen very strong growth on the base that we have and we are excited to see that. And you know, so those of the things when we look at the opportunities that we're investing in, in terms of video you mentioned. We are seeing that certainly in the number of Prime members that are subscribing, and so that has some short-term impact but great long-term impact as we retain those Prime members.
+And as they start to do more cross shopping over time, so it's more of a trailing -- we have a lot of investment in front of that demand, if you will. So those are some of the things that I would call out that maybe try to be helpful.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+          We move now to Youssef Squali with Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [41]
+--------------------------------------------------------------------------------
+
+          Okay, thank you very much. Going back to the $100 million in spend on the original content that you mentioned earlier, as the business -- as that part of the business grows, is there any reason to believe that the amount of spend on originals will go down? The assumption here is it will only go up. So is that $100 million a good level to work off of?
+And then going back to the Fire phone, just trying to understand the strategy around the product longer term. Is it, again, just to try to further build the Amazon ecosystem with all its benefits or do you think this is a -- this could be a self-funded business? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [42]
+--------------------------------------------------------------------------------
+
+          In terms of the original content, you know, we're not giving guidance on the numbers going forward beyond Q3. We are very excited about what we see in the pilots that we had and the series we had. And so, you know, we are happy to green light the series that we've released that we've talked about in releases over the past few months. We're also happy you'll be seeing many new pilots, and so that's reflected in the over $100 million that I mentioned earlier.
+So we're extremely excited on behalf of customers to be able to do that, and we think that the right thing to do. But in terms of what we do, in terms of spend beyond Q3, I can't comment on today. In terms of the Fire phone, we're very excited about it. You mentioned two different areas. One is can it exist on its own and whether it's part of our family, if you will, to help drive other usage and the answer is we certainly think it can be both.
+So we think it can be a great product on its own. We're very excited to offer it to customers. It's very integrated into our -- certainly our various video services -- various digital services including, you know, video and games at our app store and ebooks and certainly Prime Music. So those are all very interesting things on behalf of customers.
+It's also a great way to do physical shopping as well. So again, it's certainly integrated into our business as well.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [43]
+--------------------------------------------------------------------------------
+
+          Thanks, Tom.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+          And Brian Nowak with SIG has our next question.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  SIG - Analyst    [45]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. I have two. The first one is around CPG, consumer packaged goods. I was wondering, Tom, can you talk to some learnings in CPG so far of what's working and what you think is still holding back faster CPG adoption. Do you think you need a same day delivery offering at this point for CPG kind of given Google and given the traditional retailers push into that category?
+And then the second one, the close to 90% AWS usage growth, just to help us understand a bit more. What did that number look like in 2013? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [46]
+--------------------------------------------------------------------------------
+
+          In terms of the usage growth, that business is growing very, very fast. Beyond the data point, there's not a lot I can help you with. In terms of CPG, and this really relates to many of our categories. We are working on behalf of customers to provide fast delivery. It's something that we've improved on over the years and we're going to continue to work on. There's a number of different things we're working on.
+One of the things that I mentioned earlier in the call is certainly sortation centers. That's an attempt on our side which we think we have in a small way and tested it and we've seen it the way to get product to customers even faster. So we're excited about that. It also helps us deliver on Sunday, which we think is great too, so those are the things that we're working on as well as others to help customers get product faster. We think that benefits CPG products as well as other products.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  SIG - Analyst    [47]
+--------------------------------------------------------------------------------
+
+          Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+          We'll move next to Mark Mahaney with RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [49]
+--------------------------------------------------------------------------------
+
+          Thanks. I wanted to follow-up on that William Blair question about the gross margins, only because I know you don't focus on them and there's a lot of mixed factors that you correctly pointed out, but that's a record high gross margin for you, 30.7% ever. And it's in the context of a quarter in which AWS clearly came in because of the price cuts. And so there's something else that happened there that really caused that gross margin to gap up. Could you give us any color?
+I understand a lot of puts and takes in there. But something must've happened that was unusual to have that kind of result with the slowing down AWS contribution. Thanks a lot, Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [50]
+--------------------------------------------------------------------------------
+
+          I apologize Mark, again. We don't focus a lot on gross margin as a business. Obviously, individual product lines we would look at gross margin but across the business, we don't, for the very reason you mentioned. There's a large mix impact. You have our web services business. You have our third-party business. You have a retail business. You have categories within retail.
+There's a whole host of things that would impact that. And so that's why we don't focus on a total company basis. Certainly, on individual SKUs or ASINs as we call them, we certainly would look at it, individual subcategories. We would certainly look at it internally, but from a total company perspective, given the mix effects, we think it's much more appropriate to look at operating profit and free cash flow.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [51]
+--------------------------------------------------------------------------------
+
+          Okay.
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+          From ISI Group, we'll go to Greg Melich.
+
+--------------------------------------------------------------------------------
+Greg Melich,  ISI Group - Analyst    [53]
+--------------------------------------------------------------------------------
+
+          Thanks. It looked like revenue per active customer accelerated again this quarter, I think over 5%. It was running closer to 2% to 3% last year. Could you help us understand what's driving that? Whether it's Prime particularly or anything -- any color on that. And when you gave the Prime numbers, second quarter more sign-ups, whether that was a gross or a net number. Thanks a lot.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [54]
+--------------------------------------------------------------------------------
+
+          The Prime was the net number so that's the net additions to total members. So again, we added net more Prime members in Q2 of this year versus Q2 last year, even with the price change. In terms of revenue per extra customer, there's not a lot I can say there. The one thing -- a few things to think about. One is certainly Prime customers buy more than non-Prime customers.
+We're seeing great growth on Prime that's certainly having an impact on that number. Certainly, there'd be other factors to our web services business would be included in the numerator that you are talking about as well. And so those are factors you should be thinking about. But again, the biggest factor would certainly be in terms of looking at our retail business.
+Prime is becoming much more meaningful. And that's also why we think about how do we make Prime better on behalf of those customers. We just like the long-term benefits that we see for those customers.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+          Our final question today will be from Colin Sebastian with Robert Baird & Company.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          Thanks Tom. One of your executives in the UK recently mentioned the Company's goal of reaching 1 billion different products available for sale on the site. I wonder if there is an expansion in selection beyond what we've seen recently that could help accelerate growth and related to that, are you still relatively agnostic in terms of the splits between first and third-party unit sales. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - CFO    [57]
+--------------------------------------------------------------------------------
+
+          In terms of selection, you know I would say nothing is new here. We are going to continue to add unique selection. That's something that we've been working extremely hard day in and day out over many years. We have a great team of people working on that and trying to make sure we get vast selection. So that is something we are pleased about.
+In terms of the margins, you know, they do approximate each other. Obviously, there are some differences. Some of the third party will be used products so you shouldn't assume that a used product necessarily has the same contribution profit per unit as a new unit and things like that. But they're close approximates of those.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [58]
+--------------------------------------------------------------------------------
+
+          All right. Thanks very much.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [59]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [60]
+--------------------------------------------------------------------------------
+
+          Again, that we conclude today's conference. Thank you all for joining us.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
+EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
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+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2014-Oct-23-AMZN.OQ-140669099674-Transcript.txt

@@ -0,0 +1,612 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2014 Amazon.com Inc Earnings Call
+10/23/2014 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Tom Szkutak
+   Amazon.com, Inc. - SVP and CFO
+ * Phil Hardin
+   Amazon.com, Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Scott Devitt
+   Stifel Nicolaus - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Ron Josey
+   JMP Securities - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Aram Rubinson
+   Wolfe Research - Analyst
+ * Matt Nemer
+   Wells Fargo Securities, LLC - Analyst
+ * Aaron Kessler
+   Raymond James & Associates, Inc. - Analyst
+ * Brian Nowak
+   Susquehanna International Group - Analyst
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+ * Colin Gillis
+   BGC Partners - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Thank you for standing by. Good day, everyone. Welcome to the Amazon.com Q3 2014 financial results teleconference.
+(Operator Instructions)
+Today's call is being recorded. For opening remarks I will be turning the call over to the Director of Investor Relations, Phil Hardin. Please go ahead.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello and welcome to our Q3 2014 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 reflects management's views as of today, October 23, 2014 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factor 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, and our press releases, slides accompanying this website, 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 2013. Now I'll turn the call over to Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Phil. I'll begin with comments on our third-quarter financial results. Trailing 12-month operating cash flow increased 15% to $5.71 billion. Trailing 12-month free cash flow increased to $1.08 billion. Trailing 12-month capital expenditures were $4.63 billion.
+The increase in capital expenditures reflects additional investments in support of continued business growth due to investments in technology infrastructure, including Amazon Web Services, and additional capacity to support our fulfillment operations. Return on invested capital was 6%, up from 3%.
+ROIC is trailing 12-month 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 481 million shares compared with 475 million one year ago.
+World-wide revenue grew 20% to $20.58 billion, or 20% excluding the $13 million favorable impact from year-over-year changes in foreign exchange. Media revenue increased to $5.24 billion, up 4%, or 4% excluding exchange.
+EGM revenue increased to $13.95 billion, up 26%, or 26% excluding foreign exchange. Worldwide EGM increased to 68% of world-wide sales, up from 65%. World-wide paid unit growth was 21%, active customer accounts was approximately 260 million, world-wide active seller accounts were more than 2 million, seller units represented 42% of paid units.
+Now I'll discuss operating expenses excluding stock-based compensation. Cost of sales was $14.63 billion or 71.1% of revenue compared with 72.3%. Fulfillment, marketing, tech and content and G&A combined was $6.09 billion, or 29.6% of sales, up approximately 350 basis points year over year. Fulfillment was $2.55 billion or 12.4% of revenue compared with 11.5%. Tech and content was $2.22 billion or 10.8% of revenue compared with 9.2%. Marketing was $961 million or 4.7% of revenue compared with 3.9%.
+Now I'll talk about our segment results. And consistent with prior periods we do not allocate to segments our stock-based compensation or other operating expense line items.
+In the North America segment revenue grew 25% to $12.87 billion. Media revenue grew 5% to $2.73 billion. EGM revenue grew 31% to $8.79 billion, representing 68% of North America revenues, up from 65%. Other revenue grew 40% to $1.34 billion.
+North America segment operating income decreased 70% to $88 million, a 0.7% operating margin. In the international segment revenue grew 14% to $7.71 billion. Excluding the $21 million year-over-year favorable foreign exchange impact revenue growth was 13%.
+Media revenue grew 4% to $2.51 billion or 3% excluding foreign exchange. And EGM revenue grew 20% to $5.16 billion or 19% excluding foreign exchange. EGM now represents 67% of international revenues, up from 64%.
+International segment operating loss was $224 million compared to international segment operating loss of $28 million in the prior period. Consolidated segment operating loss was $136 million compared to consolidated segment operating income of $267 million in the prior period. Consolidated segment operating loss includes charges of approximately $170 million primarily related to the Fire Phone inventory evaluation and supplier commitment costs.
+Unlike CSOI, GAAP operating income or loss includes stock-based compensation expense and other operating expense. GAAP operating loss was $544 million compared to operating loss of $25 million in the prior period.
+Our income tax benefit was $205 million. GAAP net loss was $437 million or $0.95 per diluted share compared with a net loss of $41 million and $0.09 per diluted share.
+Turning to the balance sheet, cash and marketable securities decreased $806 million year over year to $6.88 billion. Inventory increased 21% to $7.32 billion. And inventory turns were 8.9, down from 9.2 turns a year ago as we expanded selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 18% to $11.81 billion. And accounts payable days decreased to 74 from 75 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy and consumer spending.
+It's not possible to accurately predict demand and therefore our actual results could differ materially from our guidance. As we describe in more detail in our public filings, issues such as settling inter-company balances and foreign currencies amongst our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rates can all have a material effect on guidance.
+Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements; record any further revisions to stock-based compensation estimates; and that foreign exchange rates remain approximately where they've been recently.
+For Q4 2014, we expect net sales of between $27.3 billion and $30.3 billion, a growth between 7% and 18%. This guidance anticipates approximately 250 basis points of unfavorable impact from foreign exchange rates. GAAP operating income or loss to be between a $570 million loss and $430 million income compared to $510 million of income in the fourth quarter of 2013. This includes approximately $470 million for stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income or loss, which excludes stock-based compensation expense and other operating expense, to be between $100 million loss and $900 million in income compared to $876 million in income in fourth-quarter 2013.
+We remain heads-down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareowners. Thanks. And with that, Phil, let's move to questions.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [4]
+--------------------------------------------------------------------------------
+
+          Great, thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions)
+Thank you. Our first question comes from analyst Brian Pitz with Jefferies & Company.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Great, thanks. Two quick questions. Can you provide any color on the consumer over this year's back-to-school season? And how do you view the outlook for the consumer as we head into the holidays?
+And then, separately, you recently closed the acquisition of Twitch last month. Can you help us understand where does Twitch fit into your overall digital content strategy? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [3]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of back-to-school, certainly the results are reflected in the Q3 results that you see today. There's a number of different impacts back-to-school has. One thing I would like to call out, as you look at our North American media growth rates, one thing that we are seeing is certainly a shift from a textbook standpoint from purchase to rental. And, so, we see a lot more customers renting, so you see that impacting the growth rate a bit in North America media.
+But in terms of Q4, as in any Q4 when we look at it, there's a wide range of outcomes with giving a wide range of guidance. What we feel good about is we have a team that's been improving customer experience over the past 12 months. We're very excited to serve customers. We've had a lot of unique selection. We've got an inventory closer to customers, many different things we're doing on behalf of customers. We're very excited about the holiday season and look forward to serving customers.
+In terms of Twitch, we're very excited to have Twitch as part of our overall team. We've been in video games for quite some time and we think that it's a very creative team. They're doing some very innovative things on behalf of their customers and our customers. And, so, we're excited to have them be part of Amazon, and look forward to working together with that team.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [4]
+--------------------------------------------------------------------------------
+
+          Great, thanks.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Thank you. Our next question will come from Carlos Kirjner, analyst, with Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Thank you for taking my question. Two, if I may. International CSOI margin this quarter were the lowest they have been in years, maybe ever I don't know. We know you have been investing internationally but has something changed fundamentally? And if yes, what.
+Secondly, I wanted to ask you about a vast difference in revenue growth rate between your international and domestic business. What is the fundamental difference between the US and your main international markets? And is this difference fundamental or temporary? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [7]
+--------------------------------------------------------------------------------
+
+          Thanks for the questions. In terms of the consolidated segment or the segment operating for international, certainly versus what you would have seen last quarter, some notable changes. One is we're certainly getting ready for the holiday season. So, as we get ready for the holiday season, we are expanding from a capacity standpoint.
+We do see we've gotten great penetration in Fulfilled by Amazon customers. So you'll see that actually our growth rate, our unit growth rate, is actually higher than our revenue growth rate. That's what we've been experiencing. So, certainly adding capacity from a fulfillment perspective, adding capacity from a infrastructure standpoint.
+If you look at our overall operating expenses, we're certainly investing. With the slower growth rate, you're certainly not seeing as much leverage. We understand that we do have to get leverage over time, but we are investing right now. We're also investing in newer emerging geographies including India and Italy and Spain, and continue to invest in China.
+And then one other call out. We had mentioned in my opening remarks there was approximately $170 million impact related to inventory evaluations and supplier commitment costs. The vast majority of that was in North America, but there was about $25 million in international, just to let you know that's there.
+In terms of the growth rates, it has been softer across a number of geographies. If you look back over the past, really, four quarters, we've seen a little bit of volatility between the quarters, but it's been softer. We continue to focus on the inputs. We still think international is a very big opportunity for us in terms of growth.
+More recently, if you look at the growth rate for Q3 and you see the 13% excluding foreign exchange, you may remember on the last call about 90 days ago I talked about Q2. What had happened was, in late Q1 we had seen a ramp up in Japan before the consumption tax increase happened on April 1. We saw a pretty sizeable drop off in Japan growth rates from Q1 to Q2, which brought that down.
+The only update -- again, there's a number of different puts and takes in geographies -- but the only other comment I would say is that we really haven't seen Japan growth rates improving since Q2. So, that's something that's there.
+But in terms of the fundamentals, long term we're very excited about international, as well as North America. We think that it's a big opportunity. We continue to focus on the inputs. Some of those inputs are certainly on the media side working on the conversion from physical media to digital media. We continue to work on that in a number of different ways. We continue to add new selection in those geographies and work on the retail basics. And so, again, we're very excited about the opportunity.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [8]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+          Our next call will come from analyst Scott Devitt with Stifel.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Stifel Nicolaus - Analyst    [10]
+--------------------------------------------------------------------------------
+
+          Hi, Tom. Thanks. I had a question just broadly. A lot of the capital that's been deployed in terms of planting seeds in new businesses have worked out very well. But given what's happening right now in terms of the deterioration in the margin structure as growth is slowing, I'm just wondering, I think a lot of investors have this question as well in terms of when things don't go as anticipated in some of the bigger projects where there's not a revenue stream, areas maybe like some of the hardware projects and China and other markets, what's the process for determining whether to plow ahead or turn back capital and redeploy it in other areas? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [11]
+--------------------------------------------------------------------------------
+
+          Thanks for the question, Scott. With anything new that we do, and obviously we've done, as you mentioned we've done a lot of new things, there's certainly a wide range of outcome. And we certainly understand that. We try to learn from everything that we do as we launch new opportunities. That's something across things that go great and things that don't go as well as others. We try to learn from that.
+And, so, the way that I would describe it is, from a looking-forward standpoint, we still think that we have a lot of opportunities. That said, we need to be very selective about what opportunities we pursue. So, that's, again, the way we're thinking about it. Probably not much more I can add to it than that.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Stifel Nicolaus - Analyst    [12]
+--------------------------------------------------------------------------------
+
+          Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          We'll continue on to analyst Mark Mahaney with RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Two questions, please. That $170 million in charges related to the Fire Phone, where was that put in the P&L, which of the OpEx lines, or was it a COGS? And then, secondly, in the media side you talked about maybe seeing a negative impact, or definitely seeing a negative impact from the switch towards owning to renting. Do you think that's a broader trend just beyond textbooks that affects all media retailers including Amazon? Could that be one of the issues behind the slow media growth in international markets? And if so, is there really a solution to that other than your own rental models? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [15]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of the first question, the $170 million, it's predominantly in COGS. The very vast majority is in COGS. And then in terms of the split about $25 million of that is in international and the remainder is in North America.
+In terms of the growth, we certainly are seeing that in textbooks. We do see in other digital media, we're certainly seeing rentals being part for our portfolio, more than we had probably during certainly with physical. But in terms of some of the recent growth rates the one that I called out related to book rentals is certainly impacting North America media.
+One of the other things that's really impacting it, too, is we just had some things last year Q3 that were overlapping, that were paused in Q3 last year from a demand standpoint. One was, certainly, in physical books we had very heavy discounting, which helped our growth in Q3 last year. We're overlapping that in Q3 this year.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Thanks, Tom.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Thank you. We'll now go to analyst Aram Rubinson with Wolfe Research.
+
+--------------------------------------------------------------------------------
+Aram Rubinson,  Wolfe Research - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Hello, and thanks for taking my question. Hoping we can go back to square one here, if you don't mind. Can you tell us, or remind us, what financial measures are important to you, and which financial measures do you hold yourselves and the Board hold you accountable to? Because it's a little hard to see any of it making positive progress, so I just would love to get back to basics.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [19]
+--------------------------------------------------------------------------------
+
+          Sure. We're looking at a number of different metrics over a long period of time. And certainly our goal is to maximize free cash flow over the long term. We don't focus on individual margins, but we do focus on the inputs that are going to help drive free cash flow and operating income.
+We certainly will look at making sure that we're using our capital wisely so that over time we get good returns on invested capital. And we certainly have been in several years now of what I would call an investment mode, because of the opportunities that we've had in front of us. As I mentioned earlier, there's still lots of opportunity in front of us, but we know that we have to be very selective about which opportunities we pursue. But we're encouraged by the opportunities that we have.
+
+--------------------------------------------------------------------------------
+Aram Rubinson,  Wolfe Research - Analyst    [20]
+--------------------------------------------------------------------------------
+
+          So cash flow and return on invested capital is where we should keep our attention?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [21]
+--------------------------------------------------------------------------------
+
+          Yes.
+
+--------------------------------------------------------------------------------
+Aram Rubinson,  Wolfe Research - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          And are the employees on the recruiting side, is that becoming more difficult as the stock has faded a little bit, and those return characteristics have faded? How are you making sure that you're hiring the best people?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [23]
+--------------------------------------------------------------------------------
+
+          We have processes in place to make sure that we have a very high bar on the hiring that we do. The people that we're hiring are extraordinarily talented. We're very fortunate to get to work with so many talented people here. And we've been fortunate to be able to grow that employment base to work on the opportunities that we have.
+
+--------------------------------------------------------------------------------
+Aram Rubinson,  Wolfe Research - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+          Thank you. We'll go to analyst Colin Gillis with BGC Financial.
+
+--------------------------------------------------------------------------------
+Colin Gillis,  BGC Partners - Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for taking my question. Just to get back to that North American media sales, it was the lowest growth rate in over 20 quarters. Are there other factors beyond the textbook shift and the Q3 strength last year? Are the digital media trends still intact?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [27]
+--------------------------------------------------------------------------------
+
+          In terms of the principal drivers, it's the two that I mentioned. It's the textbook rentals and also overlapping some of the strong discounting in strong titles that we had in some categories. So it's across a number of categories within the media. But those are the two principal drivers.
+
+--------------------------------------------------------------------------------
+Colin Gillis,  BGC Partners - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          You don't see this as a broader shift in that number?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [29]
+--------------------------------------------------------------------------------
+
+          No. Still, both in terms of North America and international, there is certainly a shift that's going on from physical to digital. And that's something that we're spending a lot of time on and trying to improve the experience for customers. And we've been able to do that certainly over a period of time. And so it's something that we'll continue to work on.
+
+--------------------------------------------------------------------------------
+Colin Gillis,  BGC Partners - Analyst    [30]
+--------------------------------------------------------------------------------
+
+          Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          Thank you. We'll continue on to analyst Ron Josey with JMP Securities.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for taking the question. Two, please. If you could update us on this rotation center rollout. Are all 15 online? And I'd love to know maybe how they've helped bridge the last mile and improve overall speed delivery.
+And then the second question, switching gears and just focusing on advertising, I believe a pilot was launched or beta was launched for Amazon's ad network called CPM Ads, I think maybe late August. I'm wondering if you could provide some commentary there. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [33]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of sort centers we'll have over 15 sort centers in the US by the end of the year. It's certainly helping us a lot. We have same day delivery in 12 cities. We'll have Sunday delivery in approximately 50% of the population. And, so, we're pleased to do that.
+And in terms of the ad network there's not a lot I can say there.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          Okay, thank you very much.
+
+--------------------------------------------------------------------------------
+Operator    [35]
+--------------------------------------------------------------------------------
+
+          Thank you. Our next question will come from analyst Aaron Kessler with Raymond James.
+
+--------------------------------------------------------------------------------
+Aaron Kessler,  Raymond James & Associates, Inc. - Analyst    [36]
+--------------------------------------------------------------------------------
+
+          Great, thanks for taking my question. Can you just give us an update maybe on your views on original programming? It looked like Transparent's had some good success.
+Also, just from an international standpoint, your views on the growth in China, India, as well as are you seeing signs of any increasing competition in the international, your key international markets today?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [37]
+--------------------------------------------------------------------------------
+
+          In terms of original content we're excited about it. We're investing as we talked about last quarter. We spent approximately $100 million in the quarter. Keep in mind that that's expensed in the quarter and so that's included in the results that you see in Q3. We're very excited about it.
+We have a number of pilots, as well as a number of series launched. Transparent, you mentioned, is one of them. It's gotten very good reviews. The streaming on that series has been great. So, we're very excited about it and we think it's an interesting area for customers.
+We continue to invest heavily in video content, including originals. There's a number of different metrics we're looking at certainly from a Prime standpoint. What we are seeing so far is those customers who are streaming are renewing at considerably higher rates, at a rate that's already high. So, we like what we see there.
+When customers come in for new trials, free trials, and they engage from a video content standpoint, we see the conversion being higher. So, we see that we're adding new Prime members as a result of that. When those new Prime members become Prime members, the other thing we're seeing is they are buying physical product, which is a great impact for us. We see very similar patterns in terms of how much physical product that they're purchasing from us.
+We're still certainly in investment mode there, but we like what we see. We have a long way to go there but we're concentrating on building a great service. And we see that customers are rewarding us with engagement on the content, both original and licensed. And they're buying more from us on the physical side and becoming Prime members when they do, and renewing at higher rates.
+So, those are some of the early signs. We'll continue to monitor it very closely. But we're excited about what we're seeing there.
+In terms of some of the international comments, and I would say this not just international but I'd say it for the US, as well. One thing that's not new is it's a very competitive environment. We have a lot of competitors both online and offline. That's not anything that's new. We are used to operating in that environment. We've been in that environment, really, for 19 years. But we are seeing a lot of competition. Again, that's not new.
+
+--------------------------------------------------------------------------------
+Aaron Kessler,  Raymond James & Associates, Inc. - Analyst    [38]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+          Thank you. Our next question will come from Heath Terry with Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [40]
+--------------------------------------------------------------------------------
+
+          Great, thanks. Last quarter you mentioned that the AWS business saw a 90% increase in volume. Was wondering if you could give us a sense of what you've seen so far this quarter.
+And then in the highlight section of the release, the first six bullet points or so that you have there are all related to the hardware side of the business. If you can just give us, now that you have a little bit more time on the hardware side of the business behind you, if you can give us a sense of what you're learning in this category and where you think Amazon's long-term position in hardware is ultimately going to be.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [41]
+--------------------------------------------------------------------------------
+
+          In terms of AWS, we saw a very good growth in Q3, as well. From a usage standpoint, it's very similar to Q2, close to 90%. And, so, the team's doing just a fantastic job.
+You can see our other revenue in North America went up a little bit sequentially. AWS is certainly the largest piece of that and it's the vast majority of it. They're growing at a faster rate than that other line item. So, again, the team is doing a fantastic job in not only serving customers, but launching many new features and services. And you can see some of the detail in that in the highlight section of our release today. So we're very excited about it.
+In terms of devices, I can't speculate what we would do going forward. But we just launched a number of new tablets and E-readers that we're excited about. There's some really great price points for customers on the tablet side. We also launched a kids' tablet, which is the first time we've launched.
+We've launched some new Kindles, including our premium Kindle. It's a terrific product. We think it's the best Kindle we've made to date, for sure, and so we're very excited about that. And we're excited to have these offerings for customers.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Great, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [43]
+--------------------------------------------------------------------------------
+
+          Thank you. We'll continue on to analyst Ben Schachter with Macquarie.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [44]
+--------------------------------------------------------------------------------
+
+          Hi, Tom. You mentioned that you need to get leverage at some point, and last call you also said something similar. But can you help you quantify the timing? In your internal modeling, when do you expect to see more meaningful leverage? When you look at your three-to-five outlook, what does the leverage picture look like there? And then, also, can you remind us what your philosophy of stock buybacks is and what it would take to get you back in the market? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [45]
+--------------------------------------------------------------------------------
+
+          In terms of leverage, beyond the guidance that we're giving today, there's not a lot of certainty I can give you. But, again, what I'd mentioned earlier is we do have a lot of opportunities, but our job is to be judicious and selective about which opportunities we pursue. And, so, that's the way we're thinking about it. I apologize I can't give you any more certainty in terms of timing, but certainly that's the way we're thinking about it.
+In terms of buybacks, we have an open buyback right now. We have authorization to do that. I certainly can't comment on what price points we would or wouldn't do there.
+
+--------------------------------------------------------------------------------
+Operator    [46]
+--------------------------------------------------------------------------------
+
+          Thank you. We'll continue on to analyst Justin Post with Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [47]
+--------------------------------------------------------------------------------
+
+          Great, thank you. If you look at the phone impact in Q3, it seems to explain some of the difference versus the Street. But when you look forward to Q4 it looks like you're guiding to about 15% to 16% growth ex-FX, and again profits maybe below expectations.
+Is the phone having an impact on profits in Q4, as well? And, also, when you think about the Q4 guidance, are there any events or things you want to call out? Are you being especially conservative in Q4 given recent trends? Anything different this year in the holiday?
+Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [48]
+--------------------------------------------------------------------------------
+
+          Yes, in terms of the holiday season, Justin, if you look back the last several years, I've been giving wide ranges because it's, again, our most seasonal quarter, always challenging to predict precisely where we're going to be. In terms of a dollar range, I gave a $3 billion range last year, I'm giving a $3 billion range again this year from a revenue perspective. Again, wide range. At the higher end of the range, excluding foreign exchange it's approximately 21%, so it's a little bit higher than what we saw in Q3. And then you can see we were on the low end of the range.
+In terms of the season itself, we're very excited about it in terms of to serve customers. We feel great about the selection that we have added and are continuing to add for the holiday season. We think from an operations standpoint each year we try to get better, and we believe that we'll be even better this year than we have in previous years. And so we're super excited to serve customers.
+In terms of the phone, the only other thing that I can comment on is, at the end of Q3, we had approximately $83 million worth of inventory on hand. I can't comment on how that would impact guidance or not, but that's the amount of inventory we had on hand at the end of Q3.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [49]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [50]
+--------------------------------------------------------------------------------
+
+          Thank you. Our next analyst will be John Blackledge with Cowen and Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [51]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, just a couple questions. We saw that Amazon Fresh expanded into Brooklyn recently. Just wondering if you can discuss the decision to expand into New York City and how we should think about timing for expansion into other markets. And then if you can update us on the number of fulfillment centers globally ending the year, that would be great. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [52]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of the number of fulfillment centers it's 13 net for the year. And then, as I mentioned earlier, in the US we'll have more than 15 sort centers by the end of the year.
+In terms of -- sorry, the other part of the question was on Fresh? The team's doing a great job from a customer experience standpoint. As you can see we're in a few cities today. The team is just heads down focused on making sure that experience is great for customers. We continue -- customers like the service. So, we're seeing good pick up there.
+And as you mentioned, we're expanding into Brooklyn. I can't speculate on what we do beyond the cities that we have launched to date, but we're excited about what we're seeing so far there.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [53]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [54]
+--------------------------------------------------------------------------------
+
+          Thank you. Our next question will come from analyst Eric Sheridan with UBS.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [55]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. Tom, you put through a price increase on the Prime service this year. Was curious what you were seeing in terms of the impact of that price increase on both the rate of adding people into Prime and the ability to control churn inside the Prime subscription base in general. And as you add additional functionality and layers into Prime, like you've done this year through the investments, whether you've thought about maybe putting in another price increase through next year. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [56]
+--------------------------------------------------------------------------------
+
+          In terms of what we do going forward, I certainly wouldn't speculate. We had a price point since our initiation, since the launch of Prime at $79. So it took us a long time. And we were very careful with that to increase it to $99.
+But since we've increased to $99 we've had great retention. We're very pleased with the retention we've had from customers. The program is growing very fast. We're very excited about it. And, so, we do think that it's really good for customers and it's really good for us and shareowners over the long term.
+You're correct in that we're investing in Prime in a number of different ways, including video content, as I talked about earlier. That is certainly the way we will get a return on that investment principally, will be customers buying more, including, and especially, physical products. Again, we're very excited about Prime globally.
+
+--------------------------------------------------------------------------------
+Operator    [57]
+--------------------------------------------------------------------------------
+
+          Thank you. Our next analyst will be Brian Nowak with SIG.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Susquehanna International Group - Analyst    [58]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. I have two, please. The first one, fulfillment ex stock-based comp was the highest it's ever been as a percentage of gross profit in the third quarter. Can you just talk about the drivers of that? Is that sortation centers or international growth? What's driving that?
+And then as we think about the sortation centers what's the impact of those over next few quarters to fulfillment? Do they take awhile to get the inefficiencies out of the system like a standard DC would?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [59]
+--------------------------------------------------------------------------------
+
+          In terms of the fulfillment cost, you're right. Again, we are adding 13 net fulfillment centers. We'll have over 15 sort centers at the end of the year. Certainly one of the drivers for that is the growth that we're experiencing.
+But in addition to that what we're seeing is the FBA adoption continues to get better. We get further penetrated with sellers adopting Fulfilled by Amazon. We think that's really good for sellers and for us and for customers over the long term.
+What you're seeing is, several years ago in terms of fulfillment center planning, we were adding less of them and it was much closer to the holiday season. With the sheer amount of capacity that we're adding you're seeing more of that come in even before Q4. So, you're seeing that impacting us earlier. And the benefit of coming in earlier is we get to serve customer, get up to the productivity rates that we want to to serve customers in Q4 by having that capacity in a bit earlier than in past. So, we've seen that trend happen over the past few years where that's coming in earlier than certainly historically we've been able to do.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Susquehanna International Group - Analyst    [60]
+--------------------------------------------------------------------------------
+
+          Okay, great, thanks.
+
+--------------------------------------------------------------------------------
+Operator    [61]
+--------------------------------------------------------------------------------
+
+          Thank you. Our next analyst will be Matt Nemer with Wells Fargo.
+
+--------------------------------------------------------------------------------
+Matt Nemer,  Wells Fargo Securities, LLC - Analyst    [62]
+--------------------------------------------------------------------------------
+
+          Thanks so much for taking my questions.
+First, Prime launched a referral fee recently and I'm wondering if we should take that as any indication that the membership growth has slowed or you're seeing some higher churn. And how does that referral fee get accounted for?
+And then, secondly, Target launched free shipping with no hurdle for the holidays versus your $35 hurdle. Just wondering what your willingness is to leave that competitive gap during the holidays. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [63]
+--------------------------------------------------------------------------------
+
+          I can't comment from a competitive standpoint what we might or might not do there. But in terms of the Prime referral fee, no, you should not read into that that Prime isn't growing well. In fact, just the opposite. We are seeing great growth.
+We like the fact that enabling customers, because they like Prime, to be able to refer others, we think is great for us. I can't actually -- maybe offline you can follow-up with Phil or Dave on the accounting. Off the top of my head I can't remember how that's working. But I know they will be able to answer it for you.
+
+--------------------------------------------------------------------------------
+Matt Nemer,  Wells Fargo Securities, LLC - Analyst    [64]
+--------------------------------------------------------------------------------
+
+          Okay, thanks so much.
+
+--------------------------------------------------------------------------------
+Operator    [65]
+--------------------------------------------------------------------------------
+
+          Thank you. Ladies and gentlemen, our final question will come from Colin Sebastian with Robert Baird.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [66]
+--------------------------------------------------------------------------------
+
+          Great, thanks. Good afternoon.
+A couple of follow-ups. First off, in terms of the Q4 revenue guide, are you giving any consideration in that forecast to some of the shipping issues that happened last holiday, and the ability of your shipping partners to manage your growth? And then, secondly, on paid units, can you provide a split or color between physical and digital unit growth?
+Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [67]
+--------------------------------------------------------------------------------
+
+          In terms of the guidance, it reflects all of the assumptions that we think could happen for the quarter. So, again, it's a wide range. To speak specifically to some of the issues last year, the team, again, we continually are trying to learn from everything that we do, and the team has done a great job learning from our experiences coming out of Q4 last year, as we do every year, and are excited to serve customers.
+In terms of the unit growth, there's not a lot I can add in terms of splits, other than the overall growth rate. But we are pleased with -- certainly we're seeing good customer growth. Sellers are -- we're doing, we think, a great job for sellers. We continue to add a lot of unique selection throughout the year in terms of, we have customers, we see FBA for sellers getting further penetrated.
+We've launched, we think, some interesting products for customers. We think our Web Services team is doing a great job. We realize that we have a lot of opportunities, but we need to be selective on which opportunities we pursue. And I think beyond that, we're just overall excited and getting ready for the holiday season.
+Anyway, thanks, everybody, for calling in today.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [68]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us today on the call and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
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exam/original-files/Problem_1_Sample/2014-Oct-28-FB.OQ-140415619254-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2014 Facebook Inc Earnings Call
+10/28/2014 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook, Inc. - VP of IR
+ * Dave Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Scott Davis
+   Stifel Nicolaus - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Paul Vogel
+   Barclays Capital - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Stephen Ju
+   Credit Suisse - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Anthony DiClemente
+   Nomura Securities Intl - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. 
+(Operator Instructions) 
+Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's third-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. 
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and on our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 
+During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at Investor.FB.com. 
+And now, I would like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah, and thanks, everyone for joining today. This has been a good quarter for Facebook, and we've achieved strong results across the board. We've continued to grow our community in both size and engagement, with 1.35 billion people now using Facebook each month and 64% using Facebook daily. On mobile, 1.122 billion people now use Facebook each month and 703 million people each day, nearly 40% growth from this time last year. 
+Looking at our business, we continue to do well. This quarter, total revenue reached $3.2 billion, and advertising revenue grew 64% year over year. Mobile now accounts for 66% of our advertising revenue. These results show that Facebook is getting stronger every day as a community, a partner for developers and marketers, and as the business. 
+One thing that I'm particularly pleased about is that while we are investing aggressively and making progress toward our big, long-term goals, we also continued to execute well against our near-term priorities. On previous calls, you've heard me talk about our big Company goals of connecting everyone, understanding the world, and building the next generation of platforms. 
+These goals are important for us and are the foundation of our strategy for the next decade. But achieving these will look involve many different efforts and steps along the way, some that will be achieved rapidly and others that are going to take longer. So with that in mind, I'd like to run through our progress this quarter on the different efforts that we expect to deliver a lot of impact over the next 3, 5, and 10 years. 
+Let's begin with our three-year goals: over the next three years, our main goals are around continuing to grow and serve our existing communities and businesses, and help them reach their full potential. When you look at the size and engagement of our community, our progress remains very strong. 864 million people use Facebook every day, and across our core products, we continue to see huge engagement. 
+For example, around 700 million people now use Facebook groups every month. Achieving this scale shows that we're delivering experiences for the way that people want to share and connect. 
+Another example is our progress on public content. Last quarter, I talked about how we're working to connect people around important public moments and personalities on Facebook. This quarter, we have continued to build on our results, and there are now more than 1 billion interactions every week between public figures and their fans on Facebook. 
+The investments we've made in video have also played a big part here. This quarter, we announced a new milestone for video on Facebook, achieving 1 billion video views a day of made [of] videos. During the summer's ice bucket challenge, there were more than 10 billion video views by 440 million people, which is a good sign of how far our video product has come. 
+Instagram has also made a lot of progress this quarter. In August, the Instagram team launched Hyperlapse, a standalone app for time-lapsed videos on iOS. The team has also invested heavily in improving the speed and performance of Instagram on Android. This has helped drive Instagram's strong international growth which, in some countries, has achieved more than 100% year-over-year growth. 
+Globally, people using Instagram now spend around 21 minutes a day, on average, using the app. This is a strong figure compared to the industry and a good sign that Instagram's strategy is on the right path. 
+Our other big focus over the next three years is to continue serving businesses well in creating a lot of value for marketers. As our results show, our approach here is working. To continue delivering value for businesses, we've work to improve the quality of ads and news feed by reducing low quality content and improving our targeting to show more timely and relevant content. 
+We've also made some big advances in our ad tech, most importantly, the launch of our Atlas platform. Atlas offers marketers a lot of new capabilities to help reach people across devices, platforms and publishers, as well as improving measurement of online campaigns. We're very excited for the future of Atlas, and Sheryl is going to talk more about this in a moment. 
+Next, let's talk about our strategy over the next five years. Over the next five years, our goals are around taking our next generation of services, Instagram, Messenger, WhatsApp, and Search, and helping them connect billions of people and become important businesses in their own right. One big priority for us here is messaging, and continuing to build and grow Messenger and now WhatsApp, as well, as great services. 
+This quarter, we made an important change to our mobile messaging efforts by transitioning people to Messenger on iOS Android and Windows phones. We believe that this change allows us to offer a better and faster messaging experience on mobile, and our data shows that people who use Messenger usually respond to messages about 20% faster. 
+This month, we also completed our acquisition of WhatsApp. I'm excited to be working with this team and for Jan to join our Board. WhatsApp continues to be on a path to connect more than 1 billion people around the world, and we are going to be working to accelerate their efforts here. 
+Another key part of our strategy is helping developers to build more great social experiences on our platform. Over the next few years, our goal is to make Facebook the cross-platform platform that allows developers to build, grow, and monetize their apps across every major mobile platform. 
+We've continued to make good progress here. This quarter, we opened our Audience Network to all developers and publishers, allowing over 1.5 million advertisers on Facebook to extend their campaigns across mobile, and for developers to begin monetizing their apps. 
+We're also excited by the continued adoption of App Links, our deep-linking technology for mobile apps. App Links is now used by hundreds of apps across iOS, Android, and Windows phones, and in just the past six months, developers have created links to more than 3 billion individual destinations in these apps. 
+Now let's talk about how we're approaching our goals over the next 10 years. For the next 10 years, our focus is on driving the fundamental changes in the world that we need to achieve our mission, connecting the whole world, understanding the world with big leaps in AI, and developing the next generation of platforms, especially in computing. 
+This is a very big -- very busy period for our efforts with Internet.org. In July, we worked with Airtel to launch the Internet.org app in Zambia. This provides free data access to a set of basic Internet services for health, education, employment, and communication. The results from this are very encouraging, and we've already heard a lot of amazing stories about how people are using the Internet to add value to their lives. We hope to bring the Internet.org app to many more countries soon. 
+Over the last few months, I've also traveled to several countries and met with policymakers, industry leaders, and people in communities that are coming online for the first time. Increasingly, industry and governments are seeing expanding Internet access as one of their core priorities. This is a positive development for our work with Internet.org and our long-term goal of connecting everyone in the world. 
+Finally, let's talk for a minute about our progress with Oculus. As I've said before, with Oculus, we're making a long-term bet on the future of computing. Every 10 to 15 years, a new major computing platform arrives, and we think that virtual and augmented reality are important parts of this upcoming next platform. 
+This quarter, Oculus continued to make progress towards this vision. In September, the first Oculus developer conference took place, where we announced a new prototype via our headset on the path to the consumer version of the Rift. We continue to see a lot of excitement in the developer committee, and we've now shipped more than 100,000 Rift developer kits to over 130 countries. It's still early for Oculus, but we're encouraged to see the variety of apps and games being developed for this platform. 
+Internet.org and Oculus are just two of the huge opportunities ahead. Our efforts here will take longer to achieve their full impact, but we're going to continue preparing for the future by investing aggressively. So that's how we're approaching our strategy over the next 3, 5, and 10 years, while focusing on our big goals of connecting everyone, understanding the world, and building the next generation of platforms. 
+This has been a quarter with strong results. I want to thank the entire Facebook community, our employees, our partners, and our stockholders for their continued support. Because of your contributions, Facebook continues to grow in strength and to create greater value in the world for people, partners, and businesses. We have a long journey ahead, we're on the right path, and I'm excited about the progress that we're making. 
+Thank you, and now, here's Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hi, everyone. We had another strong quarter, and we're continuing to execute well on our priorities, capitalizing on the shift to mobile, growing the number of Facebook marketers, and building products to make our ads more relevant. 
+Our growth this quarter was again very broad-based. We've had strong performance around the world, as well as across verticals and our four marketer segments: brand, direct marketers, developers, and small and medium businesses. I'd like to briefly highlight some of our progress on the product front, and then focus on important new investments we're making in ad-tech. 
+One of our main ad product goals is to make ads more relevant. Just like content and news feed, when ads are more relevant, they provide a better experience for people using Facebook and a better return for marketers. 
+One of the best ways to improve relevance is to help advertisers reach the right audience with their messages. Facebook's age and gender targeting is 45% more accurate than the digital industry average. Working with Facebook, advertisers can also target based on people's interests. 
+In addition, we're continuing to build out custom audiences, which enable marketers to use their own data to segment current and prospective customers. We are pleased with the response from clients, and we're focused on driving deeper penetration with both existing and new clients. 
+We also offer look-alike audiences, which help marketers find potential new customers who are similar to their current customers. To share one recent example, earlier this year, global financial services company MetLife wanted to find new customers for life insurance policies. 
+Working with its agency, [Merkel], they used look-alike audiences to find people more like their existing customers. MetLife ran ads that led people to their Get a Quote website page. Over the six-month campaign, the leads that came from Facebook resulted in new policies at a 2.4 times higher rate than MetLife's next best-performing channel and at 50% the cost of display ads. 
+We're also making steady progress with newer ads initiatives. Throughout this quarter, we continued to enable autoplay for more video ads. We're also continuing to roll out ads on Instagram. We think there's good opportunity with both video and Instagram ads, but we're going to remain deliberate and slow in our approach to scaling both businesses. 
+We're also making longer-term investments that we believe will be important for Facebook and the ad industry. In Q3, we relaunched Atlas, closed our acquisition of LiveRail, and rolled out our Audience Network, so I want to spend a few minutes discussing our longer-term ad-tech strategy. 
+We're investing in ad-tech for a simple reason: consumers are shifting quickly to mobile and the advertising industry is not keeping up. 2013 was the first year the average American adult spent more time on digital media than watching TV, and that gap has continued to grow. Today, the average adult in the US spends nearly 25% of their media time on mobile, but advertisers spend only about 11% of their budgets there. 
+One of the main reasons the budgets aren't moving as quickly as consumers is that advertisers haven't yet had an effective way to serve ads and measure their returns on mobile. Current solutions work well for one person with one device, especially a PC, and for sales that happen online, but today, people often have multiple devices and still make many purchases in physical stores. Nielsen OCR data shows that the digital industry is less than 60% accurate in demographic targeting of ads, which means that four in 10 people are seeing the wrong ads. 
+Similarly, marketers are not confident that they can measure mobile ad performance. Many of the most commonly-used measurement systems overemphasize the value of the last click. This does not make sense, given that studies of Facebook campaigns show that over 90% of ads -- of ad-driven in-store sales come from people who saw an ad but didn't click on it. 
+It's clear that marketers and publishers need better tools for the mobile world. This is an industry problem that we believe we are well-placed to solve. 
+Our relaunch of Atlas last month during Adweek was an important early step that builds on the advancements and measurements we have made over the past two years. The new Atlas is an ad-serving and measurement platform we completely rebuilt. By using Facebook data, Atlas can deliver highly relevant ads, regardless of device. 
+Atlas is also able to provide accurate measurement by connecting online marketing to in-store sales. Importantly, Atlas does all of this in a privacy-protected way; neither Atlas nor Facebook tells marketers who you are. 
+At Adweek, we had productive conversations about Atlas with many marketers and agencies. We are pleased with their interest. 
+We're also investing in additional pieces of our ad-tech platform. Our Audience Network improves the relevance of ads inside mobile apps. LiveRail provides tools for publishers to enable personalized marketing at scale, via their apps and websites. We believe LiveRail can build on their success in desktop video to become a great solution for mobile publishers. 
+I want to emphasize that the investments we're making in ad-tech are long-term; these are large and strategic investments. The payoff will take time, but we think they provide a necessary foundation for the advertising industry to make the shift to mobile and for Facebook's long-term growth. 
+We recognize that by staffing engineers in these strategic ad-tech areas, we forego shorter-term product improvements, which would generate revenue more quickly. We believe these are the right decisions. 
+As we look toward 2015, we're going to stay focused on the areas I've talked about today: capitalizing on the shift to mobile, growing the number of Facebook marketers, and building products that make ads more relevant. Our investors and ad-techs will be an increasingly important part of all of these efforts. Thanks, everyone, and now here's Dave. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. Q3 was a solid quarter across the board. We had strong revenue growth, generated $766 million in free cash flow, and continued to make investments to position us for long-term growth. 
+864 million people used Facebook on an average day in September, up 136 million from last year. This represents 64% of the 1.35 billion people that use Facebook during the month of September. 
+Mobile continues to be the core driver of our growth; over 1.1 billion people used Facebook on mobile during the month of September, up 250 million from last year. In addition, we have hundreds of millions of people on mobile using Instagram, Messenger, and WhatsApp. 
+Turning now to the financials, total revenue in Q3 was $3.2 billion, up 59% compared to last year, or 58% on a constant-currency basis. Total ad revenue was nearly $3 billion, up 64% compared to last year, or 63% on a constant-currency basis. Ad revenue growth was strong around the world, with each of our four reported geographic regions growing by 50% or more compared to last year. 
+Mobile ad revenue was approximately $1.9 billion, or 66% of ad revenue, compared to approximately $881 million, or 49% of ad revenue, last year. Desktop ad revenue was up 11% compared to last year, but was flat sequentially. 
+In Q3, the average price per ad increased 274% compared to last year, while total ad impressions declined 56%. The increase in the average effective price per ad was driven primarily by the redesign of our right-hand column ads, which resulted in larger, more engaging ads that delivered more value to marketers, and thus had higher effective prices. These right-hand column ads were also fewer in number, which drove the decrease of impressions in the quarter. 
+To a lesser degree, the shift of usage to mobile, where we don't have right-hand column ads, also continued to contribute to the reported price-volume trends. The price-volume trends were largely consistent across our four geographic regions. 
+Total payments and others fees revenue was $246 million, up 13% versus last year; however, payments volume from games, which represents the substantial majority of our payments and other fees revenue, declined 2% compared to last year, notably for the first time. And we expect this trend to continue, as desktop usage continues to decline. 
+Turning now to expenses, note that beginning in Q3, our definition of non-GAAP also excludes the amortization of intangible assets, and the historical non-GAAP measures discussed today have been updated accordingly. You can find our GAAP to non-GAAP reconciliations on page 10 of the Q3 press release. 
+Our Q3 total GAAP expenses were $1.8 billion, up 41% from last year, and non-GAAP expenses were $1.4 billion, up 39% from last year. Cost of revenue grew 11% on a GAAP basis and 7% on a non-GAAP basis. 
+We incurred expenses in the third quarter of 2013 related to the transition out of certain lease data centers. This mitigated our cost-of-revenue growth rate in Q3 2014, as it has done in the last two quarters. 
+Operating expenses, excluding cost of revenue, were up 61% on a GAAP basis and 72% on a non-GAAP basis versus last year, primarily due to an increase in headcount-related costs. We ended Q3 with 8,348 employees, up 44% from last year. Of the nearly 1,200 people we added sequentially, about one-quarter were from acquisition. 
+Organic growth was high, as the third quarter is our seasonally strongest new hire start period. Overall, we are pleased with our ability to attract and retain talented people who enable us to make strong progress against our mission. 
+Q3 operating income was $1.4 billion, representing a 44% operating margin, up from 37% last year. And our non-GAAP operating income was $1.8 billion, representing 57% operating margin, up from 51% last year. 
+Interest and other income and expense was a net expense of $61 million in the quarter, versus a net expense of $10 million last year. This increase in expense was primarily due to a foreign exchange losses resulting from the periodic remeasurement of our foreign currency balances, and largely resulted from the substantial reduction in the value of the euro relative to the dollar experienced from the beginning to the end of the quarter. 
+Our GAAP and non-GAAP tax rates for the quarter were 40% and 35%, respectively. GAAP net income was $806 million, or $0.30 per share, and our non-GAAP net income was $1.1 billion, or $0.43 per share. In Q3, we spent $482 million on CapEx and generated $766 million of free cash flow. 
+We ended Q3 with approximately $14.3 billion in cash and investments. This does not reflect the approximately $4.6 billion cash payment that we made in conjunction with the WhatsApp acquisition, which closed earlier this month. 
+Turning now to outlook, I'd like to start by noting that my forward-looking statements include the impact of both Oculus and WhatsApp. In addition, as part of the WhatsApp deal, we agreed to file a registration statement to register for resale the approximately 178 million shares issued to the WhatsApp stockholders. Nearly all of those shares will be fully registered and tradable during open trading windows in Q4 2014 and Q1 2015 under the Registration Statement we plan to file later this week. 
+In light of our recent acquisitions and our plans to file this Registration Statement, we are providing some additional guidance this quarter, including a more specific outlook on the current quarter revenue and a preliminary view on 2015 expenses. This is a more detailed outlook than we have historically provided, or plan to provide, on future earnings calls. 
+Let me start with 2014 expenses. We expect our full-year 2014 total GAAP expenses, including cost of revenue, stock compensation and the amortization of intangibles, will grow approximately 45% to 50% versus the full-year 2013. This increase from our prior range of 30% to 35% is primarily due to the impact of the WhatsApp acquisition on stock-based compensation charges in the fourth quarter. 
+We continue to expect that our full-year 2014 total non-GAAP expenses, including cost of revenue but excluding stock compensation and amortization of intangibles, will likely grow in the neighborhood of 30% to 35% versus the full-year 2013. 
+Turning now to revenue, we expect that total revenue in the fourth quarter will grow in the range of 40% to 47% versus the same quarter of last year. Please keep in mind that Q4 of 2013 was our first holiday season with the rollout of news feed ads at scale, which makes for a more difficult comparison. 
+For taxes, we anticipate the GAAP tax rate in the fourth quarter will be approximately 45% to 50%, which is higher than the current rate due to large, nondeductible stock-based compensation charges related to the closing of the WhatsApp transaction. Our Q4 non-GAAP tax rate should be similar to our Q3 rate. 
+For share count, we expect that our fourth-quarter fully diluted share count will be approximately 2.8 billion shares, taking into account the shares that we issued upon the closing of the WhatsApp deal. We expect that our 2014 CapEx will be at the low-end of our prior $2 billion to $2.5 billion CapEx guidance. 
+And lastly, while it is relatively early, I wanted to provide some preliminary color on our expense outlook for 2015. As Mark discussed in his remarks, we believe that we have very substantial growth opportunities in front of us, and we plan to invest aggressively to capitalize on those opportunities. As such, we plan on 2015 being a significant investment year. 
+Our current expectation is that total cost and expenses on a GAAP basis, inclusive of stock-based compensation charges related to the recent transactions, are likely to increase 55% to 75% compared to the full-year 2014. On a non-GAAP basis, we expect total cost to increase approximately 50% to 70% compared to 2014. Tax rates for 2015 should be similar to our fourth-quarter rates on both a GAAP and non-GAAP basis. 
+In summary, we're very pleased with the growth of our network, the great momentum we continue to see in our ads business, and the significant investments we're making to drive near-term and long-term growth. We have large opportunities ahead of us, and we're focused on capitalizing on those to achieve our mission and drive long-term shareholder value. 
+With that, operator, let's open up the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) 
+Douglas Anmuth, JPMorgan. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the questions. Dave, just a follow-up on the comments that you just made on the outlook for expenses for 2015, could you help us understand more on the non-GAAP expenses, the 50% to [70%] and where we should be thinking about the incremental dollars being spent there, primarily? 
+And then secondly, can you talk, Sheryl, perhaps about what you're seeing in terms of branded advertising, whether you're seeing more of an inflection there as more bigger brands, CPG companies, auto OEMs are coming on board and how you're positioned there for the holidays? Thanks 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Sure, Doug. I'll take the first part. We're investing where we think there's a great opportunity for long-term growth. That's going to be really investing and continuing to grow the talent base at the Company, so we're investing in the people, and that's a big part of it. And we're also investing on the product side to grow the existing products, but also to invest in new areas like Oculus, WhatsApp, and then the ad-tech initiatives that Sheryl was talking about. 
+From an infrastructure side, we plan to invest to support the growth of the core business. That includes things like video; it also includes things like our global growth efforts with Internet.org, so we're really investing across the board on that. And in summary, we've got -- the strength of the business today is really putting us in a strong position to invest smartly for the future, and we're doing that. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          On brands, we're seeing very strong growth among our brand marketer segment. We're really excited about the engagement we're having right now with brand marketers and agencies. We think we're the first technology platform to offer the ability to do creativity and storytelling at scale in a personal way, and we talk a lot with our clients and partners about personal marketing at scale. 
+You'll find with our clients that they're in different parts of the adoption curve. We have clients who are very early on, and they don't launch any products or think about their ongoing messages without including Facebook. And there are some for whom we're not yet core, and we're working on that. 
+With all of this, we know we need to go client by client, and we're especially focused on measurement, because measurement is so key for this segment. A lot of the products the brand marketers are selling are bought in-store, and so showing that online and mobile ads lead to in-store purchases is a hugely important part of our strategy going forward, as I talked about, and video is really exciting as well. 
+When you think about the holiday season, Q4 is a really important time for our clients, and that makes it a really important time for us. And I think people are increasingly recognizing that mobile is important; 65% of people use their phones while they are out shopping and people are recognizing that opportunity. 
+From an earnings perspective, last Q4 was a great quarter, both because our business was growing but also because that was when we rolled out ads fully into news feeds. And so, it's worth keeping that in mind when you think about how you think about our business going forward. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Ben Schachter, Macquarie. 
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          A few questions: David, there was no mention of a 2015 revenue range, but I was wondering if you could give us any thoughts on how much margins should compress in 2015 versus 2014? 
+Then, a couple for Mark. Mark, now that you've spent more time with the Oculus team, can you update us on how your plans for Oculus have evolved since you first tried the device on? And then you mentioned it when you talked about your 10-year outlook. Does that mean we shouldn't expect any consumer Oculus product in the next one or two years? 
+And then similarly, on search, you mentioned that in your five-year plan, so does that mean we shouldn't expect anything on search for the next five years? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+
+          Hey, Ben. It's Dave. We're not really giving any guidance on 2015 revenue. We gave the growth range that we are expecting on Q4, which was 40% to 47% and that's down from 59% in Q3. But we're not providing any specific guidance on 2015. 
+Revenue sort of outlined the expense growth that we expect because of the substantial investments that we're making, also driven off some of the acquisitions that we've made. Hope that that is helpful for everybody. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [8]
+--------------------------------------------------------------------------------
+
+          Sure.  And on your questions around Oculus and search and some of the other things that we're doing, the strategy for Oculus is to help accelerate their growth. They have these two products around Rift on PC, and they are supporting Gear VR and the Samsung team in building the mobile version. And I'm really excited about both of them. 
+I don't think that this is going to be -- it needs to reach a very large scale, 50 to 100 million units before it will really be a very meaningful thing as a computing platform. So I do think it's going to take a bunch of years to get there. 
+I don't know, it's hard to predict exactly, but I don't think it's going to get to 50 or 100 million units in the next few years. That will take a few cycles of the device to get there, and that's what I'm talking about. 
+When you get to that scale, that's when it starts to be interesting as a business in terms of developing out the ecosystems. So when I'm talking about that as a 10-year thing, it's building the first set of devices and building the audience and the ecosystem around that until it eventually becomes a business. 
+Some of the things like search and some of these other products -- this may sound a little ridiculous to say, but for us, products don't really get that interesting to turn into businesses until they have about 1 billion people using them. So for Facebook, we're there with news feed, and that's why, in the near term, our priority is really around continuing to grow and serve that community and making sure that the business around news feed and those mobile ads fully reach their potential. 
+Over a five-year time frame, we have a number of services which we think are well on their way to reaching 1 billion people:  Messenger,  WhatsApp Instagram, and search are a number of them. And once we get to that scale, then we think that they will start to become meaningful businesses in their own right. And I think that the right way to think about that, as I've tried to say repeatedly on these calls, is not that we're going to try to monetize them very aggressively in the next year or two, because I really think for each of those categories, the right strategy is to first focus on connecting 1 billion- plus people in reaching the full potential before very aggressively turning them into businesses. 
+But I do think that this is such a big opportunity ahead of us. I can't think of that many other companies or products that have multiple lines of products that are on track to reach and connect 1 billion people that have a clear path at how we can turn them into a business. So that will be a very fun and exciting challenge to work on over the next five years. 
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+          Heather Bellini, Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [10]
+--------------------------------------------------------------------------------
+
+          Great, thank you for taking the question. I just had two; one for Sheryl. If you could talk about the comments you made about giving advertisers a better feel for attribution, I was wondering, what percent of attribution do you find today is given to the left-click and how overstated do you think that is right now? 
+And then just a follow-up question for Dave, given your total expense range of 50% to 70% wider than what we've seen in the past, I'm wondering how should we think about the low-end versus the high-end? Under what scenarios are you thinking about those ranges? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [11]
+--------------------------------------------------------------------------------
+
+          Heather, to your first question, we think measurement is really -- really needs to evolve for the world we're in today in many ways. One of those is overemphasizing the last click. And the percentages by which that's done really vary, but we think substantially across the industry are overemphasized. 
+But there are also other problems: the current measurement systems don't work on mobile, because they are largely cookie-based. They are not accurate; we think they're only 59% accurate in even the most basic demographic targeting. They don't go off-line to online. 
+They really work well for one person with one device, usually a PC, that's making online purchases. The world we live in today, I bet you everyone on this phone call has multiple devices, and people look at ads online and then purchase off-line, as well as deserve more relevant ads and better targeting. 
+So as we relaunch Atlas, as we think about investing in ad techs, we're looking to solve all of these problems and we think our relaunch is the first step in doing that. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [12]
+--------------------------------------------------------------------------------
+
+          Heather, yes, on the range of guidance, it is wider. It is obviously an early view into 2015, and so consequently, it is a wide range. It's -- giving you the best view that we have on it at this time, and we'll be updating that in the future, in terms of the expense guidance range as we have in the past on an annual basis each quarter. 
+The big drivers will be things like the pace of hiring and the success we have in building the great teams that we want to build at Facebook, but we will be updating that on an ongoing basis. 
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          Eric Sheridan, UBS. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Great, thanks for taking the questions. Mark, you made comments about public content and the way that's evolved on Facebook. Would love to get deeper thoughts there about the way you think content distribution develops on Facebook over the longer term. 
+And then one for Sheryl. The ad-tech acquisitions and moves you've made over the last year to two, wanted to know when you think we should be looking at ad tech being fully deployed in the marketplace, and what sort of returns that might generate for Facebook? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [15]
+--------------------------------------------------------------------------------
+
+          Sure, well, I can start off by talking about public content. So historically, a lot of people use Facebook for sharing moments in their lives with their friends and smaller sets of people, right? So we have Messenger for one-to-one communication; groups that just reached 700 million monthly actives this quarter; and then news feed, which is kind of the primary thing that people are using to share with all of their friends at once. 
+One of the big things that we, looking at this ecosystem, thought that there was a big opportunity in was public content, right?  Where it's content that people are either comfortable sharing with everyone or want to consume that is public and shared with everyone. So we're looking at a few different areas. 
+Video is a very big priority. News is a very big priority, because a lot of people want to share that on Facebook already.  And enabling public figures, whether they are celebrities or athletes or actors or politicians or leaders in different kind of communities, to get on Facebook and use the platform to distribute the content that they want. So those are the three areas that we're -- that you'll probably see us investing the most in over the next year or so. And we're making a lot of progress. I shared some of the stats before, but we're very proud of what we're doing, and we will have more to report soon. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [16]
+--------------------------------------------------------------------------------
+
+          On ad tech, I think we're in the middle of what is a very fundamental shift from marketing that is cookie-based on a PC, one desktop, to people-based marketing on multiple devices, to marketing that is primarily for online sales, to marketing that affects both online and off-line sales on mobile. So I think we're right now in a pretty big shift and we're not [close to fully deployed] there. We have a lot of pieces to do. 
+Our Atlas relaunch is new. We're first growing our client base, and we're pleased with our progress there. And we're putting these other pieces in place on Audience Network or LiveRail. So I think we're pretty far from being fully deployed on even this big shift. 
+But I think in our industry, nothing is ever fully deployed. That as soon as we catch up here, there's going to be another movement and something else that happens that we have to react to and build the technology for. And so, we remain -- we're a long-term Company, run by a founder with a very long-run vision, and we want to keep our eyes ahead on these changes in technology and keep deploying against them. 
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Ross Sandler, Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Thanks, I just had two questions, one for Mark and then a quick one for Dave.  Mark, I don't think I heard you mention payments in the three-, five-, 10-year plan. There's been some speculation of payment offerings within Messenger.  Can you give us a sense at a high level of what you'd envision Facebook potentially doing in the payment space longer term across merchant payments, consumer products, like savings and lending or peer to peer? And then, how do you see social interaction tied in with payments evolving? Does Messenger make payments better than what's out there on the market? 
+And then Dave, just a clarification. So the high-end of the 4Q revenue guidance assumes a pretty sharp drop-off, even normalizing for some extra currency hit. So are you seeing anything out there that makes you concerned about pacing into the quarter? Or is that largely business as usual, and it's just a tougher law-of-large-numbers type situation? Thanks 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [19]
+--------------------------------------------------------------------------------
+
+          I'll start on payments. So payments is an important part of the online business ecosystem. But we've traditionally thought about this as something that we're going to partner with other companies on to enable great solutions, rather than trying to compete and do it as a business ourselves. 
+And the reason why we've taken this approach is it's very important for all online businesses and our customers and partners that there's a good online payment system. People run ads to get customers and sell products, and at the end of that conversion, if there's a good payment system that is smooth, then people will buy more things, which ultimately makes the ads and all of the whole online flow more valuable for those partners and, therefore, more revenue and profit for our business as well. 
+We view the ad part of the business as a more efficient part of the business than payments itself.  Payments tends to be fixed fee, whereas in ads because of the option model, there's really good price discrimination built in, right? So a partner or business who is willing to pay us 30% of their revenue can bid that, and someone who's willing to only pay 5% of their revenue can bid that. And the auction model inherently takes care of that. 
+We think that focusing on the ads part is going to end up being the more effective thing for us to do. But we realize that it's important for the ad system over time and for all of our partners for there to be a payment system, which is why we're excited about partnering with credit card companies and partnering with PayPal and all of the different folks in online payments to make their solutions as good as possible as well. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [20]
+--------------------------------------------------------------------------------
+
+          And, hey, Ross, it's Dave. Our view now is that Q4 revenue will come in that 40% to 47% year-over-year growth range. As I mentioned, Q4 of 2013 was just an absolutely fantastic quarter for us. We had news feed rolled out at scale. It was our first $1 billion mobile quarter. So we're comping against a really outstanding quarter last year; that's really the largest issue. 
+You asked about currency; we did see the euro drop about 7% in value over the course of Q3. And that really didn't pick up, as you saw, it didn't pick up in an impact in Q3 at all, because it happened at the end of the quarter. So that will be a headwind that we see and that's factored into the guidance. 
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney, RBC Capital Markets. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          Great.  Sheryl, you talked about being careful about and slow about rolling out video ads, autoplay video ads and Instagram monetization. Have you seen any pushback in terms of user experiences to date on videos or on video ads? Is that overall caution, or is there anything you've seen in the data that suggests that you want to keep it at a really slow pace? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [23]
+--------------------------------------------------------------------------------
+
+          We're pleased with the consumer response we've had on both fronts, and we remain really optimistic over the long run about Instagram and video, because there's a lot of interest. I spoke before about creative storytelling; images video can be such a big part of that and create a really resonant experience for brands and companies. 
+We really believe in going slow. That as we grow products, we pay attention to the consumer experience. We want the consumer experience always to come first. So although we're very optimistic about the opportunity here, we continue to grow slowly and pay a lot of attention to the quality of the advertising we see. 
+To share one example, we are seeing people using both Facebook and Instagram and also video and other ad products in combination. Mercedes-Benz launched the GLA, which was their first compact SUV, on Facebook and Instagram. They found that by doing Facebook and Instagram together, they got a 54% increase in their website visits. 
+So a lot of our products, as you do one, you also do more Facebook ads as well, and that's something we're paying a lot of attention to. 
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+          Paul Vogel, Barclays. 
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [25]
+--------------------------------------------------------------------------------
+
+          Great, thanks so much. I was wondering if you could talk a little bit about on the engagement side. Your DAUs to MAUs continued to be very strong. If you could talk a little about your older cohorts versus your newer cohorts and how they are behaving. And then also geographically. And on top of that on the frequency side, obviously DAUs doesn't measure how often people come back more than once per day, so is there any update on increasing frequency of visits? Thanks 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [26]
+--------------------------------------------------------------------------------
+
+          I don't think anything to update on the latter front, Paul, but the DAU to MAU ratio, which we focus on on engagement, was strong across all geographic regions. So North America remains at the high end, and we're really pleased with what we're seeing there. 
+Nothing to update on cohorts. Obviously, we're really pleased overall what the mobile impact has on the DAU to MAU ratio, and really encourage what were seeing across the board on engagement. So I don't think anything other than that specifically to call out. 
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          Mark May, Citi. 
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Thanks. For the last couple of years you've -- back on the OpEx for next year guidance, for the last couple of years, you've grown your cash OpEx by around $1 billion a year with some consistency. And I think that seems to be continuing into the second half of the year. But obviously, your midpoint of OpEx guidance for next year represents a very significant -- I think it's like 2.5% -- $2.5 billion increase at the midpoint. You obviously plan to change the level of investment in something quite significantly. 
+So I'm just wondering if you could talk a little bit more specifically about what are a couple of the projects, of the capital-intensive projects that you're planning for next year? And is it physically possible to accelerate your hiring by that much next year? 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [29]
+--------------------------------------------------------------------------------
+
+          Yes, thanks, Mark. The projects really that Mark and Sheryl both outlined, in terms of continuing to invest in the core Facebook experiences, growth engagement, and monetization there, building up the ad-tech side and the investments that we want to make there, as well as the recent -- continuing to invest against the recent acquisitions that we made in terms of WhatsApp and Oculus. So it's really the investments we're making there.                                                                                                                                                                                                                                                                                                                                                                   We're also going to be supporting global growth with our Internet.org initiative, investing there. So it's a number of the key initiatives that Mark outlined in his comments that we're investing against. And again, we're giving a range on what we think is a reasonable range of guidance on that. 
+You saw headcount, we had a good growth headcount this quarter. And we're going to be continuing to invest, as we think that these will be good investments over the long run in terms of being able to drive our long-term growth. 
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          John Blackledge, Cowen & Company. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          Great, thanks; just a couple questions on video. How should we think about Facebook as a video platform? And how does the mix of video between user-generated versus public content versus professionally produced content evolve over time? For example, as the upcoming short film content produced by Lions Gate around the Twilight franchise that will be shown exclusively on Facebook, will that increasingly be the type of content Facebook users will see in the future? 
+And then if you could give an update on the Instagram multi-active user comp, that would be great. Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [32]
+--------------------------------------------------------------------------------
+
+          I can speak to the video point. I think it's going to be all of the above, in terms of what you said. Most of the content on Facebook is things that people are sharing with their friends and the people around them. So I think we'll continue to see that in video as well. 
+There's definitely been this trend over the last few years where, if you go back five years, most of the content was text. Now a lot of it is photos, and if you look in the future as networks get better and the ability to capture good video and share it in a good way improves, then I think that going forward, a lot of the content that people share will be video. It's just very compelling. 
+There's also a lot of great public content that's video, especially the shorter-form content that you were mentioning I think will fit very well into the feed form factor that people consume on Facebook. So I think we're going to see a lot of both of these things, and it's going to be an evolution over the next few years, but I think you can expect to see a ramp of all of this. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [33]
+--------------------------------------------------------------------------------
+
+          And on Instagram MAU, we haven't updated the number; they continue to grow nicely, but we haven't announced a new public number on Instagram. 
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Justin Post, Merrill Lynch. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          Thanks. Mark, it seems like you're taking a portfolio approach to apps, and you've got several different experiences for people on mobile devices and other devices. Can you give us your philosophy around that? And as people use things like WhatsApp and Instagram, is it actually maybe possibly hurting Facebook's reported metrics? And how do you think about putting this all together and helping every app work? 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [36]
+--------------------------------------------------------------------------------
+
+          Sure. One of the things that's happening on mobile is that there's an increased focus for apps to do one thing really well. So on desktop, a lot of the things that might have fit well into a single Facebook website, now (technical difficulty) people, you need to build multiple standalone different apps. So we are seeing that with Facebook and Messenger, and the work that we did to kind of split out Messenger from the Facebook app to give a dedicated experience around that that we think is a better experience. And we're going to do more of that in the future as well with the Facebook Creative Labs products that we are releasing. 
+Part of what we've seen is that the use cases for products like Instagram and WhatsApp are actually more different and nuanced from -- than the products that people compare them to that Facebook had already built. So for example, on the WhatsApp and Messenger side, Messenger is primarily used today for people to chat with their Facebook friends, within this context of maybe it's not a realtime text like you would send an SMS on your phone, but it's something that you're sending to one of your Facebook friends. Then if they happen to be there, and you can text back and forth or maybe they respond later. 
+SMS and WhatsApp are more for realtime activity. People have contacts on WhatsApp who they wouldn't want to make friends on Facebook. The graphs are somewhat different. 
+So one of the things that we found, interestingly, to us as well, was that Messenger and WhatsApp are actually growing quickly in a lot of the same countries. There's countries that they are growing in that are different, and there are countries that they are growing in that are the same, which to me suggests that they actually are in more different of markets than you probably intuitively would've thought. And that was definitely our understanding as we dug more into this. 
+Same with Instagram, and the type of sharing that happens on Instagram versus news feed. We've recently started doing more to help promote and accelerate the growth of Instagram from the Facebook app itself, because what we've found is that by doing that, we're net overall increasing the amount of sharing that people can do and connecting what they can do within our whole family of apps. 
+We're definitely seeing that this is all accretive and positive, and we think that in the future there will probably be room for more apps for sharing as well. 
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+          Anthony DiClemente, Nomura Securities. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities Intl - Analyst    [38]
+--------------------------------------------------------------------------------
+
+          Thanks a lot. First for Sheryl, I want to come back to the theme of media measurement. You gave us some good perspective. Can you help me with first-party data versus third-party data? Can you get where you need to go with brand marketers using your in-house tools like Atlas, or do you think you need the validity and integrity of a third-party measurement source, i.e., Nielsen, in order to get there? 
+And then second question for Mark.  Mark, I was just wondering where do you see Facebook at this point, in terms of its place in the hardware ecosystem? And given so much time is spent on your apps, do you think it's possible that you could get more aggressive in devices in hardware in order to achieve some of your longer-term or 10-year goals that you laid out?  Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [39]
+--------------------------------------------------------------------------------
+
+          To your first question, data is really important for both measurement and targeting. And when you think about first-party and third-party data, you have to think about both of those usage. 
+Certainly with measurement, third-party verification of that data can be very important. A lot of our largest clients and agencies also build their own data systems, which are a very important part of measuring and certifying everything we do with them. So we're using a combination of first-party and third-party. 
+I think where this really gets interesting is around relevance.  And as I spoke about, that's a major theme for us, because we think one of the best things we can do to drive more value for marketers and improve the consumer experience on Facebook is improve relevance. And data is a great way of doing that. 
+So, for example, with Custom Audiences.  Custom Audiences is a combination of our clients using the data they have on their client base, combined with the data we have that we can target. Let's say target one ad to existing customers to get them to engage more and buy more, and one ad to brand-new customers. And you can see how having a different ad to people who have never bought your product and a different ad to people who are currently buying your product would make a lot of sense. 
+Then you look at something like look-alike audiences, where we're looking to map customers who share characteristics; age, demos, likes, interest, with current customers, and all of this takes a combination of first-party and third-party data, all of which we do in a very privacy-protected way. 
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+          Stephen Ju, Credit Suisse. 
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [41]
+--------------------------------------------------------------------------------
+
+          Thanks. Sheryl, from a product-development perspective, it feels like from the outside looking in that you have accelerated the rollout and delivery of various products. So wondering how you were thinking about how your product delivery cadence will change, especially given the investments you have guided to for 2015? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [42]
+--------------------------------------------------------------------------------
+
+          Before we go to that, I'll just quickly answer the hardware question that we didn't get a chance to answer on the last question. We actually probably do more with hardware already than is apparent, because we design and work with folks to build up all of our own data centers and the servers there. I do think that if that ever became the right thing for us to focus on from a product perspective, we have some of the skills there already. 
+And when we were thinking about working with Oculus, that's actually one of the areas where we think we can help out is because we've built up a supply chain team, and we've been, I think, pretty effective at delivering what we've needed to run Facebook as this large system at scale. 
+But that said, I think that there's a huge amount of value in delivering these network and software services, and that's where you should expect us to focus on the things that we've talked about. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [43]
+--------------------------------------------------------------------------------
+
+          To the question about the rollout of products, I think the usual way we do things is that we roll out products slowly and then we iterate. So one example is Custom Audiences; we roll out Custom Audiences. Then we add on that website Custom Audiences to target ads to people visiting websites, and then mobile apps Custom Audiences adds to people who have visited mobile app. And one is building on the next, building on the next. 
+Similarly, this month -- earlier this month we launched local awareness targeting. It's a new option that allows local businesses to reach nearby customers, and when you saw that, it was in a massive launch; it was a small launch, fully enabled as targeting, get people to use it, and we will develop it. 
+Then there were the exceptions, such as Atlas. Atlas was one big launch that we're still in the process of doing, and that's really because it's a product we bought and needed to rebuild. But for the most part, our product development tends to be very iterative, and that's what you can expect from us going forward. 
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+          Youssef Squali, Cantor. 
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [45]
+--------------------------------------------------------------------------------
+
+          Thank you very much. First question for Mark.  Mark, you recently came back from China. How do you think about that opportunity and what gives you the confidence that you can actually be successful where so many have failed? 
+And then, second, on Instagram, we've seen some very complimentary data that shows that Instagram is actually becoming more popular than ever with some brand marketers. Just wondering, what are the best-performing ads formats on the platform right now, and where is the ad load versus where Facebook is? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [46]
+--------------------------------------------------------------------------------
+
+          Sure. On China, we're already doing more in China on the business side than I think a lot of folks think about. A lot of Chinese businesses use Facebook to grow their export businesses and to help find customers around the rest of the world and grow the Chinese economy there. So that's actually a pretty meaningful thing for us already, and we always are looking to find ways to help businesses around the world to grow. And that will be just a long-term thing. 
+Our approach to China and every country is very long term. We're going to be here for decades, and we want to create good relationships with these countries and businesses around the world that will help and grow over the long term. 
+On the Instagram side, I think we're pretty early. There have been a number of good ads, both video and images, that I think have been pretty effective, but it's fairly early in the growth phase at this point. The top priority for Instagram is to grow from 200 to more and eventually connect 1 billion or more people, and I think that's something that should be possible. That's what I'm really focused on and excited about now, while we also start building out some of the parts of the business as well. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [47]
+--------------------------------------------------------------------------------
+
+          Operator, we have time for one last question. 
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+          Scott Davis, Stifel. 
+
+--------------------------------------------------------------------------------
+Scott Davis,  Stifel Nicolaus - Analyst    [49]
+--------------------------------------------------------------------------------
+
+          Thanks. I think this question is for Sheryl; the app download business seems to have grown quickly and become a big contributor of the ad revenue total for Facebook, and just wondering how you think about app re-engagement relative to app downloads, and which of those you think is the larger long-term opportunity for the Company? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [50]
+--------------------------------------------------------------------------------
+
+          I'm glad you asked the question, because I think there has been some confusion around our mobile apps and our mobile app ads and our mobile app engagement ads. 
+On the engagement ads, it's still pretty early and we have rolled those out. We rolled those out after mobile app ads, so we definitely see less of them, but we do think there's an opportunity. 
+I think the broader point is that our growth in mobile ads is very broad-based. It's across all marketer segments, and it's across all of our different ad formats. When we talk about our mobile ad business growing, mobile app ads are a small part of that, that's growing in line with our total business. 
+The other thing that I think people get a little confused about is who is using mobile app ads. I think commonly when you think about mobile app, people often think about developers, and developers are using them and we're pleased we're able to help them grow. 
+But they're also being used by some of the largest branders and marketers in the world. So, for example, Burger King. Burger King just used our mobile app ads to do app installs for their apps. Excuse me, I'm about to sneeze. And the app was to find Burger Kings, look at their menu and nutritional options, use mobile coupons, and use virtual gift cards. That was one use of our mobile app ads, which is not what people typically think of. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [51]
+--------------------------------------------------------------------------------
+
+          Great.  Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again. 
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+          This concludes today's conference call. You may now disconnect. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
+PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
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exam/original-files/Problem_1_Sample/2015-Apr-15-BAC.N-138140128784-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2015 Bank of America Corp Earnings Call
+04/15/2015 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Moynihan
+   Bank of America Corporation - Chairman, President and CEO
+ * Bruce Thompson
+   Bank of America Corporation - CFO
+ * Lee McEntire
+   Bank of America Corporation - SVP, IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Paul Miller
+   FBR & Co. - Analyst
+ * John McDonald
+   Sanford C. Bernstein & Co. - Analyst
+ * Eric Wasserstrom
+   Guggenheim Securities - Analyst
+ * Mike Mayo
+   CLSA Limited - Analyst
+ * Steven Chubak
+   Nomura Asset Management - Analyst
+ * Jim Mitchell
+   Buckingham Research - Analyst
+ * Jeff Harte
+   Sandler O'Neill & Partners - Analyst
+ * Nancy Bush
+   NAB Research - Analyst
+ * Glenn Schorr
+   Evercore ISI - Analyst
+ * Ken Usdin
+   Jeferies LLC - Analyst
+ * Matt O'Connor
+   Deutsche Bank - Analyst
+ * Brennan Hawken
+   UBS - Analyst
+ * Betsy Graseck
+   Morgan Stanley - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to the Bank of America earnings announcement conference call. At this time all participants are in a listen-only mode but later you will have the opportunity to ask questions during the question-and-answer session. Please note that this call is being recorded.
+It is now my pleasure to turn the conference over to Lee McEntire. Please go ahead.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP, IR    [2]
+--------------------------------------------------------------------------------
+
+          Good morning. Thanks to everyone on the phone as well as the webcast for joining us this morning for the first quarter results. Hopefully everybody had a chance to review the earnings release documents that are available on the website.
+Before I turn the call over to Brian and Bruce, let me just remind you we may make forward-looking statements. For further information on those please refer to either our earnings release documents, our website or other SEC filings.
+So with that, let me turn it over to Brian Moynihan, our CEO, for some opening comments before Bruce goes through the details. Brian?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thank you, Lee, and good morning and welcome everyone to the earnings call for our first quarter of 2015.
+I am going to start on slide two. So the highlights are there. We earned a $3.4 billion after tax in the quarter, which is up both on a linked quarter and year-over-year basis. We continue to work to drive growth in all our core businesses. We are beginning to see it overcome the run off with non-core portfolios in many areas. At the same time, we continue to focus on managing expenses carefully. As a result, we are beginning to see more predictable earnings with more improvement expected ahead.
+Both capital and liquidity remain at record levels in our Company. We expect to return more capital to shareholders this year than we have in the past.
+Revenue on an adjusted basis was $21.9 billion for the quarter. From the top of the house, revenue remains challenging in an environment with below trend economic growth and rate environment which comes from that. In addition, we remain faithful to our customer strategy with strong risk management and risk appetite to ensure we do not repeat the outsized credit losses of the past. With that said, we are seeing our core business stabilizing across the drivers of the revenue.
+This quarter we saw continued growth in our wealth management revenues and a rebound from the fourth quarter in trading revenue. In our loan and deposit areas, we saw continued core growth albeit subject to continued spread contraction.
+Our expense management efforts continue. The year-over-year expenses, excluding litigation costs, are down 6%. Including litigation costs, year-over-year expenses are down 30%. We continue to see our efficiency efforts drive forward beyond New BAC through our simplified and improved program.
+We also continue to see progress on LAS expense. As proof of our efforts for the quarter we ended with our headcount at a little under 220,000 full-time employees, a reduction of 4000 employees for the quarter, about 2% and 19,000 employees year-over-year, or 8%. For the quarter this reduction came to about 35% from LAS and about 65% from the rest of the Company. To put it in a broad context, we are approaching employment levels where we were in early 2008 prior to bringing in over 100,000 people from Countrywide and Merrill acquisition. We are doing that to the investments we are making in technology to reduce costs and they continue to take hold. And we will continue to drive this effort even as the economy continues to improve and rates rise helping keep balance to our operating leverage.
+During the last year even while we were reducing those costs and headcount, we continued to invest in the client facing growth capacity in this Company. We've added financial advisors in U.S. Trust and in Merrill Lynch, focused on building for the future. We have added commercial bankers in all our Global Banking areas to help fill in our franchise. We have added new financial centers in areas of opportunity and we continue to invest in products and innovation as well as efficiency. A simple example is our Consumer Mobile Banking space where we now have 17 million mobile banking customers, up over 2 million from last year.
+Turning to slide three, you can see what we simply need to do. Each of the four core lines of businesses on the left-hand part of the slide earned above our cost of capital for this quarter. In addition, the aggregate earnings for all those businesses were $4.4 billion after tax. The LAS segment had a much smaller loss this quarter showing we are making progress.
+The other area on the right-hand side of the slide has affected this quarter by the impacts of retirement eligible incentive costs and the market related NII adjustments which affect top of the house earnings. They are booked there in distributed business over the quarters. But this shows that we need to keep working LAS to get it to break even and the other will take care of itself in subsequent quarters.
+Turning to slide four, with regard to CCAR, as previously disclosed, we received a conditional non-objection to our capital plan. We received the approval for our requested capital actions that we requested in the original submission, a dividend of $0.05 per share and $4 billion of stock repurchase on the relevant periods. As you can see, the cushion we have increased from about $2 billion last year under the tightest constraint to over $22 billion this year, in both of those cases under the tightest constraint after all capital actions.
+These quantitative results bode well. However, the conditional approval is an area with which we are focusing. We are focusing our energy to the September resubmission and beyond. Our efforts are well underway. We are bringing additional resources to task. We simply have to be the best at CCAR to meet our shareholder objectives in our Company. To ensure that we achieve that success, I have asked Terry Laughlin to lead our efforts. As many of you know, Terry helped us clean up the mortgage issues over the last several years.
+I can assure you that our Board and management are extremely focused on our resubmission and our core process improvement for CCAR 2016 next year. Terry has retained a team of external experts, increased the internal staffing to ensure we are successful. We have had in depth discussions with our regulators regarding the particular specified issues that we need to remediate with the resubmission and we are focused on getting that done by September.
+With that, I will turn that over to Bruce.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Brian, and good morning, everyone. I'm going to start on slide five. As Brian mentioned, we recorded $3.4 billion of earnings in the first quarter or $0.27 per diluted share. That compares to $0.25 a share in the fourth quarter of 2014 and a loss of $0.05 if we go back to the first quarter of 2014. I'd like to note a few items as you review these results.
+Both first-quarter periods include $1 billion in expense for the annual cost of retirement eligible incentives awarded. This was $0.06 in EPS impact in each of the first-quarter periods. The first quarter of 2015 also includes a negative market related adjustment to net interest income of $484 million for the acceleration of bond premium amortization on our debt securities that is driven by lower long-term rates. That cost us $0.03 in EPS during the quarter.
+The other large item that is worth noting as you look at the comparisons is the outsized litigation amount of $6 billion in the first quarter of 2014.
+I'd like to spend just a moment on total revenue comparisons. Our first quarter of 2015 revenue on an FTE basis if we exclude the market related adjustment to NII and a small DVA adjustment, was $21.9 billion during the quarter. If we compare that to the fourth quarter of 2014 and adjust for the same items, revenue is up $1.7 billion or 8% and that 8% increase is attributable to a rebound in sales and trading results as well as higher mortgage banking income and is offset somewhat by lower net interest income mostly from two fewer days during the quarter.
+If we compare back to the first quarter of 2014 and we further adjust for $800 million in equity investment gains as a result of monetizing a single strategic investment in the year-ago period, revenue is now a couple hundred million dollars or 1% and that is from lower net interest income and lower sales in trading results.
+Total noninterest expense during the quarter was $15.7 billion and included the $1 billion in retirement eligible costs as well as $370 million in litigation expense. I will go through the comparisons from an expense perspective several slides back.
+As we look at provision for credit losses during the quarter, they were $765 million and included $429 million in reserve release versus $660 million in the fourth quarter of 2014. Preferred dividends during the first quarter were $382 million and as you all look to update your models given the preferred issuances that we have had the majority of which pay semiannually as you look at preferred dividends, they should be roughly $330 million in the second and fourth quarters and $440 million in the first and third quarters going forward based on our existing preferred footprint.
+Let's go ahead and move to slide six on the balance sheet. Our balance sheet was up slightly to $2.14 trillion and that was driven almost exclusively by cash balances associated with the deposit growth that we saw during the quarter. We continued our focus on balance sheet optimization for liquidity as we continued to ship some of our discretionary portfolio first lien loans into HQLA eligible securities.
+Loans on a period end basis were down modestly reflecting good core loan activity in both our Global Banking as well as our Wealth Management segments. That was more than offset by seasonally lower card balances in our discretionary consumer real estate area as well as run-off portfolios.
+Deposits were up $34 billion or 3% from the end of the year and some of that obviously has to do with seasonal tax activity. We issued $3 billion of preferred stock in the quarter that benefitted regulatory capital and as you look at common shareholders' equity, you can see it improved driven both by earnings growth as well as improved OCI. As a result of these factors, tangible book value increased to $14.79, 7% higher than 12 months ago and our tangible common equity ratio improved to 7.5%.
+The last point that I would note is that we did add a slide in the appendix as we updated our capital allocations across the segments coming into 2015 and the returns that we show you are reflective of those updated capital allocations.
+Let's go ahead and flip to slide seven and go through loans. From several calls, we are as frequently about the decline in reported loans which are down modestly again from the fourth quarter levels as you can see in the upper left-hand chart. I want to make a few points though as we go through this.
+As we have discussed many times, much of the movement in loans has been driven by two pieces of non-core loans. The first relates to shifts in our discretionary mortgage loan levels that are used to manage interest rate risk and predominantly recorded in the all other unit. Many times based on the investment decisions that we make, these loans are replaced with debt securities on the balance sheet.
+The other component as you look at loans to consider is the run-off that we have within our LAS unit, which are mostly home equity loans. As these home equity loans go away, it enables us to reduce our operating costs as we have less work to do.
+As you can see over the past five quarters, these non-core loans have declined approximately $59 billion. If you adjust for that $59 billion though, and I'll go to the upper right-hand box, you can see that our loans have actually increased by $21 billion from the first quarter of 2014. The bottom chart on this slide provides the mix of this loan growth across our primary businesses. And you can see within our Wealth Management area, we have experienced strong demand in both consumer real estate as well as securities based lending and that has led to year-over-year loan growth within that segment of 10%.
+Within Global Banking, we saw modest growth on a year-over-year basis but importantly we saw a significant pickup in activity in the first quarter of 2015 relative to the fourth quarter of 2014. Over that time frame, loans were up $6.7 billion or 8% on an annualized basis.
+We move to slide eight and take a look at regulatory capital. This quarter the standardized transition reporting includes the switch from reporting RWA under the general risk-based approach to Basel III and the capital number includes another year of phase-in for capital deductions. With those changes, our CET1 ratio was 11.1% in 2015 under the new reporting.
+If we go ahead and look at Basel III regulatory capital on a fully phased-in basis, our CET1 capital improved $6 billion during the quarter and was driven by earnings, lower DTA, lower threshold deductions as well as an improvement in OCI. That translated under (technical difficulty) approach to our CET1 ratio improving from 10% in the fourth quarter to 10.3% in the first quarter of 2015 while under the advanced approaches the CET1 ratio improved from 9.6% to 10.1%.
+As you know from our 10-K disclosure, we are working with our banking regulators to obtain approval of our models in order to exit parallel run. Our regulators have requested modifications to certain commercial and other credit models in order to exit parallel run which we estimate would increase our advanced approaches RWA and negatively impact the CET1 ratio that we show here by approximately 100 basis points.
+If we look at supplementary leverage, we estimate that at the end of the first quarter of 2015 we continue to exceed the US rules applicable in 2018. Our bank holding company SLR ratio was 6.3% and in our primary banking subsidiary, BANA, we were at 7%.
+We turn to slide nine, long-term debt. At the end of the first quarter was $238 billion, down $5 billion from the fourth quarter of 2014. In the lower left box you can see that from a maturity profile perspective, we have $16 billion of parent company debt that matures during the balance of 2015 and we will be opportunistic as it relates to refinancing that indebtedness.
+Our global excess liquidity sources reached a record level of $478 billion this quarter and now represents 22% of the overall balance sheet. The increase from the fourth quarter reflects the deposit inflows as well as the shift from discretionary loans into HQLA securities.
+Within the liquidity, our parent company liquidity remains quite strong at $93 billion and our time to require funding is at 37 months. During the quarter, we did continue to increase our liquidity coverage ratios at both the parent as well as at the bank levels and at the end of the first quarter, we estimate that our consolidated company was well above the 100% fully phased in 2017 LCR requirement.
+On slide 10, net interest income on a reported FTE basis was $9.7 billion, down a couple hundred million dollars from the fourth quarter of 2014 driven by two fewer interest accrual days during the quarter as well as some spread compression. If we exclude the previously mentioned market related adjustment, NII at $10.2 billion was largely in line with our expectations and lower than the fourth quarter of 2014 given two fewer interest accrual days.
+Modest improvements in net interest income mostly from lower funding costs in the quarter were offset by some of the continued pressures that we saw in loan and securities yields as well as balances in new assets coming in at lower long-term rates. This drove the adjusted net interest yield to 2.28%.
+If we look at the movement down in rates during the quarter, our balance sheet did become more asset sensitive compared to year-end such that 100 basis point parallel increase in rates from the end of the quarter would be expected to contribute roughly $4.6 billion in net interest income benefits over the next 12 months. Slightly more than half of that $4.6 billion is on the long end and just under half is based on the short end.
+On slide 11, if we moved to expenses, non-interest expense was $15.7 billion in the first quarter of 2015 and included roughly $370 million in litigation expense. First quarter 2015 once again did include $1 billion in annual retirement eligible incentive costs consistent with what we saw in the first quarter of 2014.
+Litigation expense during the quarter included FX and RMBS items and was significantly below what we saw a year ago, which included the cost of the [FHFA] settlement.
+While we are on litigation, I do want to make sure that you notice this quarter that we did get one step closer on our Article 77 settlement as the Appellate Court approved the Bank of New York Mellon settlement in all respects and I would also note that the deadline for further appeal at this point has passed.
+If we exclude litigation and retirement eligible costs, our total expenses were $14.3 billion this quarter, down nearly $1 billion from the first quarter of 2014 driven by three factors; continued progress on our LAS initiatives, our New BAC cost savings as well as lower revenue related incentives within Global Markets.
+Relative to the fourth quarter of 2014, the expense level on an adjusted basis is up about $0.5 billion on higher revenue related incentives mostly for the improved sales and trading results on a linked-quarter basis. Our legacy assets and servicing costs, ex-litigation, were $1 billion. They improved approximately $100 million from the fourth quarter of 2014 and more than $500 million if we go back to the first quarter of 2014. And we remain on track to hit our Q14 target that we laid out for you of $800 million dollars in LAS costs, ex-litigation once again in the fourth quarter.
+Beyond the LAS business, our teams continue to do very good work in optimizing our delivery network as well as our infrastructure and as you can see headcount was down 8% over the course of the last 12 months.
+If we look at asset quality on slide 12, reported net charge-offs were $1.2 billion in the first quarter versus $900 million in the fourth quarter of 2014. I do want to note that the first quarter of 2015 included a net impact of approximately $200 million in losses associated with the DOJ settlement that was previously reserved for and that was offset in part by recoveries from certain NPL sales.
+Our Q4 2014 included similar items but with the net adjustment positively benefiting net charge-offs to the tune of about $163 million. If we adjust for all these impacts, our net charge-offs during the quarter were $1 billion dollars, which is slightly lower than what we saw in the fourth quarter of 2014.
+Our loss rates on the same adjusted basis were at about 47 basis points in the first quarter of 2015 consistent with what we saw in the fourth quarter of 2014. In both our consumer delinquencies as well as our NPLs declined from fourth-quarters levels.
+On the commercial front we did see a slight pickup in reservable criticized exposure from the fourth quarter of 2014 as we bounce off comparatively low levels.
+The first quarter of 2015 provision expense was $765 million. We released $429 million in reserves. Most of those reserve releases were in our consumer real estate portfolio, while we did see a modest increase in reserves in the commercial space that was associated with the strong loan growth that we saw during the first quarter.
+We can flip to slide 13 on consumer banking. Hopefully last week you all saw and had a chance to review the filing of our recasted segment results. We mentioned to you during the last earnings call that we made changes in segment reporting where we moved the Home Loans into our Consumer Banking segment from CRES, which left our legacy assets and servicing as a standalone segment. We also moved the majority of business banking from Consumer Banking to the Global Banking segment which is how we manage the business. All of these changes have been made retroactively.
+Let's go ahead and walk through then the business segment results starting on slide 13 with Consumer Banking. The results showed solid bottom-line performance with earnings of $1.5 billion, which is up slightly from the year-ago quarter and down seasonally from the fourth quarter of 2014, which tends to be a better consumer spending quarter. Business generated a solid 21% return on allocated capital.
+Total revenue was lower compared to the first quarter of 2014 from a decline in net interest income. Two-thirds of that decline in NII was a result of pushing out in the allocation of a portion of the market-related NII adjustment to the deposits business.
+Our non-interest income was stable compared to last year, reflecting good growth in both mortgage banking as well as higher card income, but was offset by a portfolio divestiture gain last year of roughly $100 million in the first quarter. Expenses were managed tightly and non-issue expense declined from the fourth quarter of 2014 as we continue to reduce our financial centers and the associated costs driven by consumer behavior patterns shifting to more digital.
+The number of mobile banking customers continues to increase. We ended the quarter at roughly 17 million and these -- activity from these customers accounts for roughly 13% of all deposit transactions.
+Page 14 we have added some additional slides here to give you a sense as to some of the trends that we are seeing in the business and key drivers. You can see we remain a leader in many aspects of our consumer bank, doing business with nearly half of all US households.
+We look at fees compared to the first quarter of 2014, card income was up modestly despite some Affinity portfolio divestitures over the last year. Our card issuance remains very strong. Our balances did decline as our customers began to pay down holiday spend balance levels and our net charge-offs remain low at 2.8% and risk-adjusted margins remain high.
+If we move to mortgage banking income, it was up 60% as originations for the Company ramped up during the quarter. Year-over-year first mortgage originations were up 55% to $13.7 billion while our home equity line and loan originations increased 62% to $3.2 billion.
+The revenue improvement was driven by these increased volumes as well as the mix of first lien originations that was 76% weighted towards overall refinance activity. And looking forward, the pipeline remains strong, up 50% from the end of the year.
+Moving to service charges, service charges were down versus the fourth quarter of 2014. This fee line continues to be muted as more of our customers take advantage of our reward plans and are opening accounts with higher balances. We also continue to reduce the number of less profitable accounts serviced and migrate customer activity to more self-service channels. As a result, we are getting the same or slightly better account fees and debit interchange from fewer accounts, which is allowing us to reduce our infrastructure.
+Expense is declining and if you look at cost of deposits, it has dropped from just less than 2% in the first quarter of 2014 to 1.87% in the first quarter of 2015.
+And lastly, as you can see while we are bringing down our overall headcount in this business, I want to note that we have been increasing our sales specialists in the financial centers and their sales are driving client balances higher. For example, our deposits are up 5% from the first quarter of 2014 and our brokerage assets are up 18%.
+If we moved to slide 15, Wealth Management, it generated earnings of $651 million during the quarter. If we compare this to the first quarter of 2014, there's a $78 million decline as the solid fee growth that we saw during the quarter was offset by lower net interest income and higher expense. Once again, the allocation of the market-related NII adjustment drove the decline in NII, which more than offset the benefits that we saw from solid loan growth.
+Our asset management fees continued to grow driven by strong client flows and higher market levels. Our non-interest expense increased from the first quarter of 2014 as a result of higher revenue related incentives as well as investments in client-facing professionals.
+Our pretax margin was down 23%, down last year largely impacted by the decline in net interest income. Return on allocated capital remains strong at 22%.
+If we look at the activity and drivers within Wealth Management on slide 16, you can see our management fees continue to grow and are up 10% from the first quarter of 2014 but this is partially offset by some of the sluggishness that we've seen in transactional revenue within the brokerage line. We do continue to be an employer of choice in this business increasing financial advisors by more than 850 individuals over the course of the last 12 months.
+Our client balances climbed to over $2.5 trillion, up $12 billion from the fourth quarter of 2014 driven by strong client balance inflows. Long-term AUM flows at $15 billion for the quarter were positive for the 23rd consecutive quarter.
+And as I mentioned earlier, when we discuss loans, we continue to experience strong demand in both our securities based and residential mortgage lending areas of the business reaching a new record level in loans during the quarter.
+On slide 17, our Global Banking earnings during the quarter were $1.4 billion, which generating 16% return on allocated capital. Earnings were up 6% from the first quarter of 2014 as the decline in net interest income was more than offset by lower expense as well as improved provision expense.
+As we look at NII, the year-over-year decline was driven by three things: the allocation of the market related to NII adjustment, which I have touched on in previous segments; the push-out of the firm-wide LCR requirements, a good chunk of which goes to Global Banking as well as some year-over-year compression in loan spreads. Our provision expense was lower than the first quarter of 2014 by $185 million as we did not build reserves to the same magnitude as we did in the first quarter of last year.
+Non-interest expense was down 8% from the first quarter of 2014 driven by three factors, lower technology initiative spend, lower litigation as well as lower incentive costs.
+Moving to the Global Banking metrics on page 18, we chart the components of revenue which show stability across the quarters with the exception of NII, as I just mentioned. Our investment banking fees companywide during the quarter were $1.5 billion, down 4% from the first quarter of 2014. I would highlight during the quarter we recorded the highest level of advisory fees since the Merrill merger, up 50% from the first quarter of 2014. This helped to offset the drop that we saw within our leverage finance business as a result of the regulatory guidance that was implemented during the first half of 2014.
+Equity underwriting was also up nicely, up 10% from the first quarter of 2014. And as you look at the balance sheet, loans on average were $290 billion, up modestly on a year-over-year basis but if you look linked quarter, as I mentioned earlier, we had a fair bit of momentum ending the first quarter with balances up $7 billion on a spot basis from the fourth quarter of 2014.
+The $7 billion improvement was broad-based. We saw middle-market utilization rates at levels that we have not seen for six years at this point so we feel good about that. And within commercial real estate, we saw linked quarter improvement as well.
+On slide 19, Global Markets, we earned $945 million on revenues of $4.6 billion in the quarter. That was an 11% return on allocated capital during the quarter. Our earnings were up nicely from the fourth quarter of 2014 but down from the first quarter as our revenue was down 7% excluding net DVA and FVA. The decline from the first quarter of 2014 was driven by lower fixed sales and trading results.
+On the expense front, non-interest expense was modestly higher year-over-year as we had $260 million in litigation expense in the quarter. Ex litigation, expenses were down 7% on reduced levels of revenue related incentives.
+If we look at the Global Markets metrics on slide 20, sales and trading revenue of $3.9 billion ex-DVA and FVA as I mentioned was up nicely off fourth quarter of 2014 levels but down 5% from the first quarter of 2014. Fixed sales and trading was down 7% on a year-over-year basis while equities was effectively flat with the year-ago period.
+Within the macro related product areas like FX and rates, there was a solid return in volatility and client trading activity in the quarter while the credit spread traded products area experienced lower activity in line with lower issuance levels during the quarter. And as you look at and we lay out a mix between macro and credit in the upper box, upper right-hand box and you can see that our activity tends to be more heavily weighted towards credit spread trading given the position that we occupy within the issuer market.
+And the last point I would make on markets, our asset levels were fairly flat while VaR was below the level that we experienced last year.
+Slide 21, Legacy Assets & Servicing, you can see we saw improvement in revenue and expense trends compared to both periods within Legacy Assets & Servicing. The loss in this segment narrowed to less than $240 million. Revenue improved as both rep and warrant was down $156 million from the year-ago period and we had a more favorable MSR hedge performance. Those two factors were partially offset by lower servicing fees as we continue to reduce the servicing portfolio.
+Non-interest expense ex-litigation was $1 billion in the quarter once again improving approximately $100 million from the fourth quarter and more than $500 million since the first quarter of 2014. Importantly, our 60-plus days delinquent loans were 153,000 units but were down 36,000 units or 19% from the fourth quarter of 2014.
+If we move to slide 22 All Other, All Other reflects a loss of $841 million and that includes once again the impact of the annual retirement eligible incentive costs as well as some of the market-related NII impact. If we compare this quarter to the first quarter of 2014, revenue is lower by about $683 million and that was driven by nearly $700 million in equity investment gains in the first quarter of 2014 compared to essentially nothing in the first quarter of 2015 and it was partially offset as well by the absence of payment protection costs this quarter compared to about $141 million in the prior-year quarter.
+From a modeling perspective, the effective tax rate during the quarter was about 29% and as we look out during the balance of 2015, we would expect the tax rate to be roughly 30% absent any unusual items.
+So I would just wrap up the prepared part of my comments that as we end the quarter, we end the quarter with record capital. We end the quarter with record liquidity. We will begin our $4 billion share repurchase program this quarter. The team is very focused on addressing our CCAR resubmission. Expense management remains a key focus across the Company. Our businesses are showing good activity including a pickup in lending across several businesses in the Company, credit quality remains strong and we remain well positioned to benefit in a rising interest rate environment.
+And with that we will go ahead and open it up for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions). Betsy Graseck, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          So Brian, very impressive commentary in the beginning of the call on headcount getting back to 2008 levels before CFC and the Merrill Lynch acquisition. The one question we get continually from investors is what is left to do on the expenses and you've already got the core expense number coming into the $13 billion range, so can you give us some sense as to where you go from here on expense management and is it steady as she goes, or is there room to become even more efficient?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [3]
+--------------------------------------------------------------------------------
+
+          A couple of things. One is if you parse expenses, Betsy, into three basic buckets, the litigation expense bucket, which you are seeing come down to more reasonable levels and then there is a cost of that litigation, the external legal fees and stuff, which we will continue to see lift in which is in the expense numbers. Then you have a second bucket, LAS, we are at the $1 billion level and as Bruce said, we expect to get that down to $800 million and keep moving that to lower numbers over into 2016.
+And then you get into the baseline and I think the thought on the baseline is even as we reduce the headcount we continue to reinvest in sales capacity. So just in our consumer business, headcount down year-over-year but we have 1000 more salespeople roughly out there selling. And then so the idea is to continue to drive salespeople into the businesses at the same time we are taking out wealth management, etc.
+So when you think about the broad expense base, there is adjustments always in first quarter, second quarter just because of revenue and stuff in terms of the aggregate amount but we will continue to pare away. You can look linked -- year-over-year quarters over the last four years, we have continued to chip away. This year it was 300 on the core base. We will continue to work at that but I would say that a lot of it we are trying to make sure that we create the investment rate, continue to grow the franchise (inaudible) size. This is a matter of holding these expenses relatively flat as revenues start to pick up with the expected increase in rates and the economy continue to grow. If that changed we would have to go aggressively and push down the core also.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          We manage it every day.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [5]
+--------------------------------------------------------------------------------
+
+          We manage it every day and you can see the headcount is a leading indicator because that headcount reduction in the quarter really benefits us in the second quarter.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Got it. And then just separate topic on GWIM and maybe you could give us some commentary around how you are thinking about the impact of the fiduciary language that has been coming out if the Department of Labor and also how you deal with the competitive threats coming from Silicon Valley including some of the robo-advisor efforts?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [7]
+--------------------------------------------------------------------------------
+
+          On the first question, John Thiel, who runs Merrill Lynch for us, where largely we are affected by the discussion on fiduciary standards because remember U.S. Trust is actually a private bank and operates under the fiduciary standard in most of its activity. So John Thiel does the lead in our business, does a great job for us, has been clear. We believe that doing what is in the best interests for your customers is absolutely the right thing to do. And while this rule has just come out yesterday afternoon and frankly, Betsy, to get prepared for your questions this morning, I haven't spent a lot of time examining it in detail. But from a basic standpoint, we have been clear that we see the industry moving and we expect to help move it there.
+On the robo-advisor I think that the clear segment match for us in that area in terms of what Schwab and other people are talking about is really in the Merrill Lynch business, which is below the Merrill Lynch cut off, for lack of a better term. So John and his team drive people $250,000 in investable assets free to invest, which is net worth $0.5 million/$1 million in [uprating] of the client. And then Dean Athanasia and his preferred team drive the business below that and if you look in our information, you will see that that business has got about $118 billion of brokerage assets. It is growing faster than the industry year-over-year. I think the assets are up 18%. The numbers of accounts are up, the sales levels are up and so that's really the automated rebalancing portfolios and stuff like that and we are driving that through as a core execution.
+And by the way, they also refer tens of thousands of customers a year up to Merrill Lynch at the same time, so we are trying to have the best of both worlds.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [8]
+--------------------------------------------------------------------------------
+
+          Okay, thanks. You have been a leader there, so appreciate that color. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+          Matt O'Connor, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [10]
+--------------------------------------------------------------------------------
+
+          Any sense of when we get a clearer picture on the final impact of exiting parallel run? Should we just assume the 100 basis point hit that you mentioned is a done deal or is there a potential for it to be less than that?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [11]
+--------------------------------------------------------------------------------
+
+          I think what we wanted to disclose, Matt, is that I think that we are coming out of the disclosure that we had in the K, there were a lot of questions and you are absolutely right that what we disclosed today was the requested amount from our banking regulators to exit parallel run. That was the ask on their behalf. Discussions continue but we did want to put out there what the ask was.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [12]
+--------------------------------------------------------------------------------
+
+          Okay. In terms of timing of a conclusion on that?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [13]
+--------------------------------------------------------------------------------
+
+          I think that those things are always hard to predict but we are obviously working hard to get through it over the next quarter or so.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Okay. And then just related, obviously capital build was very good this quarter of 50 basis points, so you essentially got half that back already. But assuming that 100 basis point hit goes through, are there additional RWA levers to pull or model adjustments in the future that we can think about?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [15]
+--------------------------------------------------------------------------------
+
+          You ask a very good question, which is that to the extent that there is an adjustment in the RWA, you obviously as you look to refine and improve your models, always have the ability to work hard to get that back. But there's obviously a lot of scrutiny with respect to models. But your point is spot on is that there would be the opportunity as we work through and look to refine, improve and become better with our models, to get some of that back over time.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [16]
+--------------------------------------------------------------------------------
+
+          And Matt, in a broader context, we have flipped the binding constraint in our Company to some degree with a move to advanced and so therefore, continue to look at the balance sheet what mix of businesses and how you approach the businesses changes again because standardize was a constraint we were focused on and was our binding constraint and now it's going to flip to advanced, as you can see in the numbers. And that then just -- expect us to be as aggressive and in depth at thinking through how we mix the businesses right to make sure that we are focused on that constraint now that it has become a binding one.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [17]
+--------------------------------------------------------------------------------
+
+          Okay. That is very hopeful, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [18]
+--------------------------------------------------------------------------------
+
+          Paul Miller, FBR Capital Markets.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [19]
+--------------------------------------------------------------------------------
+
+          On your legacy asset servicing in your discussions you said that the loans went down from 36,000 loans in the quarter. Did you sell any loans in the quarter?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [20]
+--------------------------------------------------------------------------------
+
+          There was some servicing of loans that was moved as well as the outright sale of some nonperforming loans, so there was some inorganic activity but as you look at those reductions, it was very strong from both organic as well as inorganic. And I would say the other thing that we are seeing, Paul, is just less new delinquencies coming in than what we would've expected. So you've got the benefit of less coming in, you've got the benefit of working through some of what you have and then we are supplementing that with moving additional out.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          Yes, I know one of the things out there is what we are seeing or hearing is that there is a strong market right now for people wanting to buy either re-performing or nonperforming loans. Are you going to use that as an advantage to start moving this stuff off your books quicker?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [22]
+--------------------------------------------------------------------------------
+
+          We have been using it as an advantage. If you go back and look at the results, Paul, I think we were one of the first out there that started to move those loans in the first half of 2014. We have been aggressively doing that both to take the risk of the loans off as well as to move the servicing. And I think if you look at the impact of that and how it flows through different things, you really get a good sense for it when you look at some of the CCAR results where the loss content that we have, particularly within both first mortgages as well as home equity, has come down. So we have been at that for some time at this point.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [23]
+--------------------------------------------------------------------------------
+
+          And Paul, I think overall remember as you get further and further removed from the crisis, what is left over even though at the time when we set up LAS or set up some of these non-core portfolios would have been a product or service you didn't want to continue. Seven years later, you are seeing the customers are left over and paid and so there's a good bit but also we want to make sure we measure the economics of the portfolios. Now that they are much smaller, the risk is way down and so we judge that really on the basis of who the customer is and whether we want to roll them into core loans in our Company and then also what the economics of the outside are.
+So I wouldn't expect us to change our course there. We will just look at the opportunities we have to keep moving in the right direction. On both servicing and assets we own too because remember, Paul, there's also the servicing side of this even though we don't own the asset, the is a strong bid. Even the agencies are moving to move some portfolios.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Okay, thank you guys.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+          Jim Mitchell, Buckingham Research.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Just want to follow up on the capital discussion. You guys had pretty good progress on the advanced approach, up 50 basis points quarter over quarter but the gap between standardized and advanced is still very large. And I guess if you have to go through with the full 100 basis points, I guess about 120 basis point gap versus your peers that are less than half that. I guess -- is the big difference operational risk because of the larger litigation you faced over the last couple of years and how do we think about that coming down and getting more in line with the peers? Is that just a time as you get further away from that, those op risks come down or how else do we think about the trajectory of the closing of the gap?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [27]
+--------------------------------------------------------------------------------
+
+          No, your point is exactly right, which is that as we talked about last quarter that the op risk relative to the total advanced RWA was upwards of 30%. That's obviously higher than our peers. It is something that we are working hard on to be able to drive down. And to your point, the question is when are you able to get benefit from a declining litigation trend as we wrap up the legacy matters and that does take some time. Obviously the last two quarters from a litigation perspective have been much lighter than what we experienced going back several years. So it is up to us to continue to work that and to look to convince people that the level op risk capital should come down given the resolution of the matters.
+And I would just highlight that we once again whether you look at Article 77, there was an Ocala litigation matter that was wrapped up as well as on the RMBS front with settlements that we got through this quarter were at roughly 99% of all threatened or filed litigation with respect to RMBS. So we continue to work through that and drive through that and ultimately the benefit from that should be lower op risk capital from an RWA perspective.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Right and sorry, is that sort of a negotiation process on the models with regulators, so is it going to be sort of a step function or is it just really just time value as you move further away? I'm just trying to understand the process.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [29]
+--------------------------------------------------------------------------------
+
+          I think in all these cases clearly that we work closely with our supervisors on all model related activity and as you look to make changes that are to the good you obviously need to work through your regulators to get those put through.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [30]
+--------------------------------------------------------------------------------
+
+          As you think forward remember you saw a good capital build this quarter and we will continue to build. But remember that if we keep on the course of earnings that we expect -- and the issue wasn't CCAR last year when we went to the ask. You have to remember we came off a really low nominal earnings environment and so we retain a lot of capital between now and the next time we can ask to actually change the capital position of the Company and we have a big cushion.
+So we will close this gap relatively quickly and then we have a longer-term question of what you are saying which is as op risk runs off, how do you get that reflected ultimately in your capital requirements and the same with the models and the other [side].
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          Right. And to your point, the stress test is based on standardized, not advanced.
+But just one quick follow-up elsewhere, on the FICC revenues, can you talk about the trajectory over the quarter? Did it improve in March? It sounded like some of your peers have talked about a slow start. Did it get any better in March, or how do we think about the trajectory through the quarter?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [32]
+--------------------------------------------------------------------------------
+
+          I am always hesitant to comment on results given that we are nine days into a new quarter but I think if you look at what we saw from both I would say both a sales and trading as well as an overall investment banking fee perspective, the January on the margin was a little bit slower than what we would've expected and we saw activity and momentum build up throughout the quarter to where if you had to grade which of the three months of the quarter did you feel best about, it was clearly March. And like I said, we are only nine trading days into the new quarter but we have not seen anything change directionally. Some of the activity that we saw in March, we have continued to see in April.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [33]
+--------------------------------------------------------------------------------
+
+          Okay, great. That's very helpful. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Glenn Schorr, Evercore ISI.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          Quick question on Proposal 8 in the proxy. I don't think the regulators want it to happen. I don't think it should happen and I assume you have been doing a lot of the work on this along the way for the last couple of years. But curious why the Board is so against shareholders voting for it and what you actually have to do if it does get the yes vote?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [36]
+--------------------------------------------------------------------------------
+
+          As I think you read the response in the proxy, Glenn, you will see this is a core Board duty and they do look at it periodically and think about the optimal company structure, capital structure. So the idea to have a special element around it is really the whole Board looks at it and that is who should look at it. So then the technical terms of what the request is are a little hard to understand when you think about how a company really operates. But we do look at the question of do we have the optimal business mix? Is it optimal for shareholders? And the Board will look at it continuously and we will continue to look at it.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [37]
+--------------------------------------------------------------------------------
+
+          Okay. I appreciate the comments you made on the increased asset sensitivity and if I remember the numbers correctly, it sounds like more of the increased sensitivity came out on the long end. So I guess my question is, it is great you make a lot more money if the curve shifts up 100 basis points. But I think a lot of people are more fearful of what happens if we get into a [flattener] environment. So is it is simple as you capture at least half by short rates going up and if we're in a flattener, that's where it ends?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [38]
+--------------------------------------------------------------------------------
+
+          A couple of things, Glenn. The first is that in many respects we were at 3.5/3.6 at the end of the year and we went to 4.5/4.6 this quarter. Keep in mind that a chunk of what you see as far as becoming more asset sensitive is just the FAS 91 that we lost during the quarter. So I'd keep that in mind.
+And to your point you are exactly right. If you looked at where we were at year end, I think we were just over in the 2.1 to 2.2 benefit from short rates moving and that has not changed materially. So to your point, the asset sensitivity is based almost solely on long-term rates and given the deltas that we saw change from the end of the year to the end of the first quarter.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Okay. I appreciate it. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+          John McDonald, Sanford C. Bernstein.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Co. - Analyst    [41]
+--------------------------------------------------------------------------------
+
+          Just a follow-up on in terms of if rates stay pretty flat, what kind of outlook would you have for the core NII if we take the 10.2 this quarter as a jumping off point? Do you have any room to lower the debt costs from here or how would you expect the core NII to trend if we don't see too much movement on rates?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [42]
+--------------------------------------------------------------------------------
+
+          It is something we have spend a lot of time on, John. When we got to the end of the first quarter we looked at and said during the balance of 2015 what is the impact that we would see if in effect we rolled a spot throughout 2015, which just means that you don't get the benefit of the curve as we go through. And if you look at that, it is roughly a couple hundred million dollars a quarter relative to $10 billion of NII.
+So we think that we've done between the debt footprint, deposits and if you actually look at the clean yields during the quarter Q4 to Q1 that we've done a pretty good job of managing this exposure in what has been a tough environment. But to your question, there is probably a couple hundred million dollars a quarter in risk if you roll the spot.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Co. - Analyst    [43]
+--------------------------------------------------------------------------------
+
+          Got it. Okay and that's couple hundred million over a couple of quarters, Right?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [44]
+--------------------------------------------------------------------------------
+
+          It would be about $200 million per quarter over the next three quarters.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Co. - Analyst    [45]
+--------------------------------------------------------------------------------
+
+          Got it. And that's just kind of core leakage from new stuff coming on or lower yields and you not investing much in a low rate environment?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [46]
+--------------------------------------------------------------------------------
+
+          That's correct.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [47]
+--------------------------------------------------------------------------------
+
+          Yes, and continuing to shorten the balance sheet every time we get a chance to.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Co. - Analyst    [48]
+--------------------------------------------------------------------------------
+
+          Okay. And then just switching gears, Bruce, on the credit side, do you see the net charge offs kind of bouncing around the $1 billion per quarter level, or is there room for those to come down or is that kind of stabilizing? And how should we think about reserve releases from here relative to the 400 or so you did this quarter?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [49]
+--------------------------------------------------------------------------------
+
+          A couple of things on that. I would say we continue to see, John, if you look at within the consumer space and overall consumer credit that the first quarter typically all of the things being equal is the toughest consumer quarter in the first quarter. So I think there's probably a little bit of room there if we continue to see what we see in the economy on the consumer side.
+The tougher piece of it is probably to judge commercial because outside of what we see in the small business lending, there really haven't been many charge offs and we will just have to see how long that benign environment covers.
+On the reserve release for the quarter, the one thing I want to make sure that we point out that while we release 400 plus of reserves, 200 of that was from the DOJ where with the mailings you had both charge-offs and reserve release, so as it relates to just from a -- as you look at the provision perspective, realize that which impacted the provisions is more like 200.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Co. - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          Okay. So that should be something -- the jumping off point is more like a 200 reserve release number?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [51]
+--------------------------------------------------------------------------------
+
+          Yes. And I think we have said that we clearly expect reserve releases to moderate, so we will have to see as we roll into the quarters. But I think you are directionally right on your charge-off number and we will see if there's anything left in the reserve releases as we go through the second and third quarters.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Co. - Analyst    [52]
+--------------------------------------------------------------------------------
+
+          Okay. Last quick thing for me. In terms of rep and warrants, the slide 26, not sure if you mentioned this already, Bruce, there was a pickup in the claims, the new claims this quarter showed a big increase. Just what is the driver of that? Why would those show up now? And any color you can provide on whether that is a concern or not.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [53]
+--------------------------------------------------------------------------------
+
+          Yes, I think you need to go down to and we lay it out in the footnote but if you start up in the new claim trends, if you recall there is a case going through where the statute of limitations on rep and warrant claims in the ACE case was found -- the statute was six years and if you look at the claims that you see up in the new claim trends, you can see virtually all of those claims were in the pre-2005 through 2006 area. So absent any tolling, a good chunk of those are going to be time barred.
+The other part that -- the other point that I would mention is if you go down to the footnote you can see that the vast majority of these claims were put in with no file work done on whatsoever or no individual loan work that was done.
+So I think there continues to be obviously activity on that front but there is not a lot of work being done as those claims are being filed.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Co. - Analyst    [54]
+--------------------------------------------------------------------------------
+
+          Okay. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+          Steven Chubak, Nomura.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          So Bruce, I just wanted to touch on the preferreds for a moment. So saw that you completed another $3 billion of issuance in the quarter. But seeing as you are already at the 150 basis point target contemplated under Basel III, whether it's fair to assume that you are now full on press at the moment and we shouldn't expect any additional issuance?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [57]
+--------------------------------------------------------------------------------
+
+          Yes, I think you're absolutely right that we got the bucket filled up this quarter. I think the only thing that is out there is depending on exactly where we come out from an overall RWA perspective as we exit parallel run. That beyond 2015, could there be a couple billion dollars more preferred sometime during 2016? That's a possibility but you are absolutely right that based on where we are from an RWA perspective, the bucket is filled up, so we don't see much if any at all in 2015. Maybe a little bit in 2016 but not much.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [58]
+--------------------------------------------------------------------------------
+
+          Excellent. Thanks for clarifying that, Bruce. And I suppose since you mentioned RWA, one thing that I just wanted to clarify, I believe it was relating to your response to Jim where you noted that for CCAR it only contemplates a standardized approach. But I just wanted to know if that determination had been finalized since some are speculating that the advanced approach could be incorporated within the CCAR exam going forward?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [59]
+--------------------------------------------------------------------------------
+
+          Yes, there is an open question out there that you are absolutely right that for the different CCAR submissions that went in in 2015, that those submissions are against the standard ratios. And as an industry, we just don't know the answer if we will test under just standardized in CCAR 2016 or if advanced will be brought in. That is an open question that is out there for the industry.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [60]
+--------------------------------------------------------------------------------
+
+          And do you have a sense at least for the moment as to what the impact would be on RWAs if they were to incorporate the advanced approach versus the standardized?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [61]
+--------------------------------------------------------------------------------
+
+          I think if you look at the numbers you can see the difference that we have within our numbers. As to advanced, I think the open question that is out there as you look at moving to advanced in a CCAR scenario is that under advanced you hold capital for op risk and then that there's the open question if you go to stress test under advanced, what do you do with respect to CCAR in those op risk litigation type items? And like I said, that is an open question for the industry.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [62]
+--------------------------------------------------------------------------------
+
+          Right. But would it be fair to expect that because it is a -- the advance calculation is more procyclical in nature that the RWAs calculated under a period of stress would be higher versus the standardized?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [63]
+--------------------------------------------------------------------------------
+
+          There is no question that there is a procyclical aspect of it that intuitively I think you are right but it is just until you understand exactly the completeness and the entire picture of what you are looking at, I just don't want to speculate.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [64]
+--------------------------------------------------------------------------------
+
+          Fair enough. That's it for me and thank you for taking my questions.
+
+--------------------------------------------------------------------------------
+Operator    [65]
+--------------------------------------------------------------------------------
+
+          Ken Usdin, Jefferies.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jeferies LLC - Analyst    [66]
+--------------------------------------------------------------------------------
+
+          I was wondering if you could talk a little bit about the investments in brokerage services business. The metrics continue to look very strong as far as assets gained but the growth rate on a year-over-year basis looks like it has slowed considerably. Any context you can provide around revenue generation and is there a potential catch up that we should see or expect going forward based on either markets or just activity levels?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [67]
+--------------------------------------------------------------------------------
+
+          From a high-level that team has continued to invest and grow and there is a couple of things driving that. One is they are adding more core advisors. So in the last 12 months I think we added 120 experienced advisors and we added almost 900 total. So there's a carry cost to bring those up but that is good for the future.
+The second thing is there's a little bit of a business mix issue which is that the investment management side of the business continues to grow but we have seen weakness in the brokerage transactional side just as the business gets repositioned in that sort of year-over-year is enough to hit you.
+And then third, frankly, is that the NII that Bruce pointed out earlier, just the way we allocate and we won't let businesses take an excuse for intercompany allocations but the way we allocate year-over-year, a big chunk of the NII loss is just due to the way we allocate out the impact on the market and less NII.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jeferies LLC - Analyst    [68]
+--------------------------------------------------------------------------------
+
+          Okay. And then secondly, just extending that to the other consumer fee lines, card income flattish and service charges down a bit. Is this customer behavior driven or additional repositioning in there and can you talk about growth expectations on the consumer side as well?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [69]
+--------------------------------------------------------------------------------
+
+          I think as Bruce talked about earlier, if you think about a couple of broad things. One is, as we continue to drive to be the core checking account for households, we are seeing higher sales. We are seeing higher primary sales but with that comes less fees in the sense but the average balances are higher. And so what you're seeing is a flattening of the fees charged on accounts, overdraft and other fees while you see an increase in the consumer balances, which in this environment are worth something but will be worth a lot more as rates rise because these are core checking account.
+So there is some elements of how the business has been shifted based on our priority of making sure that we just don't have a lot of checking accounts, we have a lot of core checking accounts and that has caused it. So you are seeing a far faster growth and balances and actually a slight decline in total checking accounts out there.
+When you put debit fees and other fees plus the interest rates together, which is core checking revenue, it's actually a little better picture. But that is kind of the story there.
+On the credit card fees, it is basically we have absorbed most of the compression on the interchange at this point in the rebates we give. So really year-over-year you have a bit of loss there because we added a divestiture of a big Affinity program, two big Affinity programs that hurt us and you should expect to see that a little bit more in line with our spending growth going forward, which has been about 3%, 4%.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jeferies LLC - Analyst    [70]
+--------------------------------------------------------------------------------
+
+          Okay. And then last one, just Bruce, you mentioned on the discretionary portfolio on the switch out to HQLA. Can you give us a sense of just how much more of that mix shift we should expect or at some point do you get to a point where the loan portfolio finally starts to bottom out?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [71]
+--------------------------------------------------------------------------------
+
+          I think a couple of things. So the shift to the discretionary portfolio, you probably have about $5 billion of that in each of the second quarter and the third quarter of this year and at that point that work is done. I would say as you look at just discretionary mortgage balances and what you are seeing from a payments for the old stuff that was put within the investment portfolio, you are probably looking at before what the new is that we put on within the business that you are in the $10 billion to $14 billion type run off in each of the next couple of quarters. Realize all of that net interest income doesn't go away because there is reinvestment of that and there is new loans coming in but you do have probably two more quarters where we will move stuff into securities and obviously there does continue to be a run-off of that portfolio as well.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jeferies LLC - Analyst    [72]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [73]
+--------------------------------------------------------------------------------
+
+          Eric Wasserstrom, Guggenheim Securities.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [74]
+--------------------------------------------------------------------------------
+
+          Just one quick question on the legal expense that was incurred in this period. Are those issues now the FX and the RMBS, are those issues now settled or are they ongoing?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [75]
+--------------------------------------------------------------------------------
+
+          The RMBS piece I quoted, there were both amounts in litigation for things that were settled as well as accruals during the quarter. And once again, Eric, I would go back to that from an RMBS perspective at this point we are 98% or 99% of threatened or filed claims on original UPB that we're through, so that's where we are with the RMBS.
+With respect to the FX piece, I think if you go back and look at where we said that we were in October, that we resolved the matter with the OCC, the top up that we saw in the quarter related to FX with respect to other banking regulators and there was also the resolution and we are working through the final documentation of the civil piece of the overall FX work. And that is all included within the litigation reserve during the quarter.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [76]
+--------------------------------------------------------------------------------
+
+          Okay. And sorry, just so I understand that last point -- the civil component, is that with the DOJ or some other kind of authority?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [77]
+--------------------------------------------------------------------------------
+
+          No, the civil piece with respect to a class-action type matter, not the DOJ.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [78]
+--------------------------------------------------------------------------------
+
+          Oh, I see. Okay. But that was contained within the accrual in this period?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [79]
+--------------------------------------------------------------------------------
+
+          That is correct.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [80]
+--------------------------------------------------------------------------------
+
+          Okay, great. Thank you for the clarity.
+
+--------------------------------------------------------------------------------
+Operator    [81]
+--------------------------------------------------------------------------------
+
+          Mike Mayo, CLSA.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [82]
+--------------------------------------------------------------------------------
+
+          What are your financial targets for 2015 and 2016?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [83]
+--------------------------------------------------------------------------------
+
+          So, Mike, as we said, our goal is to continue to drive towards the 1% return on assets and depending on where we end up with capital between 7.5% and 8% tangible common equity ratio, that would translate into a 13 down to 12 return on tangible common equity. In this quarter we moved to up to where we have a return on tangible common equity is 8% and so -- and our return on assets was 64 basis points, so we are sort of two-thirds of the way to that goal.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [84]
+--------------------------------------------------------------------------------
+
+          And what timeframe do you expect to get then?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [85]
+--------------------------------------------------------------------------------
+
+          I think if you adjust our earnings this quarter for a couple of things, the FAS 123, the FAS 91 and then continue to think of LAS normalizing, you see us get close to that goal and that should happen between now and the end of 2016 because we just keep chunking away at LAS as we have described.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [86]
+--------------------------------------------------------------------------------
+
+          So is that your specific financial target -- what is your target for 2015 when it comes to your financial metrics?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [87]
+--------------------------------------------------------------------------------
+
+          I think the way you asked that, we basically have to give you our earnings estimates for 2015 and we just don't do that. But our targets long-term we told you each time you asked is the same, 1% return on assets and a 12%, 13% return on tangible common equity based on where we think our tangible common equity ratio will settle out.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [88]
+--------------------------------------------------------------------------------
+
+          Okay. I guess when I look back at 2014 I ask myself the question did Bank of America meet its financial targets? And I have trouble because I'm not sure if you had specific targets just for the year 2014 as opposed to your longer-term targets.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [89]
+--------------------------------------------------------------------------------
+
+          We made $4 billion in change last year against the expectation by you and your colleagues of $15 billion. So clearly we didn't meet the financial targets due to the litigation we took last year.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [90]
+--------------------------------------------------------------------------------
+
+          Okay. Let me just ask a separate question then. Glenn Schorr brought up Proposal 8 and the proxy and I guess my reaction is why not give more information on the trade-offs of the business model? One of your competitors gave three slides on this topic at their investor day. They weren't asked to do this and they have some higher ROE and ROA. So more information I think would be good and in the proxy it says that your Board believes that the proposal would not enhance stockholder value. If that is the conclusion of the Board, just why not share some of the insights of the Board to investors?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [91]
+--------------------------------------------------------------------------------
+
+          The insights we have when you look at the returns on page two or three of the material show that the core businesses return is above our cost of capital and that the mix between them and the revenue synergies and the diversity we get have been there.
+But let's back up. What a lot of people are looking at here, Mike, is can you simplify your company to make it tighter? We started that in 2010 with about $2.4 trillion in assets. We are down to $2.1 trillion. We started with about $70 billion in capital or $80 billion in capital. We are up to $140 billion. And we started by getting rid of 60 operating businesses and so we have done a lot of simplification.
+So what is really left and this is one of the reasons why our market business is more constrained in its growth prospects potentially than some other people's is because we keep it to about one-third of the franchise in terms of size. And that market business is really focused on driving the value of our issuer side customers going to market and then with our investor side customers providing sources of capital for that. So it's a very synergistic basis.
+So we will continue to try to provide insight but if you look at it, the businesses return above their cost of capital and then if we put them out there the question would be what we would look like after and we would have capital we can't deploy and we would have less earnings power.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [92]
+--------------------------------------------------------------------------------
+
+          All right. Well if you can share additional insights into that conclusion in addition to what you just gave that would be great at least in the future. Thanks a lot.
+
+--------------------------------------------------------------------------------
+Operator    [93]
+--------------------------------------------------------------------------------
+
+          Nancy Bush, NAB Research.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [94]
+--------------------------------------------------------------------------------
+
+          I have one straightforward question and one that is more existential. I will ask the straightforward one first. Brian, could you just restate your position on paying or raising the dividend? I know the CCAR this year has distorted that a bit and if you could just state how you feel about dividends versus buybacks?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [95]
+--------------------------------------------------------------------------------
+
+          I think number one in terms of we received approval for what we had asked for which is a nickel a share of dividend and $4 billion of stock buyback in the CCAR. And we had to be conservative in that ask, leaving aside the modeling and other questions -- but this had to be conservative in base ask because if you think about it, our run rate of earnings was such that we were coming off a $4 billion plus earnings quarter. We had to keep our head on in terms of how we were accumulating capital and make sure we earned the capital before we paid it out.
+The second thing is that the $22 billion cushion shows that based on all the works at CCAR we have a strong cushion going forward. So the key for us to be able to increase the dividend and continue to push forward is to get that normalized earnings stream in a couple of quarters, $3 billion plus in earnings we are getting.
+Long-term we have said many times our ultimate goal is to take about 30% of our recurring earnings and pay it out in dividends and then to use the rest for capital management. At this price we would be buying stock back and if there's a different scenario where our multiple to book and earnings multiples are higher we might pay additional dividends but the goal would be about a 30% payout ratio of recurring earnings as we get there.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [96]
+--------------------------------------------------------------------------------
+
+          Okay, thank you. The second one is this and this is maybe a little bit more difficult to answer. You had a good trading quarter but we have seen one of your competitors have a much better trading quarter and I know that there is a mix issue there. But also as I kind of look at the composition of your businesses there, have you de-risked the trading desk to the point where you can't really take full advantage of the volatility in markets? And I'm wondering if you see that as the case? And secondly, if there will come a time when you are able to do some re-risking there?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [97]
+--------------------------------------------------------------------------------
+
+          Nancy, what you asked is really the core question, which is if you look a few years ago we put core capital Global Markets out as a separate reported segment to ensure that people saw that that was a less volatile earnings stream than people perceived and it was not the earnings stream of the Global Banking segment, high investment banking which you can see the fees move up or down and were relatively stable in clearly the loan book and the treasury services. So we tried to sort the businesses so people can see what we are doing with Global Markets.
+Based on our capital and based on our view of how the franchise fits together, we keep that business to about one-third of our total size. So this total balance sheet deployed is under $600 billion and has been for years. That then requires Tom and the team to make a series of choices how they deploy that based on our appetite for risk expressed by VaR, our appetite for size expressed by the $600 billion, which other people have far bigger balance sheets deployed in the business. And that then does limit their ability to take risk and do certain things.
+So there is a mix issue based on this quarter. In other quarters we have performed better relatively and that is this issue. But from a core standpoint, it's not an existential question at all. It's an actual determination we made to have our SIFI buffer lower, to have our overall risk lower to man demand the company, which is really customer focused on the core banking middle markets, franchise and the core investor, it would still be big enough to be a very impactful, number one research house in the world and have $3.5 billion, $4 billion of revenue in a given quarter. We had to basically optimize around size, capital, the capital deployed in the business and then the risk we were willing to put in the P&L and that's where we ended up and that's resulted in us having 100 basis points less SIFI buffer requirement than other people.
+And we think that's balanced because with our book of business if we increased that, we've got to carry that 100 basis points across the whole franchise, not just the markets business and that extra capital in our balance would really increase the capital requirements that is really not needed for our core banking business.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [98]
+--------------------------------------------------------------------------------
+
+          So basically you are happy with the trading desk as it is?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [99]
+--------------------------------------------------------------------------------
+
+          No. We are always -- never happy because we always wanted to do better. But on the other hand, it is fair to say that we are not unsatisfied when we make almost $1 billion after tax in the quarter where they had a couple of big elements. This mix in the macro businesses, which we are positioned in on purpose. And then secondly, remember a core part of our business we are still adjusting to which was the leverage finance transaction business, which you can look at is down dramatically year-over-year as we adopted the guidance and what was acquired. That is through the numbers now and then we will build back based on that business doing it the way that meets the regulatory standards.
+So happy -- we are never happy with any business. We are always pushing them to do better but given the constraints, there is an understanding I would say more than happiness of where we ended up.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [100]
+--------------------------------------------------------------------------------
+
+          Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [101]
+--------------------------------------------------------------------------------
+
+          Brennan Hawken, UBS.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [102]
+--------------------------------------------------------------------------------
+
+          A quick follow-up on the op risk questions. So if we still have pending settlements out there on a few of the remaining large issues, could that lead to op risk at least sustaining at elevated levels and could it even potentially cause a little bit of an uplift there?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [103]
+--------------------------------------------------------------------------------
+
+          I think at this point we have walked through and as we said on the last call that we are at the level that we need to be from an overall op risk perspective. And to your point, if we look at the last two quarters relative to when that op risk capital was set, we have seen fairly sizable declines in overall litigation expense. So you obviously work through that but our belief over time is that number should be less, not more but we need to deliver that to the shareholder.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [104]
+--------------------------------------------------------------------------------
+
+          Yes, from your lips to God's ears, but if we still have some potential settlements my only point is that it might take a little while before we end up seeing that come down. Isn't that a similar reason?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [105]
+--------------------------------------------------------------------------------
+
+          (inaudible). Just as we said, there's a bid ask on the RWA related to commercial credit factors and models. There was a bid ask an operating risk. We closed that out and we have actually moved our RWAs to a number of those asks. And then from then you just look at it very simply, think about the last four quarters versus last year just picking up the third and fourth quarter, you have a complete change in the amount of litigation expense that is gone through the enterprise and you will see that keep rolling through. It will take a while for that to average out but basically assume that we've agreed to an amount which was requested to bring our op risk and we put that through last quarter.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [106]
+--------------------------------------------------------------------------------
+
+          Okay, thanks. And then it seems some high-level turnover in your equities business. Can you comment maybe on what is driving some of those departures, any potential implications and what you are doing about it?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [107]
+--------------------------------------------------------------------------------
+
+          Yes, we have had some retirements of people worked in the business for 25 years, Henry and the team and it's just the ebb and flow of business. I don't think there's any major issues going on there. I think that (inaudible) and the team have done a good job and stabilized that business and brought it back. We continue to work on the prime brokerage side to make sure that we can be positioned to restart that engine of growth. Now we had to hold the business back where we got the operating platform in place to where we wanted (technical difficulty) not this past fall but the fall before.
+So I think you should not read anything into that other than the usual ebb and flow of people deciding to do other things.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [108]
+--------------------------------------------------------------------------------
+
+          Okay. Thanks for that color. And then the last one for me following up on Ken's question, it sounds like the FA headcount adds are sort of biased a little more to the junior side. So should we count on a bit of a headwind from that on your productivity metrics in GWIM? And maybe could you also comment on the recruiting environment currently and if you still think that comp may moderate as some of those deals with FAs from crisis level sunset?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [109]
+--------------------------------------------------------------------------------
+
+          The average deal last year I think was -- for the highest end producing FAs, which there were 100 of, 120 of, the average deal was like 1.27 times trailing 12 or something like that, or slightly less than that. Don't hold me to those exact numbers but think of it conceptually. So the rumors about these payouts are probably far in excess. The reality is only 120 people or so. So take whatever number. So let's broaden out the productivity question. The productivity per advisor in our business is extremely strong and has sort of structurally been strong for many years and continues to increase.
+You wouldn't mind diluting that to get faster long-term growth prospects for the business and broaden out the business and that is what John and the team are doing. Whether it goes down or not is really going to be a factor. How fast the revenue stream grows -- it has been outgrowing that impact of investing in the lower-end business but we aren't -- I wouldn't say it is going to go down or up based on the added younger advisors but let's flip that and say that the way we think this business has to drive for our competitive advantage as a franchise is the linkage from preferred to Merrill Lynch Wealth Management and the interaction between the financial services centers and the people that come in there and the tens of thousands of people that get referred to Merrill is a competitive advantage for Merrill. And we will continue to drive that and part of that connectivity is we are now putting Merrill team-based brokers in the branches to work with clients and ultimately move physically onto the teams in the offices.
+So we've got a lot of programs going. They seem to be working very well. It could dilute the productivity a little bit but it would be immaterial because of the strength of the core franchise is so strong.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [110]
+--------------------------------------------------------------------------------
+
+          Thanks for the color.
+
+--------------------------------------------------------------------------------
+Operator    [111]
+--------------------------------------------------------------------------------
+
+          Jeff Harte, Sandler O'Neill.
+
+--------------------------------------------------------------------------------
+Jeff Harte,  Sandler O'Neill & Partners - Analyst    [112]
+--------------------------------------------------------------------------------
+
+          A couple from me. First of all, you mentioned the commercial utilization rate being up a lot. Can you give me some or give us some idea of how much of that is energy complex driven versus maybe coming from other less stressed industries?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [113]
+--------------------------------------------------------------------------------
+
+          Most all of that given that the number I quoted was within the commercial bank, that's almost exclusively outside of the energy space so it has nothing to do with anything distressed. It is just core commercial clients drawing more. Those numbers bottomed out in the low 30s and they are now up in the high 30s.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [114]
+--------------------------------------------------------------------------------
+
+          Think of that, when we say commercial, that is middle-market, general middle-market for us. Not the corporate bank where the energy exposure would be. So it is back to basically where it was not the highest point because it ran up right before the crisis but if you look back, it is higher than it was in say 2004 and 2005 at this point, or right on it. So you're starting to see a normalization of that borrowing, which is good news because that means that people are borrowing the money to do something.
+
+--------------------------------------------------------------------------------
+Jeff Harte,  Sandler O'Neill & Partners - Analyst    [115]
+--------------------------------------------------------------------------------
+
+          Okay. And looking at the balance sheet, can you talk a little bit about the plans, the level of excess cash? 22% of assets in cash, a 7% plus SLR ratio. It would seem awfully tough to generate ROE or ROA with that much of the balance sheet sitting in cash. Is there something you can do there?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [116]
+--------------------------------------------------------------------------------
+
+          I think the first thing as you look at that, you have to consider as we went through with the different regulatory metrics we needed to get to that the last metric that we needed to solve for and we wanted to get behind us was the satisfaction of where we needed to be from an LCR perspective in 2017 at both the bank level as well as the parent. And we are to the point where we've gotten to that point, so from an overall liquidity HQLA perspective, we feel very good about that progress.
+As you look at on a go-forward basis, obviously the big focus and the reason as a company that we are looking to drive the loan growth that we have is to basically take the excess deposits today that are within the investment portfolio and release them from the investment portfolio into core loan activity to do more with our clients.
+So as you look at the changes and mix in the balance sheet as far as the build that you've seen with cash, I think we are at the point where from an overall balance and where we need to be with the different metrics, that we have satisfied that at this point and it will be more of a normal course on a go-forward basis.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [117]
+--------------------------------------------------------------------------------
+
+          I think generally thematically if you think about, as we see roles come up we try to get in full compliance as fast as possible even though there is delay dates and then you can then work back on how to continuously improve the way you get there. But the first thing you've got to do is get over the hump because it affects every other aspect of the franchise. And so I think the LCR is another case that we got over the hump. 2017 is two years away still and we are in compliance and then the idea is that you keep -- to figure out how to work the dials to make it more and more shareholder friendly over time. But the first thing you want to do is show you can do it.
+
+--------------------------------------------------------------------------------
+Jeff Harte,  Sandler O'Neill & Partners - Analyst    [118]
+--------------------------------------------------------------------------------
+
+          Okay, thank you.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP, IR    [119]
+--------------------------------------------------------------------------------
+
+          I think that was the last question. Thanks for joining today and we will talk to you next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [120]
+--------------------------------------------------------------------------------
+
+          This concludes the program for today. Thank you for your participation. You may now disconnect and have a nice day.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
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+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Apr-22-FB.OQ-141043150939-Transcript.txt

@@ -0,0 +1,587 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2015 Facebook Inc Earnings Call
+04/22/2015 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook Inc. - VP of IR
+ * Dave Wehner
+   Facebook Inc. - CFO
+ * Mark Zuckerberg
+   Facebook Inc. - Chairman & CEO
+ * Sheryl Sandberg
+   Facebook Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Brian Pitz
+   Jefferies LLC - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Paul Vogel
+   Barclays Capital - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Peter Stabler
+   Wells Fargo Securities - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome, everyone to the Facebook first-quarter 2015 earnings conference call. 
+(Operator Instructions) 
+Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's first-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements and actual results may differ materially from those contemplated by these forward-looking statements. 
+Factors that could cause these results to differ materially are set forth in today's press release and on our annual report on Form 10-K filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 
+During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. 
+And now I'd like to and the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah, and thanks, everyone for joining us today. This was a good quarter and a good start to the year. We continued to grow the size and engagement of our community, now with 1.44 billion people using Facebook each month, and 936 million people daily. 
+We continue to see strong growth in daily engagement around the world, including in our most engaged markets. On mobile, nearly 1.25 billion people now use Facebook every month, 240 million more than a year ago, and we now we see more than 1 billion mobile searches every day. 
+Looking at our business, we continue to achieve impressive growth. Total revenue grew by 42% year-over-year, and advertising revenue grew by 46%. Mobile now accounts for 73% of our ads revenue. These results show that we're making progress on our mission to connect the world and we're executing well against our priorities, but this quarter also shows how Facebook is continuing to make progress for the years ahead. 
+Facebook has evolved from a single blue app on your phone into a family of apps. Now many of these apps are reaching a global scale. More than 1.4 billion people use the core Facebook service, 800 million also use WhatsApp, 700 million use our groups product, 600 million use Messenger, and on Instagram, there are more than 300 million active members of the community. 
+We're building this family of apps because we want people to be able to share whatever moments they want with all the different sets of people they care about. Over time, we expect people to share richer content with an increasing frequency, so we want to continue developing new and better tools to facilitate this expression. With that in mind, let's talk about our efforts over the quarter. 
+First, we are working to help people share and connect with all the things they care about today. An important part of our approach is helping our community connect around important public moments and personalities. Facebook is the largest community of sports fans in the world, with 650 million people connecting to sports pages. 
+For this year's Super Bowl, more than 65 million people generated more than 265 million interactions on Facebook, the highest level of conversation we've seen for a Super Bowl to date. For the Cricket World Cup, there were more than 700 million interactions by 53 million people, which shows the strength of the global reach of our community. 
+We are also making good progress with video. We're very pleased with our growth share, and this quarter we reached a new milestone of more than 4 billion daily video views. We also launched an embedded video player that allows people to watch Facebook videos across the web, and more than 80,000 videos have now been embedded on third-party websites. 
+Spherical videos are going to be supported in Newsfeed later this year, allowing you to change your viewing angle for a more immersive experience. Supporting new types of content like this is an important part of preparing for the future of how people want to share. 
+Another part of our strategy is helping people connect with businesses. This quarter, we announced that there were now 2 million advertisers on Facebook. This is an important milestone for our community and we're encouraged that so many businesses are finding value on Facebook. We continue to focus on innovation in our ads business and Sheryl is going to talk a bit more about that in a moment. 
+Now, here's how we're working to develop our family of apps so we can give more people more options for sharing in different ways. In the future, we expect that people are going to want to share content with their closest friends at an even greater frequency than they do today, so messaging is a big priority for us. 
+Across the Facebook family of apps, our efforts have a lot of momentum. On average, more than 45 billion messages are sent every day. With voice calling, we're also starting to make some good progress. This quarter, we started rolling out voice over IP calls on WhatsApp to let people call friends for free around the world; meanwhile, Messenger already accounts for more than 10% of mobile VoIP calls globally. With WhatsApp, we continue to be pleased with our growth and the team remains very focused on building new features to serve their community and expand. 
+For Messenger, this has been a particularly busy quarter. We launched the Messenger platform, which allows people to use creative new apps to have richer conversations. We also began rolling out payments on Messenger to give people an easy, secure way to send money to their friends. 
+And we announced a new way for people to communicate with businesses using Messenger. We're really excited by the potential to build Messenger into a service that helps people to express themselves in rich new ways and to access useful services. 
+With Instagram, our growth remains impressive and this quarter we reached a new milestone of more than 200 million daily actives. Growth in Asia, Europe, and Latin America is particularly strong, with our community growing in some countries by more than 100% year-over-year, including Japan, South Korea, and Indonesia. Combined with an average 21 minutes a day that people spend on Instagram, this is a good sign of this community's continuing and growing strengths. 
+Now let's talk about how we're working with developers. Last month, we held F8, our annual event for the global developer community. Creating the future of sharing isn't something that we can do on our own, but by supporting developers, we can deliver more apps and experiences for our community. 
+At F8, we presented new tools to help developers build, grow, and monetize their apps, including better sharing experiences from apps to Facebook and new analytics to help developers better understand how people are using their services. More than 30 million apps and sites have been built using Facebook developer tools, and last year we drove more than 3.5 billion app installs. We think these improvements are going to create a lot of value for our community. 
+All right. Finally, let's talk about some of our most long-term innovation efforts. Internet.org, our effort to connect everyone in the world to the Internet continues to gather momentum. We've now made free basic Internet services available to more than 800 million people in nine countries, including, just in this quarter, launching in India, Colombia, Ghana, Guatemala, and the Philippines. More than 7 million people who weren't connected to the Internet before now use Internet.org to get online, and this year we expect to connect even more people. 
+With our efforts in search, AI, and Oculus, we're also continuing to build a new generation of Internet services that are more useful, intuitive, and immersive and over the coming months we'll have more to share about these. So that's how we're thinking about innovation and the future of sharing. 
+It's been a busy quarter. In the last few months, I've visited countries in Asia, Europe, and Latin America. In many communities, I've gotten the chance to see how the Internet is changing lives and creating opportunities for people. I've heard from people who can't wait to get access to the same tools that so many of us take for granted. 
+We are making progress on our mission and working to accelerate towards the day when everyone in the world can be connected. Thanks to our entire community and all of our employees, partners, and shareholders for being a part of this journey and for helping to build something great. Now here's Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hi, everyone. Q1 was a strong quarter and a great start to the year. Ad revenue was $3.3 billion, up 46%, or 55% on a constant currency basis. Mobile ad revenue grew 82% and is now 73% of total ad revenue. Our performance was strong across all marketer segments and we are pleased with the broad-based growth across our industry verticals. 
+From a regional perspective, we saw strong growth in North America and Asia-Pacific, while Latin America and Europe were affected by foreign exchange headwinds and macroeconomic factors. That said, we are pleased with advertiser adoption of our ad products across all regions. 
+Innovation drives our ads business. It's how we continually improve the quality of our ads, offer new tools to marketers, and build better experiences for the people use Facebook. We believe that this ability to innovate will continue to drive our Business, so today I want to focus on innovation across our three strategic priorities: capitalizing on the shift to mobile, growing the number of marketers using our ad products, and making our ads more relevant. 
+First, capitalizing on the shift to mobile, mobile continues to be a great opportunity for us. People continue to be highly engaged with our mobile apps. In the United States for example, Facebook and Instagram get more than one out of every five minutes spent on mobile. As consumers shift to mobile, businesses are following and we're focusing on helping them take advantage of this opportunity to use mobile to build their businesses. 
+Two new products we introduced this quarter are good examples of this. The mobile Ads Manager app gives marketers the ability to manage their ad campaigns from their mobile devices. It's early, but we are already seeing more marketers managing their activity on mobile. We also launched a page creation tool for feature phones, which has been a big driver of page adoption in high-growth emerging markets, where smartphones are less common. 
+Looking ahead, we believe video will play a significant role in bringing more marketers to mobile. More than 75% of global video views on Facebook occur on mobile, and we believe mobile video will become more important to marketers over time. 
+Lionsgate Age of Adaline premiere is a great example. To promote the film, Lionsgate targeted young women on Instagram with multiple video ads over the last few weeks. This week, since the film opens on Friday, they are retargeting the audience from the Instagram campaign on Facebook. We expect more marketers to put mobile video at the heart of their campaigns in the future and we are well-positioned to drive this shift. 
+Our second priority is growing the number of marketers using our ad products and we're making great progress. In Q2 of last year, we shared that we reached 30 million active business pages on Facebook. This number continues to grow as more and more small businesses are using our free Pages product and we remain focused on converting these page owners into advertisers. 
+One way we're doing this is by providing simple, easy-to-use products. Over 80% of our new advertisers start with entry-level tools like a promoted post or a page like. We are increasingly focused on making sure these tools work well on mobile. We are also educating marketers on how to use Facebook more effectively. 
+We recently launched to online training resources, Blueprint for large clients and agencies, and Learn How videos for small businesses. These efforts are paying off. In Q1, we announced that we now have over 2 million active advertisers. 
+Our third priority is making our ads more relevant. More relevant ads lead to better returns for marketers and better experiences for people. We are pleased with the increased adoption of our targeting tools like custom audiences and conversion tracking. 
+In Q1 we introduced dynamic product ads, which allow marketers to launch ads for different audiences. We also introduced carousel ads on Facebook and Instagram, which allow marketers to advertise for specific products. Adoption of our targeting tools and these new ad formats help make our ads more relevant. 
+We are also focused on insights and measurement. We want to help marketers accurately measure the performance of their campaign and then apply that learning to improve their returns. In Q1, we released an ads relevant score, a way for marketers to better understand how people respond to their ads. This helps marketers test different types of creative and optimize performance. 
+We also launch conversion lift, a tool that scientifically measures how much additional business is driven from Facebook ads. This is important because it shows that ads on mobile can drive sales in retail stores and via other channels. For example, Celbas is a woman's fashion retail in Europe. Using conversion lift, they proved that ads on Facebook mobile drove sales on desktop and via phone calls to sales reps at their call centers. 
+On the ad tech side, we are pleased with the results we're driving for advertisers and publishers. A good example of this is Cheetah Mobile. Using native ads from the audience network in its app, the Company is getting more than 2 times the CPMs compared to other ad networks. 
+We continue to invest in our ad tech platform. At our F8 developer conference last month, we made two important LiveRail announcements that will improve the relevance of ads people see across a sites, apps, and devices. We extended LiveRail's video ad platform into in-app mobile display, which will give publishers better ways to manage their ad inventory across devices. 
+We also announced that LiveRail will give publishers access to Facebook's anonymized demographic information, enabling us to serve more relevant ads to people. We've had a great start to the year and we're really optimistic about what's to come. Our teams are executing well, staying focused on our big priorities, and continuing to innovate. Now here's Dave. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. 
+Q1 was a strong quarter for Facebook. We generated $3.5 billion in revenue and $1.2 billion in free cash flow, and continued making investments to position us for both near-term and long-term growth. 
+We are pleased with the growth and engagement of our community. In March, 936 million people used Facebook on an average day, an increase of 17% compared to last year. This daily number represents 65% of the 1.44 billion people who used Facebook during the month of March. 
+Mobile remains the key driver of our growth. In March, approximately 1.25 billion people accessed Facebook on mobile devices, up 24% from last year. In addition to Facebook, Instagram, Messenger, and WhatsApp continue to grow, exceeding 300 million, 600 million, and 800 million MAU, respectively. 
+Now turning to the financials. All of our comparisons on our on a year-over-year basis unless otherwise noted. Additionally, as a reminder, our non-GAAP measures exclude stock-based compensation and the amortization of intangibles. Total revenue was $3.5 billion, up 42%, or 49% on a constant currency basis. 
+Ad revenue was $3.3 billion, up 46%, or 55% on a constant currency basis. The general strengthening of the US dollar in the past year had an unfavorable impact on our revenue. Had foreign exchange rates remained constant with Q1 2014 levels, our total revenue this quarter would have been approximately $190 million higher. 
+Regionally, we saw strong North American ad revenue growth of 53% in the quarter, second only to APAC, which grew 57%. Europe and the Rest of World revenue grew more slowly at 35% and 32%, respectively, with currency impacts leading to a significant reduction in these regions' year-over-year growth rates. 
+Mobile ad revenue in Q1 was $2.4 billion, up from approximately $1.3 billion last year. Revenue from ads served on personal computers was down approximately 4%, and we continue to see overall usage on PCs decline. 
+In Q1, the average price per ad increased 285%, while total ad impressions declined 62%. Similar to last quarter, these price volume trends were primarily driven by the redesign of our right-hand column ads, which rolled out in the third quarter of last year. To a lesser degree, the shift of usage towards mobile, where we don't have right-hand column ads, also contributed to the reported price volume trends. 
+Total payments and other fees revenue was $226 million, down 5% compared to last year, a trend we expect to continue. The decline was driven by the year-over-year reduction in payments revenue related to games played on personal computers. 
+Turning now to expenses, our Q1 total GAAP expenses were $2.6 billion, up 83%, and non-GAAP expenses were $1.7 billion, up 57%. Similar to last quarter, stock-based compensation and amortization expenses related to the WhatsApp acquisition contributed significantly to the year-over-year growth in GAAP expenses. 
+Non-GAAP expense growth was primarily driven by increases in headcount-related costs, cost of revenue, and marketing expenses. We ended Q1 with 10,082 employees, up 48% compared to last year. We remain very pleased with our ability to attract and retain top-tier talent. 
+Q1 operating income was $933 million, representing a 26% operating margin. Non-GAAP operating income was $1.8 billion, representing a 52% margin. Our Q1 GAAP and non-GAAP tax rates were 45% and 35%, respectively. Q1 GAAP net income was $512 million, or $0.18 per share, and non-GAAP net income was $1.2 billion, or $0.42 per share. In Q1, capital expenditures were $502 million, and we generated $1.2 billion of free cash flow. We ended the quarter with $12.4 billion in cash and investments. 
+Turning now to the outlook, let's start with revenue. The strengthening of the US dollar in the past year reduced our Q1 total revenue growth rate by 7 percentage points, or approximately $190 million. The dollar strengthened over the course of the quarter, and in the month of March, our year-over-year total revenue growth rate was approximately 10% lower than it would have been in constant currency terms. 
+Based on this, we estimate that foreign exchange headwinds in Q2 will likely be greater than those we experienced in Q1. In addition, we expect our total payments and other fees revenue to decline on a year-over-year basis for the remainder of the year. 
+Turning to expense guidance, we are tightening our expense guidance range modestly based on better visibility into our annual spending. We expect that the year-over-year growth rate for total 2015 GAAP expenses will be in the range of 55% to 65% as compared to our prior guidance of 55% to 70%. 
+We expect that the year-over-year growth rate for total 2015 non-GAAP expenses will be in the range of 50% to 60% as compared to our prior guidance of 50% to 65%. Our expense outlook reflects the broad range of investments that we're making in both our services and infrastructure, as we continue to enhance the core experiences on Facebook and Instagram, grow our messaging products, strengthen our advertising business globally, and invest in long-term growth areas like Oculus and Internet.org. 
+The remainder of our guidance remains unchanged. We anticipate our 2015 capital expenditures will be in the neighborhood of $2.7 billion to $3.2 billion. We expect stock-based compensation in 2015 to be in the range of $3 billion to $3.3 billion, approximately half of which is related to our prior acquisitions, most notably WhatsApp. 
+We expect amortization expenses in 2015 to be approximately $700 million to $800 million. And lastly, we anticipate our Q2 and full-year 2015 GAAP and non-GAAP tax rates to be consistent with the rates in the first quarter. In summary, Q1 was a great start to the year for Facebook. We are very pleased with of the growth of our community, the strength of our business, and the investments we're making to build long-term shareholder value. 
+With that, Chris, let's open up the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) 
+Brian Nowak, Morgan Stanley. 
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          I have two. The first one, can you talk a little about early advertiser and publisher feedback from the LiveRail in-app mobile product, and what are some areas where you see potential for improvements to drive faster adoption? And then on the OpEx side, appreciate your tightening the range, can you help us at all on expeditions for headcount growth this year and what are the biggest areas you see investing in incremental employees this year? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [3]
+--------------------------------------------------------------------------------
+
+          On LiveRail, we're pleased with the performance and the changes we've been able to make. Video is obviously super important, so having the ability to do work on video across the web has been really great. And then at F8, we made two more announcements that I mentioned. 
+What we're hearing from publishers is that this is a good opportunity and they're pleased with the extensions we're making because it can make their ad surveying and buying more efficient across the platforms they use. In terms of areas for improvement, I think there's a lot we can do. I think you have to look at our ad tech investments very holistically, from Atlas to LiveRail to the Audience Network. 
+These are all different pieces of the ad stack, but what they're all working on is taking the relevance and the ability to do people-based marketing and make that available to work on Facebook, but also off Facebook. We believe that because we can do marketing to people and then measure results across what people do in privacy-protective ways, we have an ability to improve the relevance of marketing, which will make it better for consumers, and increase returns for marketers. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Brian, it's Dave. Just on the OpEx question, I think the key is that we are investing in our near-, mid-term, and long-term priorities. In the near term, we're investing to grow the community, execute on the existing business, both on the product side and then the advertising sales force side. In the mid-term, we are building out those next generation of services to be great businesses that reach their full potential, so that's Instagram, WhatsApp, Messenger. Then in the long-term, we're investing in areas like the next-generation computing platform, Internet.org, AI. 
+In general, I would say our headcount growth has skewed towards the R&D side because a lot of these initiatives have long-term development needs, so we've been investing there, but we are investing across the board. In terms of a specific headcount guidance, I would just stick with our expense guidance, but I'd note that the 48% year-over-year does include some inorganic growth from the pickup of the three larger acquisitions, Oculus, LiveRail, and WhatsApp. We haven't lapped those at this point. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Douglas Anmuth, JPMorgan. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          One for Sheryl and one for Mark. Sheryl, just wanted to ask you to talk a little bit more about big brands, give us a sense for what's working best in terms of products? And then also how penetrated do you think Facebook is now with some of the larger brands? And, Mark, what are the signals that you'll be looking for to tell you when it's the right time to ramp up the advertising on Instagram more? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [7]
+--------------------------------------------------------------------------------
+
+          Our growth was really strong across all of our marketer segments, but we had a particularly good quarter in brands, I think driven by two things. The first is that we really have a great platform to do creative storytelling on mobile and I think we have that in a way that no one else does. Our mobile ad product is so integrated into the user experience and provides real creative flexibility that people have a way to reach people on mobile and that's becoming increasingly important in telling the stories that drive their business. 
+The second thing is video. Video is exploding on Facebook, as Mark talked about, and that gives us an opportunity to do a lot of work with marketers on video. This is the first time the technology in media vertical was one of our top four verticals, and that's largely because of the use of mobile, and so that's been really a great story for us. 
+In terms of penetration, we work with almost all the large marketers almost everywhere in the world, but even for the largest clients we have, we are a very small part of their budget. I don't think we have any large clients. If you look at 25% in the US of consumer media time is on mobile, and then 20% of mobile time goes to Facebook and Instagram. 
+That would be 5% of US consumer media time. With our largest clients, even our large ones, we are not close to 5% of their spend and so I think we have a considerable opportunity to grow. We also expect those underlying numbers, time on mobile, to continue to grow. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [8]
+--------------------------------------------------------------------------------
+
+          For your second question about Instagram and the ads opportunity there, we think about this the same way that we do ads on Facebook today. The primary goal is to increase the quality. That's our strategy for growing the business. There's more inventory that we can open up on Instagram over time because it's so early, but we are going to do that once we get to formats that are working well for businesses and that we feel really good about in the consumer experience. 
+This has been a theme for our ad strategy and product development for more than a year now, maybe two years, where folks have consistently asked us what we are going to do to increase the amount of ads that we are showing and our response has been that we're going to focus on improving the quality and relevance and that's both going to perform better for the people using our services and businesses who are buying ads. That strategy I think is bearing out and we'll continue to apply it to all the things that we do. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [9]
+--------------------------------------------------------------------------------
+
+          One clarification, I think I said tech and media as a vertical, I meant entertainment and media. This is the first quarter that entertainment and media is one of our top verticals. 
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          Heather Bellini, Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [11]
+--------------------------------------------------------------------------------
+
+          I just had two quick ones. I was wondering, Mark, I think you mentioned you're seeing 1 billion searches per day on mobile. I was wondering if you could give us an update on your initiatives here. And also, when you think about Facebook as a microcosm of different applications, at some point is there a plan that we will be able to use this search functionality to go across all the different Facebook apps that we might have installed on our mobile devices? 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [12]
+--------------------------------------------------------------------------------
+
+          We're pretty early in this whole thing and there's so much unique content that people share in Facebook that I think that that is the clear unique opportunity to go for first. Right? If you think about the overall web there's a lot of public content that's out there that any web search engine can go index and provide, but a lot of what we can get at are recommendations on products and travel and restaurants and things that your friends have shared they haven't shared publicly, and knowing different correlations or interesting things about what your friends are interested in. 
+That's the type of stuff -- those are questions that we can answer that no one else can answer and that's probably going to be what we continue to focus on doing first. And I think what you're seeing is that, as we enable more use cases and as we just get a lot of the basics right around performance and bringing the mobile features into parity and beyond, what we had been able to do on desktop, the volume is growing quickly. I think on a recent earnings call, we just announced that we'd passed 1 billion searches total, so now being more than 1 billion on mobile shows some progress that I'm pretty proud of for the search team. 
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          Eric Sheridan, UBS. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Maybe one for Mark and one for Sheryl. Mark, you talked about the family of apps at Facebook. As more and more people are consuming professional content, different verticals like news, sports, and video format on Facebook, how do you think about the use case for the consumption of that content inside the main Facebook app versus maybe an even separate app for more professional content long-term for Facebook? 
+And then for Sheryl, appreciate the color you gave us on the evolution of targeting on Facebook. Wanted to know, either qualitatively or quantitatively, if you could talk a little bit about the way those ads are performing as you continue to evolve the product set around targeting on Facebook and off, in particular around dynamic product ads and what that might mean for closing the loop longer term? Thanks so much, guys. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [15]
+--------------------------------------------------------------------------------
+
+          Yes. In terms of news and different kinds of content, this has traditionally been something that we've delivered a really good experience for, in terms of people being able to share the content that they want, being able to get access to the content that they want, different recommendations from friends, and we have a lot more coming there, so I'm excited about that. 
+We definitely do see, in this family of apps strategy, that there's so many new ways that people want to share content, and so many different types of sets of people that people want to share with, ranging from one person at a time and that would be Messaging or small group sharing or sharing with interest-based communities or sharing with all your friends at once or sharing with public. 
+There are just a lot of different experiences that need to get built, and a lot of what we're trying to do is enable a number of those things through Facebook, while also building unique, world-class services to enable people to share all the things they care about with all the different sets of people that they care about. So we're going to keep on doing more there, but we're happy with where we are now. We have a number of services that are reaching pretty good scale and I think we'll keep on pushing that. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [16]
+--------------------------------------------------------------------------------
+
+          To your question on targeting and closing the loop, these are two really important pieces for what we want to do. Our goal, when we work with marketers, is to drive their business and that means their products off the shelves, their services into the hands of people. In order to do that well, we need to work on targeting and we need to work on measurement. 
+With targeting, a more relevant ad is just better. It's a better experience for consumers because they see something they like in their Newsfeed and it has a higher return for marketers. So we are very focused on getting more people to use our targeting tools from custom audiences, which lets people target ads differently to their current customers or people who they'd like to be their customers, to look like audiences, which enables us to identify the characteristics of your current customers and then find other people on Facebook who share those characteristics, so again, the ad is well targeted. 
+I think our targeting abilities are really second-to-none and I'll share a recent example. XFINITY put out a voice guide for visual disabilities. And they did this by doing an Oscar commercial with a girl who is blind imagining what Wizard of Oz characters look like. Now, by doing that at the Oscars, that's obviously TV, and it's a very broad ad and that's because they were both showing a product but also working on their brand. 
+On Facebook, they took that ad and showed it to movie fans, Wizard of Oz fans, and also people connected to accessibility causes. That's actually pretty specific targeting that lets them hit exactly the right audience and amplify what they were doing on TV. And I think that's the kind of thing that only we can do at scale and it shows how important targeting is. 
+When you think about closing the loop, you then have to add in the measurement piece because if we can connect people seeing ads on Facebook to what they buy in stores or in other ways, that's how you close the loop. That's why we've put so much investment and hopefully so much innovation behind measurement, so conversion tracking is increasingly used and we work with our marketers to use it even more. 
+We're also really excited about conversion lift, because that's the first product we've had which scientifically measures the additional business you get from Facebook ads. It compares test groups that see ads with control groups that don't, so whatever you're measuring in terms of conversions, whether it's sales or website clicks or registrations, we can A-B test and see exactly what the impact Facebook has. I think we're still at the beginning of this. I think there is so much more we can do to make ads more relevant on Facebook and so much more we can do to measure results and I think our future growth will depend on executing on that very well. 
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Youssef Squali, Cantor Fitzgerald. 
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Question for Dave and then maybe one for Mark or Sheryl. FX-adjusted ARPU growth this past quarter was about 35%, which is, by our math, about one-half of what it was last year. Within mobile, it was about 45%; that's about one-third of what it was last year. Other than tough comps, what else is driving the decline? Is it just Q1 seasonality getting more pronounced? Is there anything else? Who would have thought that maybe video advertising would have actually have had the opposite effect. 
+And then, maybe Mark or Sheryl, what's your experience so far with voiceover IP? What is the strategy over time? Is that something you can start charging for or -- either through maybe a subscription or is there another way of monetizing it? Thanks, guys. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+          Youssef, it's Dave. On the FX-adjusted ARPU growth, I would really point to the overall revenue growth rates. That's what's driving it, so you're coming up against a bigger business last year than we had in the past, so you're seeing a declining rate on that basis. I don't think there's anything specific to ARPU. It's just a reflection of what we're seeing on the revenue front as we scale and it's as expected there. 
+So we're really pleased with the performance that we're seeing on the revenue front, certainly on the FX-adjusted basis. We are seeing strong growth in the face of really a tough currency environment, so we're really pleased with that. We think we've got the best mobile ad product out there in the market and it's just getting better, so we're really pleased with what we're doing on the revenue front. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [20]
+--------------------------------------------------------------------------------
+
+          And in terms of voice calling, no, we're not going to charge for it, just like we're not going to charge for messaging. What we're focused on doing is providing more -- higher-quality services for free than what you could otherwise get in paying for them. One thing that you may not know about voice calling is that, by using the Internet for calling rather than the relatively low bit rate voice networks, you can actually get higher-quality calls using VoIP. 
+One of our theories in this is that it's -- one of the reasons why voice calling has been a little slower to catch on is because you need the large established network of people who you know will have access to be able to receive a voice call before that behavior can really take on in a big global community. But now between Facebook Messenger and WhatsApp, which are two very broad communication networks, we're pretty confident that, because of the higher quality of calling that you can get through the services that we are providing, that this is going to continue growing very quickly. 
+A lot of people still -- we're just very early in rolling out and promoting it. Even in Facebook Messenger, it's been out for a little while where we are already more than 10% of the global VoIP market. I think that that's just going to continue growing and I'm really looking forward to getting the first stats on WhatsApp VoIP, as well, soon. 
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney, RBC Capital Markets. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          One question for Mark, one for Sheryl. Mark, there's just this explosion in these messaging platforms worldwide and you obviously bought into one. The growth has been greater than we would have expected and perhaps you, too. Has your thinking changed on the opportunity, or maybe the need, but really the opportunity to integrate WhatsApp and Facebook over the next couple of years because of the growth of WhatsApp to date? 
+And then, Sheryl, you mentioned some verticals that are doing well. I was wondering if I could ask about automotive and insurance, just a couple of verticals that have always been skewed very heavily towards TV advertising, and the question is whether they've really skewed up more now on Facebook given the autoplay video ad format? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [23]
+--------------------------------------------------------------------------------
+
+          On the messaging question, yes. We're pretty happy with how it's all going. I think if we are going to pay $19 billion for a company, we should have pretty high expectations for how it's going to do. So I do feel good about how we're doing, but it needs to do a lot more, obviously, and we're very excited about the road map of things that we have ahead. 
+In terms of integrating them, no, we're not going to do that. One of the things that had been interesting while we were watching these different services grow was just how quickly multiple different messaging and communication services were growing at the same time. It seemed a little bit counterintuitive at first because it seemed like there should have been more overlap than it actually, now in retrospect, looking back, seems like there is. 
+So you can look at countries where both services, WhatsApp and Messenger, are growing very quickly, like Brazil, for example, and what you'll see is that basically people use them a little bit differently. WhatsApp is more of a clear text messaging replacement. Facebook Messenger people use to connect with people that they know on Facebook primarily. 
+Then there are differences in the feature sets where WhatsApp is extremely utilitarian and focused on texting and now voice calling, whereas Messenger is very focused on expression. And the whole set of things that fit into the tools around the Messenger platform that we rolled out at F8, communicating with businesses now, richer tools to communicate different ways. So I think that these are just going to keep on growing, is my expectation and hope, and we're excited to pursue both different products to serve the different communities. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [24]
+--------------------------------------------------------------------------------
+
+          On the auto and insurance verticals, they're both still small which makes them good opportunities to grow. We're seeing good progress on both of them, and interestingly, insurance companies have been pretty active, both on Facebook and Instagram, so we're optimistic about that. 
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+          Paul Vogel, Barclays. 
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Two questions, one for Mark and one for Dave. Mark, just going back to the video question again real quick, I'm wondering, given all the noise around over-the-top and long-form content, and given your push in video, I'm just curious as to whether or not you think Facebook can or should be a player in more studio content or professionally driven content? And then, Dave, for you, just in terms of CapEx, you gave guidance for this year, but again, given the ramp-up in video and search, how should we think about CapEx longer term relative to, either in absolute terms or maybe relative to revenue growth? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [27]
+--------------------------------------------------------------------------------
+
+          I can go first. On the CapEx growth for this year, Paul, yes, we are ramping CapEx, obviously, to support the initiatives that we have. 2015 is a big investment year for us, both in CapEx and OpEx. It's a little bit early to be talking about how that's going to scale going forward. 
+But clearly, we've got a lot of areas that we are investing in, including video, including the various other services on top of Facebook. So we're going to be investing to deliver the best quality services that we can for our users, so we'll continue to invest heavily on the data center and infrastructure side going forward, but 2015 is a big investment year for us across the board. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [28]
+--------------------------------------------------------------------------------
+
+          And on video, we're excited about people sharing all different kinds of content on Facebook. Right now, a lot of what people are sharing are their social videos and content. There are a lot of public figures who have pages, often with millions or tens of millions of followers, producing unique and really high-quality content that they are pushing out to all their fans on the network today. So, yes, we'll continue looking at ways to grow that and the product experience that we have right now is growing quite well, so we feel good about it. 
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+          John Blackledge, Cowen and Company. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [30]
+--------------------------------------------------------------------------------
+
+          Two questions. One more on video. With the explosive ramp in video views over the last six months, could you discuss the video advertising ramp this year and then maybe talk about the video versus static ads within the Newsfeed? And then the other question would be, you referenced Facebook hitting 2 million active advertisers in the first quarter, and with over 30 million company pages, how should we think about the advertiser TAM for Facebook next year and over time? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [31]
+--------------------------------------------------------------------------------
+
+          To the first question, video is a big opportunity for us. Mark talked about how we have 4 billion video views on Facebook every day, and we've always believed that the format of our ads should follow the format of what consumers are doing on Facebook. So many years ago, when the homepage ticker was in vogue, we never did that. So the fact that there's so much consumer video, that gives us the opportunity to do more marketing video as well. 
+It's still early days and we are very focused on quality, and it's worth noting that not all of the revenue from video is incremental, because the video ads take the place of other ads that we would have served into Newsfeed. That said, we're really excited about the opportunity. I talked about increasing the entertainment and media vertical and brand marketers, particularly, but I think all marketers have the opportunity to do video. 
+And that's pretty exciting, including SMBs who would never be able to hire a film crew and buy a TV ad, we're seeing those put videos in. Over 1 million SMBs have posted videos and done really small ad buys around them and that's pretty cool, because I don't think there are probably 1 million advertisers who have bought TV ads in that same period of time. 
+When you think about our marketer growth, I think we have an ability to grow both the number of advertisers who use our platform, but also the percentage of their business that we get. So 30 million small business pages continuing to grow, we have an opportunity to turn those businesses into advertisers and marketers, and that's what we've done successfully and we are going to continue to focus on that. We do that by building very simple ad products. 
+Then when you think about the percentage of spend we have, what I said before on this call, which is we only have a small percentage of even our large customers, that's true of our small customers too. There are some who spend a large portion of their budget on Facebook, but that's actually very unusual. 
+For most people, even when they start spending with us, we are a small portion of their budget. When you look at the consumer time we get, we are not getting the equivalent amount of time or resources from our marketers, really of any size, and therein lies our opportunity to grow. 
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+          Justin Post, Merrill Lynch. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [33]
+--------------------------------------------------------------------------------
+
+          Dave, maybe you could help us break down the 55% ad revenue growth a little bit between usage, are you increasing ad loads at all? Maybe you talk about the formats or is Instagram helping at all? Just a little granularity on that, or maybe it's just a format shift, but just help us understand what the key drivers are and how much room you still have to go on each of these things? Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [34]
+--------------------------------------------------------------------------------
+
+          Yes, Justin. In terms of the 55% revenue growth, obviously, it's mobile Newsfeed is what's driving it from a fundamental point of view. In terms of what the opportunity there is to drive it, it's really about increasing the relevance and quality of the ads. That's been a key part of what we've been doing and that will just continue to be the big driver in the near and medium term. 
+And we're doing that on a number of different fronts. Part of it's about finding the right format, so it's getting the video units there for the people for whom video ads are going to make sense. It's getting the dynamic product ads in front of people, for people who are going to find those ads interesting and engaging.  And it's really just continuing to learn more and more about the people who are using Facebook and what types of as they interact with and like, and so that's part of what we're trying to do across the board. 
+And then at the same time, we're bringing more and more advertisers into the system and that's giving us a better selection of the ads that we can serve to the people using Facebook and that again improves the quality and the relevance. So the main thing that we're seeing drive this is just improving the quality and the relevance of the ads experience for the people using Facebook and I think that's going to continue to be the story. 
+The specific ads will be part of how we do that, but it won't be the only way. It will also be the targeting that we have and the targeting capabilities that we are doing with things like custom audiences and getting better and better at that. So there's a lot of different fronts that we're working on. 
+It's hard to tease out every individual component of it, but all in all we're really pleased with the revenue growth that we're seeing. And also, that's coupled with good engagement growth, so we are doing a nice balance of having an experience that's working well for our advertisers, but it's also working really well for the people who are using Facebook. 
+
+--------------------------------------------------------------------------------
+Operator    [35]
+--------------------------------------------------------------------------------
+
+          Ross Sandler, Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [36]
+--------------------------------------------------------------------------------
+
+          Just two quick questions. First, on the Newsfeed organic reach, and then Mark, one on Apple Watch and wearables. On the Newsfeed, you guys recently made tweaks to alter the algorithm in favor of friend-oriented content. And then, on the other hand, you're also moving towards hosting publisher content from New York Times and Buzzfeed and folks like that.  So how are you balancing out organic reach between these algorithm changes and then whether or not professional content is hosted inside of Facebook versus coming from a third-party website? 
+And then the second question is, Mark, how do you view the shift to wearables with smaller screens and shorter interactions? It looks like you guys have got most of the apps on the Apple Watch. Just wondering what you're doing to adapt to these new smaller screens? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [37]
+--------------------------------------------------------------------------------
+
+          Sure. I can speak to both of those. For the Newsfeed question, the North Star for us in Newsfeed is that we want to produce the best experience for everyone who is using the app and loading Newsfeed to see what is going on in the world around them. So when it comes to -- there are lots of businesses on Facebook, there are professional content producers, our main interest here is the people in the community who are using Newsfeed. Not those guys. 
+So of course, we want to build tools to enable them to share their content and all that, but we are constantly refining the algorithms in order to make it so the experience is the best for you, when you open up your phone, and look at Facebook and there are a bunch of things that are going on, we want to make sure that we're getting what you care about the most. And we go to a lot of lengths to make sure that we're getting signals from people in our community to make sure that we're doing this correctly. 
+In addition to the different signals that we would get from seeing people use the products, we also do a lot of qualitative surveys, to see what people what makes -- what people write in that they want to see from us, what people tell us is the most important thing that they saw on Facebook today or saw anywhere in the world today, what they would have wanted to have seen on Facebook. Our goal is just to constantly refine this and make it better, and we're going to keep on doing that, because we think that there's a lot of upside and there is a lot more that we can do. 
+At the same time, in order to make this experience good, there also needs to be good content in the system, so we need to make sure that people have the tools to be able to share the moments that they care about. If you're a professional publisher, you need to have the ability to share a version of the content that you're producing that you're proud of, that can load quickly, that can be as rich as the tools enable people to see. 
+And we're working on a lot of different tools for that. And you can imagine that as the tools for any of this content get better, people taking photos, newspapers writing news articles, advertisers putting out ads for content that they want to sell, the better that content gets, the more people are excited to see it, and then that informs the ranking and what the community qualitatively tells us that they want to see from us over time, as well. So it's just a constant cycle on that. What was the other question? 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [38]
+--------------------------------------------------------------------------------
+
+          The watch. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [39]
+--------------------------------------------------------------------------------
+
+          Oh, the watch. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [40]
+--------------------------------------------------------------------------------
+
+          Wearables. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [41]
+--------------------------------------------------------------------------------
+
+          I haven't actually spent that much time with this so far, so I mostly just want to congratulate Apple on shipping something that seems like a pretty amazing piece of technology and work. We're proud to be supporting and I know that we have a bunch of apps. It's a space that's going to be really interesting and we're going to watch closely and build what our community wants us to. 
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+
+          Brian Pitz, Jefferies. 
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [43]
+--------------------------------------------------------------------------------
+
+          Two more quick questions on video. Roughly what percentage of videos are currently monetized via ads? And where do you see it headed over time? And as you look at the early video ads on the platform, how is pricing comparing to other ad formats? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [44]
+--------------------------------------------------------------------------------
+
+          I can take this. In terms of what percentage of videos are ads, we're not breaking that out. I think what we said was that we are really pleased with the consumer adoption we're seeing. That's the fundamental table stakes that need to be there and that's the most important thing and we're really pleased with the 4 billion video views daily that we are getting. We know that marketers love video, so there's a great opportunity here. 
+It's still early. It's worth pointing out that, as Sheryl mentioned, video does displace other ads in Newsfeed and let me speak to how that plays into pricing as well. Video is just a format that is bid into the auction, so video is effectively winning in the auction if it's higher-priced. So if somebody's willing to pay more for a video, it's going to get served before another type of format ad, but there's not really a price differential. 
+You're paying for video. It's just what are you willing to pay into the system? So there's not differential pricing by product. It's just what are you willing to bid for the format that you want to show to the people that you want to show it to and that's how the system  works. 
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+          Ben Schachter, Macquarie. 
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [46]
+--------------------------------------------------------------------------------
+
+          Mark, does the OpEx guide assume an Oculus product for consumers this calendar year and will the initial products focus on gaming or more on some of the experiences that you showed at F8 around non-gaming, like that Saturday Night Live demo? And then separately, beyond searching within Facebook, should we expect to see Facebook leverage its 2 million advertiser relationships against third-party search queries? For example, when a user searches on, say, Yahoo or maybe soon an Apple device, Facebook might tap its advertisers to provide relevant sponsored results? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [47]
+--------------------------------------------------------------------------------
+
+          Ben, let me take the OpEx guidance question. We have not announced any specific plans for shipment volumes in 2015 related to Oculus. I'd just note that Oculus is very much in the development stage, so it's early to be talking about large shipment volumes, and our expense guidance reflects any volumes that we might do in 2015. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [48]
+--------------------------------------------------------------------------------
+
+          And no plans to work with our marketers in the way you described. 
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+          Peter Stabler, Wells Fargo Securities. 
+
+--------------------------------------------------------------------------------
+Peter Stabler,  Wells Fargo Securities - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          Dave, I just wanted to return to I think Justin's question about the drivers behind ad growth. You mentioned gains made in relevance and quality and formats. Wondering if you could provide any quantitative color around ad engagement trends, clicks, shares, likes, or anything like that? And then, secondly, one quickly for Sheryl.  In your SMB discussions, wondering if you are ever asked to help facilitate transactions in that space or if that's an area of small business that you are interested in? Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [51]
+--------------------------------------------------------------------------------
+
+          Peter, just on ads engagement, that's an area that we've obviously been very focused on and we're really pleased with the results that we're seeing there in terms of driving better engagement per ad. That's really the focus of a lot of our quality and relevance efforts. How do we find those ads that are going to be more engaging, that are going to get more clicks, that are going to get more views, that are going to get more installs? 
+We're working on focusing on all of those, on optimizing the relevance of the ads for all of those different potential actions that happen downstream and we are pleased with what we're doing there and the trends that we're seeing there. Again, that's a big part of what we are trying to do to drive the overall ads growth story, as well as providing a good experience for users with the ads that they're seeing. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [52]
+--------------------------------------------------------------------------------
+
+          On SMBs, we have a very small test in the US we started last quarter for Buy on Facebook and that enables people to buy products from merchants with a buy button on pages. It is a product that is used and aimed at SMBs. We are also very focused on helping SMBs have a presence, especially a mobile presence. 
+35% of SMBs in the United States, which is probably ahead of most other countries, don't have a web presence at all, and an even smaller percentage of SMBs have a mobile web presence or any kind of mobile presence that works. And so pages are a good and free and easy way to have a mobile web presence and that's something we are very focused on growing. 
+Operator, we have time for one final question. 
+
+--------------------------------------------------------------------------------
+Operator    [53]
+--------------------------------------------------------------------------------
+
+          Mark May, Citi. 
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [54]
+--------------------------------------------------------------------------------
+
+          I had two. You've recently announced plans to enable longer form video content, as well as to allow those videos to be syndicated or distributed on third-party publishers. What, if any, initiatives do you have to help with this content, contributors and the publishers, to generate revenue from those videos? And then, secondly, on public content, what, if anything, are you doing to try to secure more unique public content that's potentially unique to Facebook from personalities and other sources? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [55]
+--------------------------------------------------------------------------------
+
+          On the video question, we're basically focused primarily on video on our own site [and] service. Video tends to be pretty short-form content right now on Facebook because it's playing in Newsfeed. We do see some pretty cool examples of people using it well. 
+So for example, in the election you saw Hillary Clinton announce her candidacy, very recently, obviously, and that video got 2.7 million views. Ted Cruz and others have done the same and they've gotten large numbers of video views. So we think it's a very attractive platform for people to reach people with video messages. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook Inc. - VP of IR    [56]
+--------------------------------------------------------------------------------
+
+          Great. Thank you for joining us today. We appreciate your time and we look forward to speaking with you again. 
+
+--------------------------------------------------------------------------------
+Operator    [57]
+--------------------------------------------------------------------------------
+
+          Ladies and gentlemen, this concludes today's conference call. You may now disconnect. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Apr-23-AMZN.OQ-139804865882-Transcript.txt

@@ -0,0 +1,623 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2015 Amazon.com Inc Earnings Call
+04/23/2015 02:30 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com, Inc. - Vice President & CFO, Global Consumer Business.
+ * Tom Szkutak
+   Amazon.com, Inc. - SVP & CFO
+ * Phil Hardin
+   Amazon.com, Inc. - Director of Investor Relations
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Jason Helfstein
+   Oppenheimer & Co. - Analyst
+ * Ron Josey
+   JMP Securities - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Gene Munster
+   Piper Jaffray & Co. - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Mark Miller
+   William Blair & Company - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Robert Peck
+   SunTrust Robinson Humphrey - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Greetings. Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q1 2015 financial results teleconference.
+(Operator Instructions)
+Today's call is being recorded. For opening remarks, I will be turning the call over to do the Director of Investor Relations, Phil Hardin. Please go ahead.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [2]
+--------------------------------------------------------------------------------
+
+          Hello and welcome to our Q1 2015 financial results conference call. Joining us today is Tom Szkutak, our CFO; and Brian Olsavsky, Vice President and CFO of our Global Consumer Business. 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, April 23, 2015, only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could be potentially impact our financial results is included in today's press release and our filings with the SEC, including the 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. In addition, the release includes historical financial results of our North America, International, and Amazon Web Services reportable segments for 2014 and 2013.
+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 2014. Now, I'll turn the call over to Brian.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - Vice President & CFO, Global Consumer Business.    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Phil. I'll begin with comments on our first-quarter financial results. Trailing 12-month operating cash flow increased 47%, to $7.84 billion. Trailing 12-month free cash flow increased to $3.16 billion.
+In the supplemental financial information and business metrics portion of our earnings release, we include a few additional free cash flow measures. We believe these measures provide additional perspective on the impact of acquiring property and equipment with cash, and through capital and finance leases. Trailing 12-month capital expenditures were $4.68 billion. Capital expenditures do not include the impact of property and equipment acquired under capital and finance lease obligations.
+Return on invested capital was 14%, up from 9%. ROIC is trailing 12-month free cash flow divided by averaged 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 483 million shares, compared with 476 million one year ago.
+Worldwide revenue grew 15% to $22.72 billion, or 22%, excluding the $1.3 billion unfavorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 20%.
+Active customer accounts was approximately $278 million. Excluding customers who only had free orders in the preceding 12-month period, worldwide active customers were approximately 260 million, up from approximately 230 million in the comparable prior-year period. Worldwide active seller accounts were more than 2 million. Seller units represented 44% of paid units.
+Now, I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $15.4 billion, or 67.8% of revenue, compared with 71.2%. Fulfillment, marketing, technology and content, and G&A, combined was $6.62 billion, or 29.1% of sales, up approximately 290 basis points year over year. Fulfillment was $2.67 billion, or 11.7% of revenue, compared with 11.3%. Tech and content was $2.52 billion, or 11.1% of revenue, compared with 9.2%. Marketing was $1.05 billion, or 4.6% of revenue, compared with 4.3%.
+Now, I'll talk about our segment results. Beginning in the first quarter, we changed our reportable segments to report North America, International, and Amazon Web Services. In addition, we have provided historical results for these segments, for 2014 and 2013, with our earnings release filing today. Consistent with prior periods, we do not allocate to segments, our stock-based compensation or the other operating expense line item.
+In the North America segment, revenue grew 24% to $13.41 billion. Media revenue grew 5% to $2.97 billion. EGM revenue grew 31% to $10.25 billion, representing 76% of North America revenues. North America segment operating income increased 79% to $517 million, a 3.9% operating margin. Excluding the favorable impact from foreign exchange, North America segment operating income increased 77%.
+In the International segment, revenue decreased 2% to $7.74 billion. Excluding the $1.3 billion year-over-year unfavorable foreign exchange impact, revenue growth was 14%. Media revenue decreased 12% to $2.32 billion, or increased 2%, excluding foreign exchange.
+EGM revenue grew 4% to $5.38 billion, or 21%, excluding foreign exchange. EGM now represents 69% of international revenues. International segment operating loss was $76 million, compared to a loss of $33 million in the prior-year period. The unfavorable impact from foreign exchange to International segment operating loss was $78 million.
+In the Amazon Web Services segment revenue grew 49% to $1.57 billion. Amazon Web Services segment operating income increased 8% to $265 million, a 16.9% operating margin. Excluding the favorable impact from foreign exchange, AWS segment operating income decreased 13%.
+Consolidated segment operating income increased 41% to $706 million, or 3.1% of revenue, up approximately 60 basis points year over year. Excluding the unfavorable impact from foreign exchange, CSOI increased 45%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income was $255 million compared to $146 million in the prior-year period.
+Our income tax expense was $71 million. GAAP net loss was $57 million, or negative $0.12 per diluted share, compared with a net income of $108 million and $0.23 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $5.12 billion year over year to $13.78 billion. Inventory increased 10% to $7.37 billion and inventory turns were 8.8. Down from 9.1 turns a year ago, as we expanded selection, improved in stock levels, and introduced new product categories. Accounts payable increased 13% to $11.92 billion and accounts payable days increased to 70 from 68 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date, and what we believe, today, to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy and consumer spending. It's not possible to accurately predict demand, and therefore, our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as settling intercompany balances in foreign currencies among our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rates, can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they've been recently.
+For Q2 2015, we expect net sales of between $20.6 billion and $22.8 billion for growth of between 7% and 18%. This guidance anticipates approximately 750 basis points of unfavorable impact from foreign exchange rates. GAAP operating income or loss to be between a $500 million loss and a positive $50 million of income, compared to a $15 million loss in second quarter 2014. This includes approximately $600 million for stock-based compensation and amortization of intangible assets.
+We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $100 million and $650 million, compared to $404 million in the second quarter of 2014. We remain heads down, focused on driving a better customer experience through price, selection, and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.
+Thanks, and with that, Phil, let's move on to questions.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Brian. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Thank you.
+(Operator Instructions)
+One moment while we poll for questions. Brian Pitz with Jefferies & Company. Please proceed. Your line is live.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Can you share with us any updated metrics for Prime Now? How sticky is it in terms of repeat customers, average order value, or other details?
+And, also any update on your fulfillment center plans for the year? If you can't disclose specific numbers, maybe you could just qualitatively tell us your focus, either domestic versus international? Or, sortation versus traditional FC build out? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - Vice President & CFO, Global Consumer Business.    [3]
+--------------------------------------------------------------------------------
+
+          Sure. On Prime Now, we're -- don't have specific metrics we want to share today. But, we have expanded to seven cities, with more on the way. Customers are really enjoying the one hour and two hour delivery of tens of thousands of daily essential products. So, the response has been great.
+We'll point out that our operations network that we've been building for the last 20 years, helps make Prime Now a viable proposition for us. The scale makes a possible. So, really, so far customer response has been great.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [4]
+--------------------------------------------------------------------------------
+
+          And, Brian, on the FCs, as we've done in prior years, it's early in the year, and as we progress through the year, we'll give you some updates on how many. But, as a reminder, we ended the year with 109 fulfillment centers around the world and we'll update you as we go.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Ross Sandler with Deutsche Bank. Please proceed.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for the new disclosure, guys. Really really helpful. I guess just digging in on that a little bit, we all understand the investments you guys are making on international retail. And, maybe why that margin's been declining.
+But, can you give us some color on what's driving up the North America retail segment margin. And, I guess in the context of that, just talk about the impact that Prime is having on the retail margin for both North America and International. Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - Vice President & CFO, Global Consumer Business.    [7]
+--------------------------------------------------------------------------------
+
+          Yes, sure. So, North America operating margin up 120 basis points year over year to 3.9%. A lot of good cost efficiency. But, again, we're continuing to invest selectively as we build the Prime platform and invent on behalf of customers.
+So, you'll see a lot of invention. Definitely to feed the Prime platform, which, things like video content, Prime music as we talk about Prime Now devices. And, we continue to build fulfillment centers for selection and expansion and FBA. So, that's -- it's generally what's driving the operating margin in North America.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [8]
+--------------------------------------------------------------------------------
+
+          And, just to add onto that, we're -- we gave the metrics last quarter about Prime. It's growing very fast. As Brian said, we're feeding the platform and certainly, the common thing with category expansion, new FCs, original content, Prime Instant Video devices, Prime Now; the common theme is they're all really intertwined with Prime.
+And, they're inextricably linked to our consumer business in Prime. So, it's just -- we're happy to do it. And, the last quarter, we gave an indication of the growth rates after being added for 10 years. So, we're super excited to have the platform and to continue to invest in it.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [9]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, guys.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          Douglas Anmuth with JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [11]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. Could you guys talk a little bit more, just about the international business and, kind of, the key initiatives here in terms of getting the growth to reaccelerate from these levels?
+And, then also perhaps, a little bit more on your strategy in China? How you're thinking about the cost structure there, relative to previous years? And, some of the key ways you might be able to rationalize things there? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - Vice President & CFO, Global Consumer Business.    [12]
+--------------------------------------------------------------------------------
+
+          Yes, let me start with China. So, I think you see a lot of invention. You're seeing a lot of invention from us in China right now. Amazon is a trusted source of authentic international products.
+And, that's really what we're doubling down on now, with the Amazon global store on our own site, which gives Chinese customers access to over a million Amazon products globally. And then, the team all flagship store for international brands, which you've heard about. Giving thousands of direct imported products access, or, customers, access to these products. And those happened to be stocked and ready to ship from our fulfillment centers in China. So, that's an added benefit.
+25% of those are exclus -- or, over 25% of those are exclusives to Amazon. So, we continue to be selective in our investments there. But, we're taking the long-term view and we have hopes for the new initiatives along with the global store and the team all flagship store.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [13]
+--------------------------------------------------------------------------------
+
+          In terms of the growth for total international, just maybe, some comments first about the current quarter. And, then elaborate a little bit further. But, the growth was down 2% on a dollar basis. Up 14% on a local currency basis.
+So, we did see a little bit of improvement in terms of growth rate acceleration versus the last couple quarters. And, in addition to the things that Brian mentioned earlier, about the Prime platform. That's something that we're doing globally. And so, we're certainly, all of those things we're working on globally. So, those are things that, at least in most geographies, we have today.
+One thing to keep in mind also, as you look at the growth rate for Q1, is last year Q1 we talked about in April 1, there was a consumption tax increase in Japan. We had some, what we think some pre-buys in Q1 and we're overlapping that. And, in Q1 of this year. So, it's a headwind if you think about it for Q1. But, we're looking at -- we think there's still a big opportunity.
+As we mentioned last call, a big opportunity with Prime. Prime's growing at a faster rate. We think there's still a great opportunity to add unique selection to -- for category expansion. And, again, so we're going to continue to feed the Prime platform as we talked about. Continue to add selection in a lot of categories.
+We're also very excited about India. If you take a look at our results for -- from an operating profit standpoint, you see that it was approximately negative $76 million on a dollar basis. If you back out exchange, that's approximately breakeven. Included in there, we certainly have a sizable step up in investment in India. And, we're super excited from what we see there right now.
+We think it's very big opportunity. And, we're investing appropriately for that big opportunity. So, those are some of the things that we're working on. And, we think they're -- we still have a lot of opportunity there moving forward.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+          Brian Nowak with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [15]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for taking my questions. I have two. The first one is on the new AWS disclosure.
+Can you just help us on accounting question. The AWS data center costs related to the core e-commerce business. Are those being allocated to North America and International? Or, are those being fully embedded into the AWS segment?
+And then, the second question goes back to China, I guess. Any early learnings from the team all partnership and whether you have new thoughts of, potentially, a lower capital intensive growth strategy in China?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - Vice President & CFO, Global Consumer Business.    [16]
+--------------------------------------------------------------------------------
+
+          To answer your first question, yes, they are. The associated infrastructure costs to run our North America and International consumer business, those costs, those infrastructure costs are being allocated to those segments.
+The second question, in terms of China, it's early. We're liking, certainly, some of the things that we're seeing there. But, there's not a lot I can add to that at this stage.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [17]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [18]
+--------------------------------------------------------------------------------
+
+          Colin Sebastian with Robert Baird.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [19]
+--------------------------------------------------------------------------------
+
+          Great thanks. Maybe, just another follow up on the new segment disclosure. Thanks for breaking that out.
+If we assume that the advertising other segment is reasonably profitable, than the implication is then that the core retail business is very modestly profitable, close to breakeven. And, just wondering what the thought process is and strategy is behind that? If in a sense, there's some subsidy to the retail side being used as you build market share in the core business? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [20]
+--------------------------------------------------------------------------------
+
+          Yes, I think the best way to think about it is, we certainly have an advertising part of our North American consumer segments. But, the way you should think about it is we are making some great investments for the long term. And, that's really what's reflected in the operating results that you're seeing in terms of -- so, it is certainly impacting the operating margins both for North America and International.
+So, it's the things that we're -- both Brian and I talked about, that we're doing globally to support the Prime platform. All of those things that we mentioned. Video content, original content, Prime Now, category expansion, investing on behalf of FBA, which also helps Prime devices. Those are all intertwined and certainly part of that.
+And, then some of the things outside of -- that are more specifically related to International in addition to those, are some of the geographic stuff that we talked about. So, I think you should think about it that way. That, certainly we think it's a big opportunity.
+And, again, one of the reasons I wanted to give you an update last quarter on Prime growth and you can see that that's going very well, and so we're feeding that. And, that's what we have been doing and that's what you see also, in certainly, the results that you're seeing today.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          All right, helpful. Thanks very much.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [22]
+--------------------------------------------------------------------------------
+
+          Sure.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          Mark May with Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. On the International revenue, I believe there's probably a -- there's a real distinction here between some of your more established countries and some of your more emerging countries.
+I wonder if you could talk a little bit about, for Germany and the UK and Japan and some of the more established markets. What the profit profile of those markets look like? And, just how much of the International segment results are being -- losses being held back by a handful of the more emerging markets?
+And, then a question on AWS pricing. That seemed like the pricing environment was pretty competitive last year. What are you seeing in the market this year and what your expectations going forward? Are you expecting a bit more of a stable pricing environment? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [25]
+--------------------------------------------------------------------------------
+
+          Yes, in terms of International, we're not breaking out individual country results. The one thing that I did mention around from a country perspective, was India. In terms of, we've certainly stepped up our investment. And, if you look at it year over year. So, that's certainly reflected in the numbers that you're seeing.
+In terms of AWS, we've had 48 price decreases since inception. The team is doing a terrific job in terms of working on behalf of customers to pass on savings as they see it. But, in terms of any comment on what to expect going forward, there's really not much to add there.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [26]
+--------------------------------------------------------------------------------
+
+          It probably is worth adding, that although price is a factor, the primary factor for customers choosing to move to AWS is really around their ability to move quickly and to be nimble and agile.
+And so, we're very pleased with the kind of continued adoption and usage growth we've seen and obviously the benefits of AWS around their ability, customers' ability to be nimble, as a primary factor there.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          Carlos Kirjner with Sanford Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Hi. Thanks for taking my question. I have two. My first is, my first question is about the profitability of the North America segment. You mentioned a few moments ago, that investments in Prime were part of the, or, may -- most of the explanation for what is a relatively low 3.9% margin in North America. Which, are much lower than the 5 to 6% margin EBIT margin that the brick-and-mortar retailer books. Despite, a large benefit of booking 3P net.
+Here's the question. Prime is not new in North America. You probably have tens of millions of Prime users in the US, now 30, 40, 50 million. Yet, margins are still low. What gives you confidence that the investments that you are making will pay off?
+Second question on AWS. As you look at expenses like R&D, and perhaps, even the fixed component of marketing and sales, which presumably, one day will be really fixed. Are they still growing significantly?
+In other words, is there room for significant margin expansion at some point in the future when AWS is, I don't know, three, five, or ten times its current size? Or, do you expect R&D to scale up at the same rate as revenues? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [29]
+--------------------------------------------------------------------------------
+
+          In terms of your first question specifically related to North America. One of the comments we made last quarter, that we disclosed, was we disclosed the growth rate globally. As well as the growth rate in the US. And, the growth rate in the US after 10 years is up 50%. It was up 50% year over year.
+And so, 2014 versus 2013, in terms of Prime membership. And, that's after a price increase on Prime from 79 to 99. So, it gives you a feel for the work that we've put into Prime to make that experience great for customers and the value that we're giving them. So again, given that growth.
+So, that's what, that's certainly one of the things that gives us comfort. But, when we look at the individual pieces we like what we see. So, in other words, some of the investments we're making, I think as we've talked about the past. I'll give one example, would be, video content, both original and licensed content.
+We mentioned last call that we spent approximately $1.3 billion on content globally for Prime customers. And, what we've seen to date, is it's certainly still an investment for us. It's certainly impacting our operating results, but we like what we see. We see customers who come in through our free trial pipeline, if you will, for video content. They convert at a higher rate.
+We see -- we have a great retention of Prime members. But, those who stream, actually, we retain those at a higher rate. And, we bring in new customers through our video pipeline. The purchasing pattern that we have for those customers is very similar to those who come in from other pipelines. So, in other words, they're buying very good from a physical product standpoint, as well as digital. So, they're buying a diverse set of products.
+So, in other words, the video content that we're spending is helping us. Customers will buy consumables from us. They'll buy clothing from us. They'll buy shoes from us. They'll buy electronics. They'll buy media items.
+So, that's what we're seeing and so again, it's some of these things are very early. We'll have to see over time how efficient they are. But, each period we go, we keep the data that we see, we're encouraged. And so, that's just one example.
+But, that's why we are investing a lot in Prime and we think it's a great -- the Prime platform, if you will. And, we think it's a great opportunity and as I mentioned earlier, all these things we're investing in are very intertwined.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [30]
+--------------------------------------------------------------------------------
+
+          And, Carlos, I think you had a question about AWS. From our perspective, it's a business that's still really in day one. A lot of potential innovation in front of us, we believe. And so, you can see we're putting a lot of CapEx, obviously there, including capital leases. And, we think over time, we will be able to generate significant free cash flow at strong ROICs.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney with RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Thanks. I want to go back at this North America retail margins. And, I guess I want to try to figure out. I know you're not going to go out where they could go.
+But, if we look in the past. I assume that if the base in 2014 and in full year 2013 was probably depressed for North American retail margins, North American segment margins. And, if we look back, five, six years, it's probable that that was running at, kind of, mid to high single digits, CSOI margins. Kind of similar to the incremental margins you just reported for that segment, 8.7%.
+So, I guess the big question I want to ask is, is there a structural change in the North American retail business over the next -- this year and the next couple years? Versus what you had, call it in 2004 to 2009, when the margins were pretty clearly higher? And now, you're going to be recovering to the levels?
+That's what I'm trying to get at. Any color would be great. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [33]
+--------------------------------------------------------------------------------
+
+          The -- thanks for the question, Mark. Just in terms of going forward, we're not giving any specific guidance beyond the current quarter. So, I can't predict for you what could happen.
+But, what you mentioned is, in some of the periods that you were describing, as you mentioned, what our business look like. Several years ago, when Prime was nascent or, and we were a bit earlier in the business. We go through different cycles. We're certainly still investing very heavily.
+That being said, we, as I mentioned last quarter, we're spending time on making sure that we get productivity. So, we're working on both investing heavily in the business, while working on fixed and variable productivity in other areas. Putting a lot more energy into it. That's what's helping us with the improvement that Brian mentioned in terms of operating margins year over year. It's a number of different aspects, but certainly, a mix of business and some productivity is certainly impacting that.
+But, again, we think this opportunity is to improve margins over time. You'll have to stay tuned on that to see what it looks like. But, we certainly, as you can see from, not only the results, but some of the data points that we've given over the last several quarters. We are investing heavily in the business again.
+Because, we like what we see and the -- and Prime growing so dramatically globally after being in it for a long time. And, we think that that's a great platform to feed.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          Okay. Thanks, Tom.
+
+--------------------------------------------------------------------------------
+Operator    [35]
+--------------------------------------------------------------------------------
+
+          Justin Post with Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [36]
+--------------------------------------------------------------------------------
+
+          Hello, a couple questions on margins. First on AWS, I think those are higher than most of us were thinking. Appreciate the disclosure.
+What is driving your margin versus your pricing decision? How do you think about passing through cost efficiencies or potential margin growth through to customers?
+And then, secondly, on international margins. Clearly, below history, below the US, what kind of things need to happen to get those at least to where the US is today? Much less, back to where they were six or seven years ago? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [37]
+--------------------------------------------------------------------------------
+
+          Justin, I will take the AWS portion on the question first. So, our model over the long term really has been to innovate and to use our scale and position to be able to pass savings along to customers. And so, we've had 48 price decreases since we launched.
+As I talked about earlier, that's one factor. Customers save a lot of money, but the primary motivator is really around the innovation that AWS enables and the ability for developers to move really quickly.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [38]
+--------------------------------------------------------------------------------
+
+          In terms of the International. Again, as you mentioned, Justin, we are investing a lot right now. At which, impacts the margins there. Again, X exchange.
+Think of it as approximately breakeven for the quarter. And so, again we're continuing to invest. We're investing in all the things that we talked about related to the platform. We continue to invest in some emerging geographies. Most notably certainly, India, with the step up given the experience we have.
+So, we are optimistic over time. We have a lot to do there. We think it's a great opportunity for us and so that's what we're doing. But, we're excited about the opportunity and that's why you see the results that you're seeing there.
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+          Heath Terry with Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [40]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. I was wondering if you could give us a sense of how we should think about the run rate of CapEx and capital lease obligations in the quarter as any sort of indication for full year? And, the trajectory of investment in fulfillment and data centers?
+And then, just on the question of Prime and Prime video. As we think about the way that media growth is trending now, is there a point where you start to think of allocating Prime, some of those Prime revenues to media to account for the -- as Prime video usage increases?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [41]
+--------------------------------------------------------------------------------
+
+          Yes, in terms of the CapEx question. You know there's certainly two pieces of that. There's the consumer, the North America and International piece.
+There's a number of pieces, but certainly the two largest pieces would certainly be the CapEx associated with fulfillment and the second would be infrastructure. And, again, that's for AWS versus North America and International.
+I'll take the North America and International first. We're seeing good growth and year over year, in terms of overall unit growth, in terms of revenue growth, certainly, X exchange. As I a mentioned earlier, it's early in the year. So, as we do every year, we'll continue to monitor the growth there.
+We're making plans for the rest of the year. And we'll get back to you as we progress throughout the year in terms of what fulfillment capacity we'll need to support that growth this year.
+In terms of web services, it's obviously growing extremely fast. We saw some acceleration of growth from a revenue perspective over the last few quarters here. Usage is growing faster than that, so we will be deploying more capital as we go there. In terms of the amounts, specific amounts, we're not giving guidance on that today.
+And, one of the reasons is, it's just growing so fast, that we want to make sure we've put the right amount of capital in place and the team's doing a great job doing a lot of planning and the execution around that. So, that's what we're doing there. In terms of media, I'm not fully sure I understood the question. But, as it relates to, I think it's video, could you repeat the -- part of that, part of the question?
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Right, was just getting a sense of, as video becomes such a, becomes a bigger part of the Prime value proposition. Do you start to allocate some of the annual revenues from Prime more directly into that media segment? Because of the level of usage associated with Prime video versus the shipping benefits of Prime?
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [43]
+--------------------------------------------------------------------------------
+
+          Heath, we do allocate some Prime to account for the video.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [44]
+--------------------------------------------------------------------------------
+
+          Okay. Great. Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [45]
+--------------------------------------------------------------------------------
+
+          Thanks for the question.
+
+--------------------------------------------------------------------------------
+Operator    [46]
+--------------------------------------------------------------------------------
+
+          Gene Munster with Piper Jaffray.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [47]
+--------------------------------------------------------------------------------
+
+          Good afternoon, could you talk a little bit about the focus on same day and same hour? And specifically, about the incremental investments? And, just some context to how big of those investments are?
+And, separately is what the strategic advantage is? Is this something, ultimately, obviously, it's to improve the experience, but do you see in any of your data that this opens you up to be more competitive with traditional retailers? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - Vice President & CFO, Global Consumer Business.    [48]
+--------------------------------------------------------------------------------
+
+          Yes, I'll take that one. We certainly, as I said earlier, we see this as a natural extension of our existing infrastructure investment. We've -- we have 109 fulfillment centers, again, very close to customers. It allows us and unlocks for us, same day and next day deliveries.
+And, to its, extreme one hour and two hour deliveries, as you've seen with Prime Now. So, we're not forecasting or giving much more on that. But, we definitely see it as a valuable customer proposition and customers embraced it.
+Again, a smaller number of ASINs, tens of thousands of ASINs, but available for one or two hour delivery. And, generally, in the category of essential products that you would need in a short time period.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [49]
+--------------------------------------------------------------------------------
+
+          And, the only thing I would add to that, as Brian mentioned earlier as well, we're in seven cities today and they'll be more to come. We haven't said how many, but, you should be definitely expecting more to come, and we're very excited to do that.
+
+--------------------------------------------------------------------------------
+Operator    [50]
+--------------------------------------------------------------------------------
+
+          Robert Peck with SunTrust Robinson.
+
+--------------------------------------------------------------------------------
+Robert Peck,  SunTrust Robinson Humphrey - Analyst    [51]
+--------------------------------------------------------------------------------
+
+          Yes, thank you. I was wondering, Tom, could you give us an update on your retail store strategy? Should we expect stores to open up across the US or is that something you're just limited to trying out New York. And then number two, India's come up a couple of times on the call today.
+China had several structural challenges based on the market there. I was curious if you could differentiate what you're seeing that's different in India versus the China challenges? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [52]
+--------------------------------------------------------------------------------
+
+          Yes, in terms of our consumer business, we love the business that we have today. We love -- we think there's a great opportunity to do that. To continue to expand the existing business that we have.
+In terms of other things, we have a longstanding practice of not talking about what we might or might not do there. In terms of the second part, India and China, could you repeat that part? Sorry.
+
+--------------------------------------------------------------------------------
+Robert Peck,  SunTrust Robinson Humphrey - Analyst    [53]
+--------------------------------------------------------------------------------
+
+          Sure, so you've talked about India a couple of times today on the call. Obviously it's big area of investment and focus for the Company. China had some structural challenges based on how the marketplace is.
+I was wondering if you could differentiate what you're seeing in India that makes you optimistic there versus some of the challenges you faced in China?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - Vice President & CFO, Global Consumer Business.    [54]
+--------------------------------------------------------------------------------
+
+          Yes, thank you for the question. Yes, they are very different. You'll see the growth rate in India's very rapid. We talked about last year and it's increasing our investment.
+I think the biggest difference is the focus on sellers and the connection of sellers. A big part of the challenge there is helping sellers all across India to succeed and grow their online businesses. You'll see from our press release, that we've launched some new apps for that. So, that helps them manage their inventory better and also respond to customer inquiries.
+So, that's probably the biggest difference that we see between India and China. But, it's still very very early on in India.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+          Jason Helfstein with Oppenheimer.
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          Thanks. So, can you talk about how the impact on available third-party SKUs impacts the business particular to in Europe?
+And, ultimately what you could do to drive more SKUs through the platform? Whether it's lowering third-party rates or is it -- are there are other factors to try to get more SKUs on there for third-party? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [57]
+--------------------------------------------------------------------------------
+
+          We've spent a tremendous amount of time on our seller business over the years. And, trying to improve both the experience for sellers as well as customers. And, we've done a lot of interesting things to help sellers and that's why you see the results that we're seeing today. 44% of our units today, as of this quarter, are third-party units. That's up about 400 basis points from last year.
+Certainly, one of the things that we've talked about that's most -- that's notable, is fulfillment by Amazon. And so, the benefit for sellers is they get to take advantage of our multi-node fulfillment network globally. We have 109 fulfillment centers globally. As well as our customers get to take advantage of that as Prime members where we offer it in those geographies. So, it's really a great benefit for sellers.
+It's good for sellers. It's good for customers. And, we believe good for shareowners too. Again, we're very excited. A number of different things we're working on. But certainly, one of the drivers, along with all the things that I mentioned is certainly FBA is very helpful.
+
+--------------------------------------------------------------------------------
+Operator    [58]
+--------------------------------------------------------------------------------
+
+          Mark Miller with William Blair & Company.
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair & Company - Analyst    [59]
+--------------------------------------------------------------------------------
+
+          Hi, good afternoon. Looking at the service sales, less the AWS revenues, you've got about $4 billion in fees mostly coming from the marketplace off a strong mid-30%.
+Can you help us think about the costs that go against those marketplace fees? And, specifically within fulfillment, if you could help us understand how much of the cost is going against 3P, or basically, FBA fulfillment? Perhaps, percent of units out of the FCs that are going to 3P?
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [60]
+--------------------------------------------------------------------------------
+
+          So, Mark, I can't comment on the derived number. But, I can say that FBA continues to grow really well. It's become a bigger and bigger part of our third-party mix over the years.
+I think we gave you an update in Q4 that it was more than 40% of our third-party units. Obviously, in the fulfillment line there is cost associated with that. As well as our other third-party units as well, with things like payment processing and other costs that we incur. So, I don't know if there's much more that we can say about that.
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair & Company - Analyst    [61]
+--------------------------------------------------------------------------------
+
+          If I can insert a second question. Given the upside and profitability in the first quarter, the guidance for the second quarter quite a bit lower. What are the factors you see that are negatives? Or, I guess otherwise, people are going to think you are sand bagging. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP & CFO    [62]
+--------------------------------------------------------------------------------
+
+          Well, if you take a look at the guidance that we gave. Again, we gave as we have in previous quarters, we give a wide range. And, from a consolidated segment operating income standpoint, we gave $100 to $650.
+The implied margin at the lower end, the higher end, is approximately 50 basis points upwards to 2.9%. This quarter, in Q1, we were up 60 basis points year over year in total. At the upper end of the forecast, we implied we'd be up 80 basis points. So, again, you know that's the range that we think it's appropriate; range for Q2.
+
+--------------------------------------------------------------------------------
+Operator    [63]
+--------------------------------------------------------------------------------
+
+          Ron Josey with JMP Securities.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [64]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for taking the question. Just going back to margins, and a little bit more on AWS. As I look at the seasonality. I wonder if there's any seasonality in margins?
+Given, it looks like margins in 2Q and 3Q came in sub 10% versus maybe mid-teens in the -- in 4Q and 1Q. And then, sort of, looking at a different way, maybe given the dip in profitability in 2Q of last year. Did that have any impact from the pricing cuts in April? Thanks very much.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [65]
+--------------------------------------------------------------------------------
+
+          So, let's start with the increase sequentially in margin from Q2, or Q3 to Q4 of 2014. So, revenue grew by about 21.5% sequentially and expense grew by around 10%. And, so obviously, we were growing faster on the top line than our expenses.
+And, over the long term improvements in efficiency and innovation allow us to drive that kind of cost out of the business. I mean, there certainly was an impact with pricing changes and you probably saw some of that in Q2 as well. But, over the long term, that's the model we follow. Great, thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of Investor Relations    [66]
+--------------------------------------------------------------------------------
+
+          And, with that, thank you for joining us on the call today and for your questions. A replay will be available on our investor relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Jan-15-BAC.N-138737516690-Transcript.txt

@@ -0,0 +1,948 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2014 Bank of America Corp Earnings Call
+01/15/2015 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Moynihan
+   Bank of America Corporation - Chairman, President, CEO
+ * Bruce Thompson
+   Bank of America Corporation - CFO
+ * Lee McEntire
+   Bank of America Corporation - SVP IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * John McDonald
+   Sanford C. Bernstein & Company - Analyst
+ * Paul Miller
+   FBR & Co. - Analyst
+ * Eric Wasserstrom
+   Guggenheim Securities - Analyst
+ * Mike Mayo
+   CLSA - Analyst
+ * Guy Moszkowski
+   Autonomous Research - Analyst
+ * Steven Chubak
+   Nomura Asset Management - Analyst
+ * Jim Mitchell
+   Buckingham Research Group - Analyst
+ * Nancy Bush
+   NAB Research - Analyst
+ * Glenn Schorr
+   Evercore ISI - Analyst
+ * Matt O'Connor
+   Deutsche Bank - Analyst
+ * Brennan Hawken
+   UBS - Analyst
+ * Betsy Graseck
+   Morgan Stanley - Analyst
+ * Marty Mosby
+   Vining Sparks - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Good day, everyone, and welcome to the Bank of America earnings announcement conference call. (Operator Instructions) Please note this call is being recorded.
+It's now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP IR    [2]
+--------------------------------------------------------------------------------
+Good morning. Thanks to everybody on the phone as well as the webcast for joining us this morning for the fourth-quarter results. Hopefully you guys have had a chance to review the earnings release documents available on the website.
+Before I turn the call over to Brian and Bruce, let me just remind you we may make forward-looking statements. For further information on those, please refer to either our earnings release documents, our website, or our other SEC filings.
+So with that let me turn it over to Brian Moynihan, our CEO, for some opening comments, before Bruce Thompson, the CFO, goes through the details. Thank you.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [3]
+--------------------------------------------------------------------------------
+Thank you, Lee. And good morning and thank all of you for joining us to review our fourth-quarter results for 2014. As we think about the year, we've accomplished a lot, including resolving many significant legacy issues that were overshadowing the underlying progress in our franchise.
+Settling those issues obviously came at a cost and drove a decline in year-over-year net income. But importantly, the settlements removed uncertainty for all of us -- for investors, regulators, rating agencies, and others. Allows us to focus on the core business and operations of the Company going forward.
+As we move to slide 2, you can see that we have a simplified and stronger Company. Today we reported earnings of $3.1 billion after-tax.
+The Company is simpler and more straightforward, with improved risk profile. Everything we do now is focused on driving the Company forward and delivering for our customers and clients.
+On this slide you can see some of the important results. This year we completed arguably the industry's largest-ever cost-savings program, which achieved $8 billion of annualized savings.
+Let's think about that. We started that program in 2011 when we had around 290,000 FTE. Nevertheless, in the three years since then, driving it the right way, we completed 2014 ending the year with around 220,000 FTEs.
+Noninterest expense, excluding litigation, declined $4.4 billion compared from 2013 to 2014, and is down more than $8 billion in the last couple years, and yet we have more work to do ahead of us. We further strengthened an already strong and liquid balance sheet and increased our common stock dividend during 2014 for the first time since 2007.
+As you can see on this page, our credit costs are at a decade-low level. So not withstanding the headwinds our industry faces with rates and an ongoing global economic sluggishness, we have built our platform for growth, especially in the context of a continually improving US economy.
+We have built a Company with leading market positions across every core customer base, and our task now is to continue to build on that foundation and the progress we've made. As you look at our results, you'll see that year-over-year earnings in our primary businesses, with the exception of the Consumer Real Estate business, made progress that shows stability in a volatile rate and geopolitical environment.
+Importantly, as you think about our Company, we have been investing in growth while taking out expense. We reduced our overall headcount during 2014 by around 8%; but at the same time we invested.
+We invested by reallocating resources to sales capacity from those savings, increasing in all our core businesses. We invested by reallocating expense reductions to product capabilities, our mobile capabilities, our cash management capabilities, and other capabilities around the world.
+We've invested some of those savings and our technology, spending over $3 billion in 2014 to improve and protect our Company. Now you can see the results in the appendix pages, and Bruce will touch on them in the line-of-business presentations.
+We expect to continue this effort going forward. We have teams working on it every day. They are working to reallocate nonproductive expense to drive towards growth, allowing us to maintain the good expense management you have come to expect from our Company.
+At the same time we are laser focused on winning market share and growing with our customers, the economy continues to improve, and we look forward to reporting that progress during the year ahead. With that, I'll turn it over to Bruce to take you through the quarter's numbers.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+Great. Thanks, Brian, and good morning, everyone. Let's start on slide 3, and I'm going to go through the details.
+During the fourth quarter, we recorded $3.1 billion of earnings, or $0.25 per diluted share. Let me give you a few thoughts on revenues.
+There were two significant adjustments to revenue as well as negative DVA charges that in the aggregate reduced reported revenues this quarter by $1.2 billion pretax or roughly $0.07 a share after-tax. Of the components of the $1.2 billion impact, we recorded a roughly $578 million negative market-related adjustment which, as you all know we refer to as FAS 91, in net interest income for the acceleration of bond premium amortization on our debt securities that was driven by lower long-term rates. Otherwise, our core net interest income, which excludes this market-related adjustment, was pretty stable, with the fourth quarter coming in a little bit better than we signaled to you all during our third-quarter earnings call.
+In addition, this quarter we adopted FVA, which is for funding valuation adjustment, and incurred a $497 million charge against our sales and trading results as a result of that adoption. And as we normally provide to you, our credit spreads tightened; and this tightening caused a negative charge for DVA in the trading account of approximately $130 million during the quarter.
+Expenses during the quarter were well managed. Our total noninterest expense in the fourth quarter was $14.2 billion, which included approximately $400 million in litigation expense during the quarter.
+This level of expense is the lowest level of expense that we've seen since the Merrill Lynch merger. And credit costs during the quarter improved, as our provision for credit losses was $219 million and included $660 million in the release of reserves.
+On slide 4, reduced asset levels in our Global Markets business drove our balance sheet levels lower, coming down $19 billion from the third quarter of 2014. And we finished at just over $2.1 trillion in assets. We continued our focus on balance sheet optimization for liquidity as we continued to shift our discretionary portfolio into HQLA-eligible securities from non-HQLA loans and also improved our deposit composition.
+As we signaled to you in the third-quarter earnings call, discretionary portfolio first-lien loans declined from the third quarter of 2014 levels; but we were very pleased with the loan growth we saw in our core businesses during the quarter. If we look in those core businesses, Global Banking loans increased $4 billion during the quarter; within Wealth Management, loan balances grew $3 billion; and our US consumer credit card receivables increased $2.9 billion during the quarter.
+We did have a $2.7 billion decline in our direct and indirect portfolio as we transferred a portfolio of student loans to held-for-sale. Our deposits grew from the end of the third quarter while short-term funding declined.
+We executed another successful issuance of $1.4 billion of preferred stock early in the third quarter, and that benefited regulatory capital. Shareholders equity improved with both the earnings growth as well as the improvements in AOCI. As a result of that, our tangible book value increased to $14.43 per share, and our tangible common equity ratio improved to 7.47%.
+If we move to regulatory capital on slide 5, under the Transition rules our CET1 ratio was 12.3%. If we look at our Basel 3 regulatory capital metrics on a fully phased-in basis, CET1 capital improved $6.2 billion during the quarter; that was driven by earnings, deferred tax utilization, as well as the improvement in AOCI.
+Our operational risk-weighted assets during the quarter increased again. They now represent 34% of total risk-weighted assets. But notwithstanding that increase, we were able to keep our Basel 3 Advanced ratio at levels consistent with what we saw at the end of the third quarter.
+Under the Standardized Approach, our CET1 ratio improved from 9.5% in the third quarter of 2014 to 10% at the end of the year.
+If we look at our supplementary leverage ratios, we've done a lot of work over the past year to improve those. Obviously, the fully phased-in kick in in 2018. We look at where we ended the quarter: at our Bank Holding Company, our SLR ratio was at 5.9%; and at our primary banking subsidiary, BANA, we were at approximately 7%.
+We turn to slide 6, funding and liquidity, long-term debt ended the quarter at $243 billion, down $7 billion from the third quarter of 2014. We've done a lot of work over the past couple years to smooth out our Parent Company maturity profile; and as you can see, we have $22 billion scheduled to mature in 2015 and comparable amounts over the next four or five years.
+Our Global Excess Liquidity Sources reached a record level during the quarter and closed at $439 billion. Within those Global Excess Liquidity Sources, our Parent Company liquidity improved $5 billion from the end of the third quarter to $98 billion at the end of the year.
+Time to required funding increased to 39 months during the fourth quarter. And during the quarter we continued to increase our estimated liquidity coverage ratios at both the consolidated as well as at the Bank levels. At the end of the year, we are well ahead of the 100% fully phased-in 2017 requirement at the consolidated level, and at more than 90% at the Bank level, which is well ahead of the 80% phased-in 2015 requirement, and are well positioned to achieve the 2017 requirement.
+If we turn to slide 7, on net interest income, our net interest income on an FTE basis was $9.9 billion, down from the third quarter of 2014 as a result of the more negative market-related adjustment I mentioned a moment ago, which also drove a reported net interest yield decline of 11 basis points.
+Lower long-term rates coupled with a flattened yield curve resulted in adjustments to our assumptions to our bond premium amortization, which drove the $578 million of market-related adjustments in the fourth quarter versus the negative $55 million we saw during the third quarter of 2014. If we adjust this market-related adjustment, NII was $10.4 billion and declined less than $100 million from the third quarter of 2014, despite the challenging rate environment we saw during the fourth quarter. The adjusted NII decline was driven by the impacts of the lower discretionary loan balances within the Consumer Real Estate portfolio.
+If we look at net interest yield on an adjusted basis, it was up a touch from the third quarter of 2014 to 2.3%. Given the movement lower in rates that we saw during the quarter, we did become more asset sensitive, such that a 100 basis point parallel increase in rates from what we saw at the end of the year would be expected to contribute roughly $3.7 billion in NII benefits over the course of the next 12 months. And given the movement in rates, the sensitivity is now more evenly weighted to both long-term as well as short-term rate moves.
+Before we leave this slide I do want to remind you that during the first quarter of 2015 we have two fewer interest accrual days than the fourth quarter of 2014, which will negatively impact NII by a couple hundred million dollars.
+Noninterest expense -- and I moving to slide 8 -- was $14.2 billion in the fourth quarter of 2014 and included approximately $400 million in litigation expense. As I said earlier, this is the lowest quarterly expense amount that we have reported since the Merrill Lynch merger.
+If we exclude litigation, total expenses were $13.8 billion, which declined $300 million from the third quarter of 2014 and was driven by our LAS initiative cost savings as well as lower revenue-related incentive costs within our Global Markets business. If we compare these expenses to the fourth quarter of 2013, we were down $1.2 billion, driven by LAS cost savings, new BAC benefits, and, to a lesser degree, the lower revenue-related incentives.
+Legacy Assets and Servicing costs, ex-litigation, were $1.1 billion in the quarter, $200 million lower than the third quarter and $700 million lower than the fourth quarter of 2013. As we continue to work through these delinquent loans, we expect these quarterly costs will come down a few hundred million dollars more by the end of 2015.
+Headcount was down 5,800 during the quarter. And as we look at expense, a reminder that we will record our normal annual retirement-eligible incentive cost in the first quarter of 2015; and we expect that number to be roughly $1 billion, consistent with what we've seen the past couple years.
+We turn to asset quality on slide 9. Credit quality continued to improve during the quarter. Q4 provision expense was $219 million, and we released a net $660 million of reserves, given the continued pace of asset quality improvement, particularly within our Consumer Real Estate portfolio.
+Reported charge-offs were $879 million and declined from the third quarter of 2014. I would remind you both periods of net charge-offs included NPL sales and other recoveries, and the fourth quarter included approximately $150 million of costs related to actions that were taken in relation to our DOJ settlement, which were previously reserved for.
+If we exclude the recoveries and the DOJ component, charge-offs in the fourth quarter were just over $1 billion versus a similarly adjusted net charge-off amount of $1.2 billion in the third quarter of 2014. Loss rates on this same adjusted basis were 47 basis points in the fourth quarter of 2014 versus 52 basis points that we saw in the third quarter of 2014.
+Let's now move to the business segment results, which we start on slide 10 with Consumer and Business Banking. Our results within Consumer and Business Banking show solid bottom-line performance, with earnings of $1.8 billion. Those were down from the fourth quarter of 2014 due largely to lower release of loan loss reserves and, to a lesser degree, higher tax rates.
+The business generated a solid 24% return on allocated capital during the quarter. Revenue was up slightly on a year-over-year basis despite net interest income being down, as our noninterest income grew more than 5%, with a strong improvement in card income.
+We look at customer activity during the quarter, we had solid deposit growth; and our rates paid is now at 5 basis points. Loans on a linked-quarter basis increased seasonally, driven by US consumer credit card.
+Our card issuance remains very strong, at 1.2 million new cards in the fourth quarter of 2014, of which approximately 67% of those were issued to existing customers. We look at all of 2014, we issued 16% more cards in 2014 than 2013 and increased the percentage of the issuance to our existing customers, which is consistent with the overall strategy. Credit quality improved again, as our US credit card loss rate fell to 2.7% and continues to have a very strong risk-adjusted margin at just below 10%.
+Our Merrill Edge brokerage assets grew to $114 billion, which is up 18% year-over-year, on new accounts, strong account flows, as well as higher market levels. Our mobile banking customers reached 16.5 million in the fourth quarter, and now 12% of all customer deposit transactions are done through mobile devices.
+If we adjust for portfolio divestitures, combined debit and credit purchase volume was up 4% relative to the fourth quarter of 2013 and, if we back fuel out, was up 5%.
+Let's move to Consumer Real Estate Services on slide 11. The improvement in the results compared to the third quarter of 2014 was driven by the third quarter of 2014 DOJ settlement, which impacted expense, provision, as well as income tax.
+Revenues did increase slightly over the third quarter of 2014 while expense, even after we exclude litigation, declined from the third quarter as both fulfillment costs on the production side and costs on the delinquent loan servicing side were down from the third quarter. Core production revenue and servicing fees were both stable compared to the third quarter of 2014, while servicing income did benefit from better MSR hedging results.
+On the production front, first-mortgage retail originations were stable with the third quarter of 2014 at $11.6 billion, and the pipeline was consistent with the third quarter of 2014 as well, albeit up on a year-over-year basis. On home equity, we're the number-one lender; and line originations during the quarter were $3.4 billion, in line with the third quarter of 2014 and up north of 70% on a year-over-year basis. The credit quality of those second-lien originations remains very strong, with average FICO scores over 790 and combined loan-to-value ratios at less than 60%.
+Expenses in the segment did include $262 million of litigation costs in the fourth quarter versus $5.3 billion that we saw in the third quarter of 2014. We continue to work through and resolve our MBS securities litigation matters, including this quarter the FHLB of San Francisco matter. With the resolution of that, we now estimate that we've resolved approximately 98% of the unpaid principal balance of all RMBS as to which RMBS securities litigation has been filed or threatened against all Bank of America related entities.
+LAS expense, ex-litigation, this quarter was just over $1.1 billion as we achieved our first quarter of 2015 goal a quarter ahead of schedule. Importantly, the number of 60-plus-day delinquent loans that we have dropped to 189,000 units, which is down 32,000 or 14% from the third quarter of 2014.
+If we turn to slide 12, Global Wealth and Investment Management delivered another strong quarter. Pretax margin was strong. Net income was just over $700 million, but was down from the fourth quarter of 2013 as solid fee-based growth was offset by lower net interest income and higher expense.
+Record asset management speeds offset some weakness we saw in transactional activity and still drove a 7% increase in noninterest revenue relative to the fourth quarter of 2013. Our asset management fees now represent 45% of revenue within this segment, up from 40% a year ago.
+Noninterest expense did increase from the fourth quarter of 2013 as a result of higher performance-based incentives as well as increased support costs. We increased the number of financial advisors; and year-to-date retention of our experienced financial advisors remains at record levels.
+Return on allocated capital was 23%. Client balances were nearly $2.5 trillion, up $36 billion from the third quarter of 2014, and were driven by strong client balance inflows.
+Long-term AUM flows were $9 billion for the quarter and represented the 22nd consecutive quarter of positive flows. Our record loan flows during the quarter reflect $3 billion in growth over the third quarter of 2014 in securities-based as well as residential mortgage lending. And our period-end deposits were up $7 billion or 3% from the third quarter of 2014.
+If we turn to slide 13, Global Banking earnings for the quarter were $1.4 billion, up from the fourth quarter of 2013 on lower credit cost and, to a lesser degree, reduced expenses.
+Results were partially -- the net income was partially offset during the quarter on a year-over-year basis by lower investment banking fees off of what was a record level in the fourth quarter of 2013. Return on allocated capital was strong at 18%.
+If we look at the investment banking revenues of north of $1.5 billion, we feel very good about the results. They were up on a linked-quarter basis, and our investment banking team executed very well in a tough distribution environment, given the volatility of rates as well as energy prices.
+Provision was a slight benefit in the quarter and reflected continued low loss rates and a small reserve release compared to the year-ago period, which included a reserve addition of $434 million. If we look at the balance sheet, we'd point you to average loans were $271 billion, up $3.7 billion from the third quarter of 2014 levels.
+We switch to Global Markets on slide 14. The business reported a modest loss in the quarter, but that did include a $497 million charge to implement FVA.
+For those unfamiliar with FVA, funding valuation adjustment is an adjustment to the fair value of uncollateralized derivative trades to account for the present value of funding cost. This is an accounting practice many of our peers have also adopted; and as you all know, this is a one-time transition cost for implementation.
+Separately, net DVA for the quarter was a loss of $130 million versus a loss of $617 million during the fourth quarter of 2013. Earnings are down from the fourth quarter of 2013 as a result of a decline in sales and trading revenue that was mostly offset by a decline in expense. If you recall, on our fourth-quarter 2013 call, FICC sales and trading during that quarter included $220 million in recoveries on legacy positions in the fourth quarter of 2013.
+Sales and trading, adjusting for net DVA and FVA, were $2.4 billion in the fourth quarter of 2014 versus $2.8 billion in the fourth quarter of 2013, after we adjust for the recoveries. On this same adjusted basis, FICC sales and trading revenues of $1.5 billion compare to $1.9 billion in the year-ago period.
+December results were particularly challenging during the quarter, with the toughest areas of performance being the credit-sensitive businesses within FICC, most notably mortgages and credit trading, which are generally our largest trading revenue-related businesses. On the positive side, we saw increases in both FX and rates revenues versus the prior year that were driven by increased volatility, given global deflationary expectations leading to the US dollar strengthening.
+Equity sales and trading was up modestly from the fourth quarter of 2013, as increased volatility was a positive for secondary flows across both our cash and derivative trading businesses.
+On the expense front, the decline reflects litigation expense of $655 million in the fourth quarter of 2013. If we take that litigation expense out, expenses still declined 5% from the fourth quarter of 2013 as the incentives were reduced to align with the revenue performance that we saw.
+On slide 15, All Other, the results in the fourth quarter of 2013 reflect lower revenue from NII, largely associated with the market-related adjustments that we've discussed, as well as lower securities gains and equity investment income, partially offset by gains on the sale of certain loans with long-term standby agreements that were converted to securities. Significant equity investment income is largely a thing of the past for us, as we've reduced the size of the principal investing positions in the business as well as strategic positions, and should be modeled accordingly.
+You'll also notice we took additional reserves for the payment protection insurance, but at a lower level than we saw during the third quarter of 2014. Our fourth-quarter 2014 expense is down year-over-year on less nonmortgage litigation expense and lower infrastructure costs.
+Our effective tax rate for the quarter was 29%, and I would expect the tax rate for the Company in 2015 to be in the low 30%s absent any unusual items.
+One other thing I want to mention before wrapping up is some movement in our business lines that you'll see as we report them to you in 2015. In the first quarter of 2015, we expect to align Business Banking into our Global Banking business, which takes this more commercial business out of our core Consumer and Business Banking unit. In addition, we expect to move the home loans portion of our Consumer Real Estate Services business to Consumer Banking, as this product remains integral to their relationships with us.
+So to conclude my comments, as we look at both 2014 and the fourth quarter of 2014, capital and liquidity reached record levels, which provides a solid base to support our businesses that hold leading or top-tier positions in the industry. We continue our focus on expense and operating leverage after reaching significant milestones this year on both New BAC as well as LAS cost-saving initiatives.
+We reported a quarter of much lower legacy assets and servicing operating and litigation costs, which have been burdening our reported results. Asset quality continued its trend of improvement against a slowly improving US macroeconomic backdrop, and we continue to remain well positioned to benefit in an environment where rates start to increase.
+With that, we'll go ahead and open it up for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+(Operator Instructions) Betsy Graseck, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [2]
+--------------------------------------------------------------------------------
+Hi, good morning. Hey, I just want to talk a little bit about the asset sensitivity and how we should be thinking about that from here. In particular, as you know, the long end of the curve has come down since the end of the quarter.
+So just wanted to understand: is that FAS 91 effect Q-to-date given what the long end of the curve has done? And then maybe you could speak to what you are doing to try to minimize any further pressure.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [3]
+--------------------------------------------------------------------------------
+Sure. A couple things. If you recall, Betsy, we've historically been saying that the 100 basis points is in the $3.1 billion to $3.2 billion range. And think of the increase to $3.7 billion more or less just representing the recapturing of the FAS 91 that we saw this quarter.
+That's why we referenced that there's been more asset sensitivity on the long side. The short-end side really hasn't changed at all.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [4]
+--------------------------------------------------------------------------------
+Sure. Then given the fact that the 10-year is now yielding like 1.8% or so, should we assume -- like if we end the quarter in 1Q at 1.8%, that the same type of 10 basis points down draw is FAS 91-affected, the same in first quarter as it was in fourth quarter? Or is it, because you're more asset sensitive, there is a little bit higher impact?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [5]
+--------------------------------------------------------------------------------
+Yes, it's a good question. I think when we looked at this last night, that the movement that we've seen so far in the first quarter of 2015 is almost identical to what we saw during the fourth quarter. So if you were to snap it off of what we saw last night, it would be a comparable-type number, realizing we still have two and a half months ago.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [6]
+--------------------------------------------------------------------------------
+Okay. Is there any give-back in refi activity that you are expecting?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [7]
+--------------------------------------------------------------------------------
+Yes, it's, say, if we look at -- we referenced in refi activity increased as a percentage of overall mortgage production in the fourth quarter. And as I said in my prepared remarks, if we look at the pipelines and compare the mortgage pipeline at year-end relative to the comparable period, it's up pretty significantly.
+We'll just have to see how that plays out, realizing that the first quarter does tend to be a little bit seasonally slow.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [8]
+--------------------------------------------------------------------------------
+The other thing, Betsy, is that in January to date there's been a stark move in the amount of applications coming in -- a very stark upward move due to this last rate fall-off. So as those things close through we'd expect to see some pickup in production this quarter from the refi.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [9]
+--------------------------------------------------------------------------------
+Got it. Okay. That's super. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+John McDonald, Sanford Bernstein.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [11]
+--------------------------------------------------------------------------------
+Hi, Bruce. Just wanted to follow up on the NII. On the core side of NII, ex- the FAS 91, your core NII held up well despite what you'd indicated in October about being conservative with the buy ticket.
+I guess, how did you hold the core in on NII? And how are you navigating that now in what feels like an even more difficult environment for reinvesting cash flows today, with the 10-year where it is?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [12]
+--------------------------------------------------------------------------------
+Sure. That's a good question, John. I think there are a couple things.
+The first is, if you look at in the quarter -- I think we did a good job with respect to the overall debt footprint, which was down $7 billion, which helped us out a little bit. Secondly, if you look at we were able to get another basis point out on the deposit front. And throughout the quarter we saw some loan growth that was a little bit better than what we would have seen when we spoke to you during the quarter.
+The other thing that we did see during the quarter is we were able to invest and get some of the investments in the portfolio in -- I believe it was in mid-November when rates did back up. And as we go forward, we do have liquidity to invest in the second and third months of the quarter and will be prudent with how we invest it relative to OCI risk.
+The other thing I would say just before we leave this, John, that I should've referenced with Betsy's point is that it's easy to focus on the FAS 91 because we're resetting the amortization of premium. I think the other thing you need to realize that we did see in the quarter is, with the rate movement up, while you do have a negative on FAS 91 you've got a significant positive from a capital perspective, where OCI in the quarter from the rate movement was north of $3 billion.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [13]
+--------------------------------------------------------------------------------
+Got you, got you. So on the core piece, Bruce, do you expect it to be more challenging, to hold in to that $10.4 billion with the 10-year where it is? Does it make it more difficult? And what kind of -- how should we think about the risk to the $10.4 billion if rates stay low?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [14]
+--------------------------------------------------------------------------------
+I think, as I said in my comments, the $10.4 billion you really need to start out with at about $10.2 billion because you've got two less days during the quarter. Then say there is a little bit of headwind to hold that on a core basis, and we are obviously doing everything we can to keep it as close to $10.2 billion as we can, realizing that we're not going to take outsized OCI risk.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [15]
+--------------------------------------------------------------------------------
+Okay. Then shifting gears on expenses, you got the LAS target a quarter ahead of time. Do you have a year-end target? I think you said you expect to continue to reduce the LAS to $1.1 billion. Can you just clarify that?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [16]
+--------------------------------------------------------------------------------
+Yes, I think as we look out and we look at the plans and actions along with the progress that we've made on the 60-plus-day delinquents, I think broadly speaking -- and as you know, this number can bounce around a little bit -- that we'd look to have the LAS expenses down to the $800 million type area by the end of the year. And we are obviously working through plans as we look out to 2016 to continue to drive that number south of $800 million as we go forward.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [17]
+--------------------------------------------------------------------------------
+Okay. How should we think about the core rest of Bank of America expenses where you came in nicely at the $12.7 billion for the fourth quarter? Obviously, you mentioned the stock option expense stuff in the first quarter; but as we think about 2015, what are you hoping to do on the core expense base?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [18]
+--------------------------------------------------------------------------------
+You know, John, I think -- I will answer at a broad level and then Bruce can touch in. So if you think about it in the fourth quarter, a couple things happened.
+One is, you've got to remember the market spread, that revenue, it was down. So be careful not to forget that as we see it coming back this quarter, expect it to rise as it traditionally does in first quarter: that would be an increased expense -- which you should want, obviously.
+But from the rest of it, it's basically a continuous process of taking out expenses and then either bring in the bottom line or reinvest in the growth. So to give you a straightforward way, in the fourth quarter the reduction to headcount of approximately 5,000, 1,100 or so was LAS and the rest was core activity where we just keep drawing down the expense base. At the same time, we've added salespeople during that quarter.
+So what we're trying to do is -- I wouldn't expect it to fall dramatically. But I'd expect you guys to be able to see us continue to make strong investment in sales capacity, technology, products while holding expenses relatively flat with a slight downward bias, irrespective of -- you just got to be careful of compensation related to revenue, because we'd all want that to be higher.
+
+--------------------------------------------------------------------------------
+John McDonald,  Sanford C. Bernstein & Company - Analyst    [19]
+--------------------------------------------------------------------------------
+Okay, okay. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+Brennan Hawken, UBS.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [21]
+--------------------------------------------------------------------------------
+Yes, hi; good morning. In FICC, seems a little bit below what certainly I was looking for. I know you highlighted some of the difficult markets that you are large in. Was there any specific positional pain, given what we saw in some of the credit spreads and some of the movements there?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [22]
+--------------------------------------------------------------------------------
+No, not at all. You have to go back to the core premise that we talk about, which is that the Banking and Markets businesses are run as an integrated business. And a lot of the activity that we see within the Markets area is in market making and other things that are done off of the new issue platform from an underwriting perspective.
+I think what we saw during the quarter, particularly in December, was that there was a significant slowdown as we saw overall volatility in the markets from both a new issue as well as a secondary market perspective that flowed through. But there were not any -- if you're looking, there were no losses or particular pain points within the Global Markets piece of the equation during the quarter.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [23]
+--------------------------------------------------------------------------------
+Okay, thanks. That helps. Then can you guys add any comment to the press reports we've seen recently about you all rationalizing the PB business and cutting ties to 150 hedge fund clients?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [24]
+--------------------------------------------------------------------------------
+Well, I think this is a customer profitability exercise that -- as we look at driving the franchise, the way Tom and [Fab Gall] and the team have done a good job of repositioning the equities business, we have to constrain the prime brokerage a bit due to size, because it's lower balance sheet return, as you would be aware of.
+But importantly, it's a customer profitability: we're looking for customers who will use us with multiple products and services, whether it's fixed income, equities, in all aspects of fixed income. So as we take the scarce resource, which is the GAAP balance sheet and the RWA balance sheet, and allocate it across customers, we've got to make sure we get the returns, and this was a natural reflection of it.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [25]
+--------------------------------------------------------------------------------
+Should we expect to think about some revenue headwinds in your equities business as we model out 2015, as a result of some of those efforts?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [26]
+--------------------------------------------------------------------------------
+I would say no; it's all pretty much through it right now. As you look at the revenues quarter-to-quarter they run plus or minus $1 billion, and Fab and the team have done a good job of increasing the yield from the other clients at the same time. So that absent market forces, I wouldn't expect it to have much of an effect.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [27]
+--------------------------------------------------------------------------------
+Terrific. Okay. Then helpful to hear about the target of around $800 million for LAS by year-end and then driving it lower in 2016. Can you help us think about how you think about that number to zero?
+Because I mean, ultimately, that's -- given the title, the L in the LAS, right? That's got to go to zero eventually. How should we think about that?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [28]
+--------------------------------------------------------------------------------
+Well, you've got the (inaudible). There's and in there, so it is all the servicing expense in the Company is in that unit, for all good loans and bad loans. So it doesn't go to zero, but it's got to get a lot better.
+Because if you start to noodle on the 4 million or so units we have in first-mortgage servicing, and think about the annualized cost, we've got to get it down significantly, make servicing mortgages make sense to us. But that's a project that we are working against doing it the right way for the customer, doing it the right way for the regulatory environment, and the consent orders and all the things that have gone on, as you're well aware of. So we've just got to keep peeling that away.
+So when we say $800 million or so, that is the next way station on our train ride here. But it's got to go a lot further than that for the 3.5 million to 4 million of good units we have, so to (technical difficulty)
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [29]
+--------------------------------------------------------------------------------
+Okay. So no indication about where that settling-out level might ultimately be? Even if not a win, but kind of what the number would be?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [30]
+--------------------------------------------------------------------------------
+Well, I think -- yes, we've talked about $0.5 [million], but I'm not sure that's a great performance in that over time either. So just assume that there is nobody more interested in driving that number down to a normalized servicing cost than this Company.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [31]
+--------------------------------------------------------------------------------
+Fair enough. And then, last one for me. You guys hit on in the Wealth Management business and the margin there, support costs and revenue-related comp. Could you maybe quantify how much each of those factors impacted the margin change quarter-over-quarter?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [32]
+--------------------------------------------------------------------------------
+Yes. I think if you look at the -- a couple things. The first is that from a margin perspective, you had a little bit of a headwind with NII being lower than what it was. But as you look at the support costs during the quarter, I would think of that as being about 200 basis points on the margin during the quarter that we saw.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [33]
+--------------------------------------------------------------------------------
+Great. Thanks a lot.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+Glenn Schorr, Evercore ISI.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [35]
+--------------------------------------------------------------------------------
+Hi. Thanks very much. I wonder if we could get your best comment that you can give us on energy-related exposures. In your Q you have a general comment on energy and $20 billion. But if you could break it down a little bit more, what's secured, what's not secured, what's investment grade, what's not, and just how overall you feel your position there -- it would be helpful.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [36]
+--------------------------------------------------------------------------------
+Sure. I think if we look at the amount of funded exposure across what we refer to as oil and gas, that the amount of funded exposure, which includes derivative exposure, was roughly $23 billion at the end of the year. As you look at that $23 billion, I would think of it generally as 60% that's directly reflected or affected by the price of oil. There are a lot of those that are not.
+So you've got roughly $22 billion, $23 billion funded; 60% directly affected by oil. Well north of 80% of that are investment-grade borrowers. And for those noninvestment-grade borrowers, they are obviously secured facilities and in most cases have formulas upon which they can borrow based on the value of the assets that we are secured by.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [37]
+--------------------------------------------------------------------------------
+I think if you think overall, one of the things that give you a perspective that we see is in the consumer spending in January -- debit and credit cards basically. We've seen the spending go up by 3%. And if you look at the fuel side of that, it's about 5% of that total spending, and it is down 28% year-over-year.
+So the people are getting a benefit. Our consumer customers are getting a benefit, but they are re-spending that benefit and the overall spending levels are growing through it.
+So there is competing -- there is a technical risk to the oil-producing companies that Bruce just talked you through. But the overall economy, even in the first week or so of January, we're seeing the benefit to the consumer very starkly in the year-over-year comparison.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [38]
+--------------------------------------------------------------------------------
+I definitely appreciate all that. You said that was the funded to oil and gas. Is commitments a larger number, I think, than that? And do you have the ability to pull back on the commitments?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [39]
+--------------------------------------------------------------------------------
+Yes, well, I think on average the fundings are roughly 50% of what the commitments are. As it relates to the pulling back of commitments, I think what I would point to and what our teams did a very good job with is we obviously have commitments in the originate-to-distribute piece, which if we look at, we ended the year I believe with two commitments of investment-grade borrowers on an originate-to-distribute basis, one of which has had a significant positive event from a financing perspective already this year. The other is a single-A credit that will get done in the second quarter.
+And outside of the investment-grade originate-to-distribute, I think there was a couple hundred million dollars that still needed to get done. So you're not pulling commitments from borrowers; but as it relates to commitments that needed to be distributed, the teams have done a very good job.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [40]
+--------------------------------------------------------------------------------
+Okay. I don't want to put words in your mouth, but it sounds like you are semi-comfortable with the positioning. There will be some hits along the way, but this is not a major risk to the portfolio? Again, I don't want to put words in your mouth.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [41]
+--------------------------------------------------------------------------------
+We're comfortable with the positions. You should assume as we are making these commitments in environments where oil is higher, we're continually running and stressing those portfolios to be comfortable with the commitments.
+And as Brian referenced, to the extent that we are in a prolonged period where these prices persist, to the extent that there are costs that run through because of difficulties that a commercial or corporate borrower may have, that as we look across the overall credit platform you'd expect there to be offsets, given what we're seeing with consumers and other people that are benefiting from lower energy prices.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [42]
+--------------------------------------------------------------------------------
+Okay, that's helpful. Last one from me is I didn't hear anything on TLAC. If you could tell us where you think your ratio shook out, net of the conservation buffer and the SIFI buffer, that would be helpful.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [43]
+--------------------------------------------------------------------------------
+I think if you look at where we are from a TLAC perspective, we are generally in the 21% type area. And embedded in that 21% type area is the fact that structured notes -- we've assumed for that purpose that we would not benefit from structured note funding. And if we refinanced out those structured notes you'd pick up another 1% to 2% based on the current size of the debt footprint.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [44]
+--------------------------------------------------------------------------------
+Okay. I just want to make sure: the 21% is net of the conservation buffer and your SIFI buffer, or gross of?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [45]
+--------------------------------------------------------------------------------
+No, it's gross of. That is a gross of. So you're roughly 21%, call it, plus another 1% to 2% for structured notes; and then depending on the exact treatment of the buffers as we go through that, that number would be reduced by the buffers.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [46]
+--------------------------------------------------------------------------------
+Got it, okay. Perfect. Thank you very much.
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+Jim Mitchell, Buckingham Research.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research Group - Analyst    [48]
+--------------------------------------------------------------------------------
+Good morning. Just a quick question on the balance sheet and NII. Appreciate the efforts to keep NIM flat; but to really get NII growing, we've got to start to see, I guess, the balance sheet on a net basis grow.
+I think your balance sheet was down close to $25 billion this quarter. At what point do we start to see the net balance sheet -- the restructuring of the balance sheet start to give way to growth?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [49]
+--------------------------------------------------------------------------------
+Yes, I think what you're going to see as we go forward is that, as we look out into our forecasted models, we would expect there to continue to be strong deposit growth throughout 2015. And as we referenced before, obviously the goal with that deposit growth is very much a focus to grow loans within our core customer segments.
+As I referenced, we saw that within the Global Banking space this quarter. We saw it within Wealth Management. We are seeing pickups in overall mortgage activity.
+So I think you're likely to see the balance sheet creep up as deposits come in and as we look to grow loans. I just want to make sure, though, that we remind you that we will continue to see the discretionary portfolio that has got whole loans in it, that in this rate environment they will continue to repay. So as you judge how we do on loan growth, you need to look at the core businesses.
+As I said, we would expect to start to see the balance sheet move up. And at the same time, we're trying to get things that don't have a return and aren't core to what we do off. But to your point, I think we are largely through that.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [50]
+--------------------------------------------------------------------------------
+Yes, and I think if you think about it, say two years ago I think we cited about $100-odd-billion of noncore loans; that's down around to $30 billion. And a dominant part of that is still in the home equity area, quite frankly.
+So in the card business and in the Business Banking area where we had some stuff that was put on by some predecessor company, we're largely through all that. And that's why you're seeing some growth there.
+So the card you saw grow; it's seasonal, but it grew and it started to -- it's been stable for a number of quarters. The good home equity side is growing quite strongly.
+The stuff we're running off in home equity starts is high charge-off contents, a better decision economic for the Company to run it. But the rest of the loan balances, we ought to see grow, with the exception of the discretionary residential mortgage holdings which will continue to run down, based on a better view of what we want to do for [ALCO] management going forward.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research Group - Analyst    [51]
+--------------------------------------------------------------------------------
+Okay. I think, Bruce, to your point, the deleveraging around trying to improve the leverage ratio is -- the impact of that should be easing going forward. Is that what you're saying?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [52]
+--------------------------------------------------------------------------------
+That's correct.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research Group - Analyst    [53]
+--------------------------------------------------------------------------------
+Okay. Just one last, a follow-up on -- I don't know if you mentioned this: where you guys are in the NSFR.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [54]
+--------------------------------------------------------------------------------
+Yes, we've done a lot of work. We have not put anything out public on that, but as we've looked through it and sorted through it, we do not see that being a constraint as we go forward.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research Group - Analyst    [55]
+--------------------------------------------------------------------------------
+Okay, great. That's it for me. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [56]
+--------------------------------------------------------------------------------
+Matt O'Connor, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [57]
+--------------------------------------------------------------------------------
+Good morning. The capital ratios grew more than expected. Obviously the decline in rates helped the positive earnings, and you mentioned the DTA consumption.
+As we think about 2015 and the drivers of capital, is it more of the same? Or is there, call it, optimization overall? Not just the loan runoff that you address, but as we think about -- you've had Final Rules for the last few months; there are still some adjustments to the business throughout.
+How should we think about the capital build? And if you have an estimate for 2015, that would be interesting as well.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [58]
+--------------------------------------------------------------------------------
+Sure. We're not going to provide an estimate, but what I would say is that, as you look at overall capital levels, if you start with the numerator, as we project out and look at the earnings stream we think that at least through 2015, and possibly into the first part of 2016, that on average -- and you can have some quarterly bounces around based on timing and payments -- but that generally we should accrete capital over the course of at least four and up to six quarters largely based on the pretax earnings of the Company, as opposed to the after-tax earnings. And that's what you saw during the fourth quarter.
+The other thing on the numerator, as I referenced, that there is -- and if we were to snap a quarter today, there would be OCI benefit from the downward movement in rates.
+As it relates to what we are seeing on the risk-weighted assets side, I would say generally we continue to benefit, although it declines a little bit each period. We continue to benefit from the runoff of some of the Global Markets positions that would have been put on in the 2005 to 2008 time frame that tended to have tenors of 7 to 10 years.
+In addition to that, as we continue to have payoffs and as we continue to move out some of the tougher Consumer Real Estate assets and put higher-quality real estate assets on that are better credit borrowers, while the asset levels may stay comparable you do have an RWA pickup from that as well.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [59]
+--------------------------------------------------------------------------------
+On RWA, any numbers you can provide in terms of how much benefit you get from the -- I guess just priced on the credit correlation book and some of those contracts and the real estate running off, just those two pieces?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [60]
+--------------------------------------------------------------------------------
+No, I mean I think as you look forward, these tend to be -- I think outside of op-risk quarter we had roughly $30 billion of risk-weighted asset benefit under the Advanced Approach. Roughly half of that was in the consumer books, half of it was in the wholesale books. I think you'll continue to see benefits, but I don't think you'll see the quarterly benefit of that magnitude on a go-forward basis.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [61]
+--------------------------------------------------------------------------------
+Okay. Then just separately, the home equity charge-offs increased a fair amount versus 3Q. Obviously, 3Q is a very low level. But remind me what's going on there.
+I think there was an accounting or methodology change a year ago. Has that fully worked through? Or is there a seasonality or (multiple speakers)? What's going on?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [62]
+--------------------------------------------------------------------------------
+The biggest thing you had in home equity this quarter is that I believe it was roughly $150 million that went through charge-off that was related to the DOJ settlement. So realize you have $150 million of charge-off, $150 million of reserve; so from a net P&L perspective, it was a push.
+But you did have that during the quarter, and it's the reason that we wanted to give you the core charge-off number Q3 to Q4. Because as we implement the DOJ settlement you will see both charge-off and reserve release come out in each of probably the first and second quarter; then we should be largely through that.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [63]
+--------------------------------------------------------------------------------
+Okay. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [64]
+--------------------------------------------------------------------------------
+Steven Chubak, Nomura.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [65]
+--------------------------------------------------------------------------------
+Hi, good morning. Bruce, I was hoping you could maybe help explain what prompted the increase in operational risk RWA? The 34% I guess makes you an outlier relative to some of your peers, whereas previously you were more in line.
+I know the process typically is you submit the models to the regulators and/or the Fed and then they give you feedback. I wanted to know: was the increase prompted by the feedback from the regulators themselves as part of the annual review? Or was it what you determined based on your own internal models?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [66]
+--------------------------------------------------------------------------------
+Answer the question slightly differently, which is that as we work through an iterative process with our regulatory supervisors, we do believe at this point that, from an op-risk perspective, that we are adjusted and the amount of op-risk RWA that we have now is consistent with what you would need to exit parallel run.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [67]
+--------------------------------------------------------------------------------
+Okay, understood. So we shouldn't expect any further increases as a percentage of RWA going forward; or is it simply too early to make that determination?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [68]
+--------------------------------------------------------------------------------
+We think with respect to op-risk RWA that we are there. We obviously need to get through those elements that are the rest of parallel run. But from an op-risk perspective we feel like we're there.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [69]
+--------------------------------------------------------------------------------
+Okay. That's really great. Then just one more quick one for me. I didn't hear in the prepared remarks any color on the investment banking backlog and didn't know if you can give us an update there as well.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [70]
+--------------------------------------------------------------------------------
+Yes, it's interesting, and we have to be a little bit careful. I would say as we looked at the backlog in the pipeline, particularly from an M&A perspective, that we feel very good about where the pipeline was at year-end. It's one of the stronger year-end pipelines that we have.
+I think the only tone of caution I would say is that we've obviously seen a little bit more volatility in both the fixed income and equity new issue markets. But as it relates to the amount of business that we are winning, that's getting queued up and is in the pipeline, we feel very good about that. It was a good back backlog at year-end.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Asset Management - Analyst    [71]
+--------------------------------------------------------------------------------
+Okay. Great. That's it for me. Thank you for taking my questions.
+
+--------------------------------------------------------------------------------
+Operator    [72]
+--------------------------------------------------------------------------------
+Eric Wasserstrom, Guggenheim.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [73]
+--------------------------------------------------------------------------------
+Thanks. Good morning. I just wanted to follow up on a couple of topics that have been touched on already. Maybe just starting with the risk-weighted asset discussion once more, I just want to make sure I understand all the puts and takes of what's going into the risk-weighted asset calc.
+It sounds like on the positive side, obviously, there is the benefit of a GAAP balance sheet reduction as well as the trade-off between lower-quality and higher-quality assets. And it sounds like the operating-risk component is now fully baked in. But are there any other components that could drive that up in a way that's different from what's going on, on the GAAP balance sheet?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [74]
+--------------------------------------------------------------------------------
+I think the only thing that's out there is that, as part of exiting parallel run we are working through with our supervisors the different wholesale and other credit models that you need to exit parallel run. So we are working through that.
+But I think absent that, you're largely at the point of looking at and you'd expect that the RWA is going to largely follow the GAAP balance sheet. The one thing, and I think you all know this, where you could possibly diverge from that is that there is a procyclicality to the extent that you have volatility in the Markets businesses as it relates to the stress VaR calculations that go into the risk-weighted asset. But outside of that, you would directionally expect it to follow the GAAP balance sheet.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [75]
+--------------------------------------------------------------------------------
+Okay. And with respect to the GAAP balance sheet, what is your overall expectation about the net growth over 2015?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [76]
+--------------------------------------------------------------------------------
+I think you're probably going to largely see it in the ZIP Code and probably be most correlated to the overall deposit balances. If you look at the range that we've been running at over the last 12 months, it's been in the 2.1 to 2.15, 2.175 type area. And I'd expect that area or that range to hold for 2015.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [77]
+--------------------------------------------------------------------------------
+Great. Then just to talk about the asset quality for a moment, obviously it was the lowest provision that we've seen from you in some time; and many of your peers are inflecting from the point of asset quality improvements to some modest now deterioration and the rebuilding of reserves. I just want to get a sense from you about where you think you are in that spectrum.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [78]
+--------------------------------------------------------------------------------
+Sure. Well, I think if we go back -- and let's start with the fact that we saw during the quarter that if we back out any impact of loan sales as well as the DOJ settlement, charge-offs in the fourth quarter came down from $1.2 billion to just over $1 billion. I think as you look at charge-offs, when you're at virtually zero from a commercial perspective, it's hard to see getting much better than that.
+I do think where we are probably a little bit different is that as we continue to work through -- and we had another solid improvement of a couple billion dollars from an NPL perspective within the Consumer Real Estate space -- that we continue to work through and reduce those tougher Consumer Real Estate credits. But I think that if you look at this $1 billion charge-off type level that we've seen, we're probably at areas where you're going to see that flatten out.
+I think as we look forward there may be a little bit of reserve release on the front end -- on the first half of the year. And you'd probably expect that to flatten out and go away as we get through 2015.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [79]
+--------------------------------------------------------------------------------
+Great. Then just finally on the LAS expense, which I know you've touched on several times, but I'm just wondering if the pace of that improvement changes at all as you are getting into the later stages of the delinquency and foreclosure inventory improvement.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [80]
+--------------------------------------------------------------------------------
+Yes, it did. It [does] that and the plus side is that you have an ability to push the numbers down faster as the economy continues to improve and the market continues to improve and the opportunities for borrowers and time passes, frankly.
+The flip side of that, though, is in the states that -- in the areas where the process is slow, you're sort of boiling the beaker, and what's left is in the really slow areas. So we've sort of caught up in the states where the process goes through at a reasonable fashion; and we still have the laggards in places that the process is traditionally oriented.
+So I think you're absolutely right. There is a bias that as you get better at it and get lower, it starts improving; but against that you get to some of the rocks that are harder to move because the process is so slow.
+Secondly is, remember that we had -- we took it up to almost 58,000 employees in that business. And there is a lag to getting the real estate costs out and letting off the buildings and all the stuff that we have to do. So we've got to be a little careful we're getting ahead of ourselves.
+The headcount comes out first; the facilities then come out second. And so we are working hard on that.
+So you're right, that once you see the improve -- the pace of improvement continues almost nominally or even nominally better than the past, but there are obvious -- there are just some things that work against you in terms of assets left are harder, and then secondly there is a lag to the hard costs over and above the people costs.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [81]
+--------------------------------------------------------------------------------
+Great. Wonderful. Thanks very much.
+
+--------------------------------------------------------------------------------
+Operator    [82]
+--------------------------------------------------------------------------------
+Guy Moszkowski, Autonomous Research.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [83]
+--------------------------------------------------------------------------------
+Good morning. I just want to go back to the net interest margin discussion a little bit. I thought that I heard you say in the prepared comments that there had been a shift in the balance of the asset sensitivity to more of a balance between long-term versus short-term rates. I was wondering if that is strictly a function of the FAS 91 issue in a falling long-rate environment. Or is there something more structural that you've been doing with the portfolio that has caused that to happen?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [84]
+--------------------------------------------------------------------------------
+It's the FAS 91, Guy; you're absolutely correct.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [85]
+--------------------------------------------------------------------------------
+Okay. Then if we can just take a look at that one historically for a second, obviously over time that has caused quite a lot more volatility in your NIMs than it has for a lot of the peer group. I seem to remember that for regional banks, say, that have often had the same issue, there is a difference, I guess, in the way they accrue versus doing the constant resets that you do. And I was wondering why you do it in the way that you do, which seems to create more volatility.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [86]
+--------------------------------------------------------------------------------
+We probably wondered the same thing this quarter. All kidding aside, I think if you go back, you're right; there are two ways that you can do this.
+The first is the way that we do it, which is: you have the premium; you look at the average life of the premium; and each quarter you reset it and basically retroactively make that adjustment from when it started. And that was the determination that we had made a number of years ago.
+But you're right. The other way that that is allowed and provided for under GAAP is that you just basically adjust as you go, and take it through the P&L as you go. And you can do it either of two ways, and we obviously do it the way that we do.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [87]
+--------------------------------------------------------------------------------
+Would you ever consider changing that? And if you were to do so, would there be a significant one-time charge that would be associated with that?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [88]
+--------------------------------------------------------------------------------
+No, I think it goes the other way. The reality is, is that we run through the P&L that amortization to catch up for, in effect, if rates ended up being lower than when the premium was set on. So I think the way that we do it is absolutely appropriate.
+And keep in mind, the other thing -- and I referenced in my earlier comment -- is that as you do this from a balance sheet perspective, you're always adjusting the valuation of your AFS securities to be the fair market value at the time that you publish your financials. And obviously that flows through OCI.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [89]
+--------------------------------------------------------------------------------
+Yes, fair enough. You also talked about changing line items or lines of business, where certain things are booked, as we move into 2015. That was fairly clear, except I was wondering: will this also entail moving the very large investment portfolio of your mortgages from All Other into the Consumer category?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [90]
+--------------------------------------------------------------------------------
+It will not result in a large portion of mortgages being moved. There may be a smaller amount or a percentage of it that we continue to evaluate, because the one thing that we want to make sure that we do is to have the geography of the financial statements motivate the behavior of the people that serve the client base that they do.
+So there may be possibly a relatively small amount of home equity loans that could travel into the Consumer business. But it's not going to be anything that distorts things in any meaningful way.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [91]
+--------------------------------------------------------------------------------
+Got it. Thanks. Then final one for me. You talked a little bit about the Investment Banking backlog at the turn of the year. But more broadly for Global Markets and Global Banking taken together, can you give us a sense -- now that we're a couple weeks into the year -- how the, in particular say, trading activity has started off?
+And given some of the increase in volatility, especially with big moves like what happened with the Swiss franc today, are you instructing the Global Markets business to pull back on risk? Or generally are you seeing that some of those volatility levels are in some way beneficial?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [92]
+--------------------------------------------------------------------------------
+I think there's a couple parts of that. The first is, I think if you look at overall risk levels that we ran within the Global Markets business and if you look at our information that we put out at year-end, that even with a little bit of a pickup in volatility at year-end, VaR was at low levels and overall balance sheet levels were at low levels as we exited the year.
+I think we are nine trading days into the quarter, so I think it's a little bit early to forecast what you would expect for the quarter for the overall sales and trading businesses. The only thing I would say is that clearly the activity levels that we've seen, that it's been more of a return to normal than what we experienced in the month of December, but I wouldn't want anyone to draw any conclusions when we are nine days through 62 trading days in a quarter.
+
+--------------------------------------------------------------------------------
+Guy Moszkowski,  Autonomous Research - Analyst    [93]
+--------------------------------------------------------------------------------
+Sure, it's early. Thanks very much. I appreciate the color.
+
+--------------------------------------------------------------------------------
+Operator    [94]
+--------------------------------------------------------------------------------
+Paul Miller, FBR.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [95]
+--------------------------------------------------------------------------------
+Thank you very much, and most of the questions has been answered. But on your legacy assets -- and you talked about this a little bit, where your default numbers have dropped roughly to 189,000 from roughly I think 220,000. Did you sell anything? Or is that all improvement in just credit in the quarter?
+In other words, did you move the houses out, or did you also sell?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [96]
+--------------------------------------------------------------------------------
+Yes, my recollection is there was -- roughly a third of that came from the sales of both servicing as well as the underlying loans themselves. Then in addition to that, we saw continued improvement in the net new 60-pluses. And then we obviously worked others through the normal foreclosure process, as well as for those borrowers that cured.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [97]
+--------------------------------------------------------------------------------
+One of the things that -- because I -- on your -- you made a comment about that the lower oil prices has improved some of the consumer credit, consumer spending, and all that. Are you seeing any improvement in working through those 60-day defaults from that? Or those loans are just so old relatively speaking in the default bucket that the lower oil prices really doesn't help out?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [98]
+--------------------------------------------------------------------------------
+I'd say it is much too early to figure out what the oil price impact would have on mortgage defaults. What we are saying is you're actually seeing consumers spend the money they are getting; and you're seeing the consumer credit quality stay strong.
+But as you project out a period of low prices, you would see a benefit on the consumer side offset by the commercial side. So I'm not sure, Paul, in the context of what's in that 60-day bucket that it will have a meaningful impact.
+It hasn't had a meaningful impact so far. It's just pretty early days.
+But the good news is if you look at our delinquencies in the first-mortgage portfolios they keep coming down. And that's what drives long-term reduction.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [99]
+--------------------------------------------------------------------------------
+Brian, I missed -- I was writing it down as fast as I could, but you talked about how that you are seeing consumer balances increase over the last couple months, I guess, or last month. Can you go over those numbers again?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [100]
+--------------------------------------------------------------------------------
+Consumer spending increased. Is that what you're referencing, Paul?
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [101]
+--------------------------------------------------------------------------------
+Yes.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [102]
+--------------------------------------------------------------------------------
+So far, January of 2015 versus January of 2014, spending on credit and debit cards is up about 3% year-over-year. And that is overcoming a drag effect of about 1.5 percentage from lower fuel prices.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR & Co. - Analyst    [103]
+--------------------------------------------------------------------------------
+Okay. Hey, guys, thank you very much.
+
+--------------------------------------------------------------------------------
+Operator    [104]
+--------------------------------------------------------------------------------
+Marty Mosby, Vining Sparks.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [105]
+--------------------------------------------------------------------------------
+Thank you. I wanted to drill into the Markets business a little bit. In the sense that we've seen pressure on fixed income the last two quarters, is there anything in the drivers of that weakness that would jeopardize the seasonal uptick that we usually see in the first quarter?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [106]
+--------------------------------------------------------------------------------
+If I understand your question, I think that the answer to that is no. If you go back and look at -- with the exception of last year, the fourth quarter does tend to be the weakest quarter of the year seasonally. It was obviously a little bit more so this quarter.
+But structurally, there's nothing that would lead you to that. I would just -- obviously, it's a market that ebbs and flows. But no, there is not anything structural that would lead you to believe that that should be different.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [107]
+--------------------------------------------------------------------------------
+Then there is a lot of noise in the Markets business, and I tried to take out as much as I could. What I'm trying to look at is expense elasticity relative to the revenues.
+From third quarter to fourth quarter it looked very effective, was about 80% in relation to expenses to revenue reduction. But over the last year, when you take out the litigation expense, looks like operating expenses only declined about 20% of what revenues declined.
+So I was just curious what you thought maybe the right elasticity number would be there.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [108]
+--------------------------------------------------------------------------------
+Well, I think largely what you saw in the fourth quarter was a reflection of the change in the incentive levels due to the lower revenue. And you'd expect that to happen.
+But let me bring that up a little higher to a more broader point, which is about two, three years ago, Tom Montag and the team made a fundamental restructuring of that business to drop its expense base to where as long as we get $2.5 billion more revenues, more or less, we start making some money. And if you adjust the FVA charge, which is the one-time charge, they made somewhere around $300 million this quarter, to give you a sense.
+So in its worst quarter, it earns $300 million; in its best quarter it earns over $1 billion. And that largely is really marginally profitable when you see the revenues go from the high $2 billions to the, say, $3 billion level up to the $4 billion level. Most of that comes through with a tariff on compensation of around 19%, 20% or something like that.
+So there is elasticity, but as you get the lower level you start to hit the floor on the fixed cost structure.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [109]
+--------------------------------------------------------------------------------
+That's very helpful. Then Brian, lastly, you've talked several times about the core expenses and the investments you're making. A lot of the core businesses, really all except Banking, showed declines in net income sequentially and year-over-year. Do you feel like you're investing to try to reignite some of that growth going forward?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [110]
+--------------------------------------------------------------------------------
+Yes -- no, one of the things you've got to be careful of is they reflect -- all these charges that we talk about in NII get pushed out to all the businesses. So there's some elements that really aren't in the business's control, for lack of a better term.
+And then secondly, you're still seeing -- as we move from a period where reserve releases were going on at the business level, you're seeing provision changes across-the-board that have it. But by and large, the rest, if you look at the fees and the direct expenses, which are the two things they control the most, you see a pretty good relationship going on and pretty good stability.
+And I'd say as you look across the businesses, the Consumer Bank continues to make good progress on sales capabilities. And its actual sales, you can look at some of the later pages; you can see it.
+I said Wealth Management, we've got to make sure the expenses and the revenue stay in line there. We talked about that last quarter, and John Thiel and the team, especially in Merrill Lynch, are doing a good job of getting after that.
+Then in Banking, I think you've seen a pretty good relationship, if you back out the fundamental impacts of FAS 91 and the provision and things like that, which they -- those are adjustments we make at the top of the house and push through.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [111]
+--------------------------------------------------------------------------------
+Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [112]
+--------------------------------------------------------------------------------
+Mike Mayo, CLSA.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [113]
+--------------------------------------------------------------------------------
+Hi. You highlighted that the expenses are at the lowest levels since the Merrill merger, and we estimate that they are down almost one-fourth over five years so that's certainly good. But we also note that revenues are down quite a bit over that time frame too.
+So how do you evaluate the trade-off between more aggressive restructuring and investing in the franchise? And specifically, you're pretty much done, I think, with New BAC. Would you have a program -- maybe Even Newer BAC, or a new restructuring plan?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [114]
+--------------------------------------------------------------------------------
+Yes, I'd say, Mike, the other piece of that is obviously the credit costs you've got to think about, in terms of if you look back and look at the higher revenue levels at the time. The charge-off run rate was $2 billion and $3 billion a quarter; at one quarter it was $10 billion if you remember, for cards especially. So be careful about that.
+But I'd say your point really is: what do you do from now forward? And we see -- we talked about it in the core expense base, leave aside the LAS, the litigation, all that stuff, but just the core expense base. Basically what we continue to do is to take out nonproductive expenses and invest part of that back in the franchise and bring part of that to the ability to see that core line continue to move down -- nudge down.
+Remember that when we are doing this we're absorbing health cost increases, wage and salary increases, incentive comp increases. So we are heavily focused on maintaining a rational balance between the core revenue and the core expense dynamic going forward.
+So you should expect, assume, that there is a continuous program of looking at this, to continue to simplify our Company, continue to take out the vestiges of the cost of the crisis. And as we have downsized the Company, take out the overhead that was harder to shake out, as you're well aware.
+So we are laser focused on it. But I think on the other hand, we continue to invest in sales capacity; and you see that reflected in things like card sales and home equity sales and auto loan sales, direct auto loan sales. All increased.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [115]
+--------------------------------------------------------------------------------
+So don't expect another new program with expense targets, just more of a day-to-day perspective now?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [116]
+--------------------------------------------------------------------------------
+No. Remember, we absorb -- if you think of 60% of our costs being people costs, and you think of inflationary level of cost increases of 3% on those, basically to keep costs down and flattish you've got to work your tail off. Whether -- and that's the process going forward.
+We had to drop the cost down to get into a reasonable level. We'll continue to make improvement relative to the revenues.
+And if the world gets different, we will then have to revisit it. But right now in this revenue environment, even a slow growth environment, we can keep the costs flat as revenues start to rise.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [117]
+--------------------------------------------------------------------------------
+Then a separate question: what are your key financial targets for 2015? I know you've expressed some of your targets, assuming interest rates increase. But if interest rates don't increase, what should investors evaluate you on at the end of 2015?
+All I had to go on without the higher interest rates is page 42 of the proxy that talks about the PRSUs. It says as long as you get over a 50 basis point ROA you go in the money on the PRSUs. So I'm not sure if I should be looking at the 50 basis point number, or it's 80 basis points, 100% in the money, or the 1% number that you've talked about before.
+But again, assuming rates don't go up, what's your ROA and ROE target for 2015?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [118]
+--------------------------------------------------------------------------------
+Mike, we don't give specific projections, but our goal is to continue to take the earnings from the $3 billion level this quarter and drive them forward. And our view is that, based on everything we see, as we see the impact of all the work we're doing plus the rollover of the cost saves, the reduction in LAS costs, the litigation falling back to the kinds of levels you saw this quarter, you'll see us move towards those long-term goals of 1% ROA and 12% return on tangible common equity.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [119]
+--------------------------------------------------------------------------------
+One last try. That 1% and 12%, that assumes higher interest rates. If your forecasts do not expect higher interest rates as soon as they do right now, at what point would you take additional action with expenses? And how do you think about that?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [120]
+--------------------------------------------------------------------------------
+We take additional action on expenses every afternoon. In other words, we had 4,000 reduction in FTE in the fourth quarter of 2014, Mike, out of the core franchise to keep getting efficient. So we work on expenses every day, and we have teams of people working to do all the things that you expect us to do.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [121]
+--------------------------------------------------------------------------------
+All right. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [122]
+--------------------------------------------------------------------------------
+Nancy Bush, NAB Research.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [123]
+--------------------------------------------------------------------------------
+Good morning, guys. Two questions.
+Brian, I'm a little bit confused about the card growth. I think you said you got 1.2 million new cards out in the fourth quarter. Is that -- and didn't you mention something about it being seasonal? You've got lots of ground that you can gain in that business, and I just want to clarify whether this is something extraordinary going on here and what your projections are for the future for growth there.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [124]
+--------------------------------------------------------------------------------
+Yes, Nancy; sorry if we confused you. Let's talk about the production of new card units.
+That's the 1.2 million -- 1.184 million, if you look on page 19 you can see that; and you can see it building from the fourth quarter of 2012, 830 million -- or 830,000. So the first is production of units, and the second was balances.
+Balances in the card business were up in the fourth quarter almost $3 billion, $2.5 billion to $3 billion. That we've got to be careful, because it's Christmas season; people spend and borrow and then they pay down.
+So the point there is that has a little seasonal help to it. But if you look back in prior quarters you've seen a stability in our card balances, which as we continue to sell more units and people continue to use the card, we ought to expect a positive growth there.
+But it's units at 1.2 million. Balances grew at $2.5 billion to $3 billion, and the balances are common in seasonality. Units have been above 1 million new production units each quarter for the last several quarters.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [125]
+--------------------------------------------------------------------------------
+Is there one particular card that's proving to be very popular? I see your ads for the cash-back cards, etc. Is that the card of choice at this point?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [126]
+--------------------------------------------------------------------------------
+Yes, that is our core card offering. We've simplified our offering to three or four core products, and that's the biggest one. And it's contributing to card income being up year-over-year by about 7%. Bruce, come in.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [127]
+--------------------------------------------------------------------------------
+Yes.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President, CEO    [128]
+--------------------------------------------------------------------------------
+So that card is selling well. And the good news, as you can see, is 67% came through basically our web online sales process and our branch sales process in the core customer. So we continue to drive it.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [129]
+--------------------------------------------------------------------------------
+Okay. Secondly, the 25% margin in Wealth Management, I think back to the old days when you had much fatter margins in that business. What do you see as a normalized margin in Wealth Management?
+Number two, to what impact is the Wealth Management margin being maybe impacted by high liquidity levels that customers are maintaining? And do you see that changing?
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [130]
+--------------------------------------------------------------------------------
+It's a couple things to that, Nancy. I think the first is that we've said that over the course of a couple years that we need that Wealth Management margin to get to 30%. I think you've got a couple things going on right now.
+In the low rate environment, that business has an artificial drag because, as you know, you don't tend to pay out compensation, which is a significant portion of the expense, to those things that are net interest income related. So we would expect -- we also have in 2016 some deferred comp and other programs running off; so as we go through over the course of the next couple years, between the business growing, a normalization of rate environment, and some other things that that should be a 30% type pretax margin business.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [131]
+--------------------------------------------------------------------------------
+Okay, great. Thank you very much.
+
+--------------------------------------------------------------------------------
+Bruce Thompson,  Bank of America Corporation - CFO    [132]
+--------------------------------------------------------------------------------
+I think we're through all the questions. So thank you very much for joining us and we'll look forward to speaking next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [133]
+--------------------------------------------------------------------------------
+This concludes today's program. Thanks for your participation. You may now disconnect.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Jan-28-FB.OQ-139431073452-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2014 Facebook Inc Earnings Call
+01/28/2015 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook, Inc. - VP of IR
+ * Dave Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Carlos Kirjner
+   Sanford C. Bernstein & Company, Inc. - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Ben Swinburne
+   Morgan Stanley - Analyst
+ * Arvind Bhatia
+   Sterne, Agee & Leach - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Co. - Analyst
+ * Paul Vogel
+   Barclays Capital - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Brian Wieser
+   Pivotal Research Group - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Robert Peck
+   SunTrust Robinson Humphrey - Analyst
+ * Peter Stabler
+   Wells Fargo Securities - Analyst
+ * Anthony DiClemente
+   Nomura Securities Intl - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Courtney and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook fourth-quarter and full-year 2014 earnings conference call. 
+(Operator Instructions) 
+Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's fourth-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. 
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements and actual results may differ materially from those contemplated by these forward-looking. Factors that could cause these results to differ materially are set forth in today's press release, our annual report on Form 10-K and the most recent quarterly report on Form 10-Q filed with that SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 
+During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. 
+And now I would like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah. And thanks, everyone, for joining today. This has been a good quarter for Facebook and a great end to the year. Our community continued to grow in size and engagement, and we're very pleased with the growth of our business. 
+Overall, 2014 was a year of great progress for the Facebook community. 1.39 billion people now use Facebook each month and 890 million people daily, an increase of 165 million monthly actives and 133 million daily actives this year. 
+Time spent per person per day across our services continued to rise, growing this quarter by more than 10% compared to last year. And that doesn't even include WhatsApp which joined us late last year. These milestones show that our community continues to get stronger. 
+It's not just our community where we've made a lot of progress.2014 was also a year of big investments in our future. This year we made big bets on the next generation of communication and computng platforms by acquiring WhatsApp and Oculus. 
+We focused on serving our community better across all of our products, raising the quality and relevance of content and newsfeed, improving our search and video products, and improving the performance and efficiency of our mobile apps. And we continue to invest in our employees and infrastructure, furthering our headcount by 45% this year, and opening our newest data center in November, in Altoona, Iowa. 
+When you consider the progress of our community and our investments, 2014 was an important year for us and a good sign of how we're thinking about the future. In the next decade, Facebook is focused on our mission to connect the entire world, welcoming billions of people to our community, and connecting many more people to the Internet through Internet.org. 
+To serve the entire world, we need to build products that serve our community and allow people to share different types of content with different audiences. We need to offer new services and infrastructure at greater scale. And we need to create new tools and innovate to solve fundamental challenges in the places we want to connect. 
+Doing this will take a lot of effort over the coming years, and Facebook is going to have to evolve. Similar to our transition to mobile over the last couple of years, now we want to really focus on serving everyone in the world. 
+Our mission has always been to make the world more open and connected. This is something we've been preparing for over the last decade. 
+Everything we've achieved in 2014 and over the last 10 years has helped us to build a foundation for a future of greater scale. I'm excited for our progress in 2015. 
+Now, with that in mind, I want to talk about the things that we expect to execute on over the next 3, 5 and 10 years. Over the next 3 years, our main focus is to continue to serve and grow our community by delivering better services for people and businesses around the world. 
+One sign of our continued growth and engagement is our progress on visual and public content. More than two billion photos are now shared daily across Facebook, Instagram, Messenger and WhatsApp. 
+Video grew significantly this year to an average of more than three billion video views per day on Facebook. We now have more than two billion interactions every week on Facebook between public figures and their fans. 
+Instagram is also growing and helping people share and consume the most engaging content in different communities across world. Instagram reached 300 million monthly actives, with more than 70% outside of the US. Average time spent using the app continues to be very strong compared to other mobile services. 
+Across Facebook and Instagram we've done a very good job on engagement, especially when it comes to helping people find and consume content they like. In 2015 we will continue working on this as well as developing more ways for people to share even more of the moments they care about on Facebook. 
+Five years ago, most of the content shared on Facebook was text and some photos. Today, it's primarily photos with some text and video. Over the next five years, we want to keep developing new products and features to help people share the way they want. 
+When it comes to serving businesses, we've continue to help drive results for businesses of every size around the world. Last week a Deloitte report found that in 2014, Facebook created more than $225 billion of global economic impact and 4.5 million new jobs. This is an important reminder of the big opportunity we have to create value for businesses, and why we are committed to serving them well. 
+In 2014 we invested aggressively in improving our ad tech and measurement tools. We're going to continue working to provide new capabilities for marketers. Sheryl will talk about this more in a moment. 
+Next, let's talk about our efforts over the next five years to build the next generation of Facebook services. We expect WhatsApp and Messenger to connect hundreds of millions of more people, and become indispensable services for the world, as well as important contributors to our business. 
+Messenger and WhatsApp recently achieved impressive new milestones. In November, Messenger reached 500 million monthly actives. And at the beginning of January, WhatsApp reached 700 million monthly actives, with more than 30 billion messages sent each day. These numbers speak to the quality of both products and the size of the opportunity ahead to help billions of people communicate and collaborate. 
+Search at Facebook is another important efforts that we expect to create a lot of value over the next few years. In this quarter we launched updates to Facebook search to make it easier to find content and posts on mobile and desktop. 
+We're going to continue listening to feedback from our community and taking the time to build a really valuable product here. Were optimistic about our ability to deliver value that only Facebook is able to provide. 
+Working with developers is the other part of our strategy. In this quarter we continued to make progress with helping developers build, grow and monetize their apps. 
+In October we rolled out our Audience Network around the world. Since then, the number of apps in the network has nearly tripled, and impressions served by the network have more than quadrupled. 
+In 2015 we will continue to build upon our long-term goal of making Facebook a truly cross-platform that allows developers to share their work across every major mobile platform. And we look forward to sharing more details at our next F8 event in San Francisco this March. 
+Finally, let's talk about our plans over the next decade to connect everyone to the Internet through Internet.org, and to develop the next generation of computing platforms with Oculus. Internet.org now has a lot of momentum. And we've launched free basic Internet services in Zambia, Tanzania, Ghana, Kenya and Colombia. 
+More than 150 million people living in these countries now have the option to connect to the Internet using Internet.org. We've already connected 6 million of them to the Internet who didn't have access before. We're very excited about Internet.org's progress, and the level of interest we're seeing across industries, governments and our community. 
+2015 is going to be an important year for our long-term plans. And I expect us to share more updates about our progress here over the coming months. 
+Oculus continues to make progress towards the future of immersive VR experiences that are part of daily life for millions of people. This month the team had another good showing at ZS, and developer interest in Oculus platform continues to grow. 
+So, that's my update for this quarter. It's been a good quarter and a good end to an important year for us. I want to thank everyone in our Facebook community and our employees, our partners and our stockholders for their support. 
+Thanks to you, our community is growing stronger every day, and we are making progress toward making the entire world more open and connected.  Thanks and now here's Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark. And, hi, everyone. Q4 was strong across the board, capping a great year. 
+This is our first quarter with over $3 billion in ad revenue and over $2 billion in mobile ad revenue. Our Q4 ad revenue grew 53% year over year. Our mobile ad revenue was 69% of the total ad revenue, and doubled in the past year. 
+Our growth was strong across all verticals and marketer segments. We also saw healthy growth around the world, although growth rates outside the US were affected by exchange rates. 
+Looking back at 2014, our teams made great progress on our three main priorities -- capitalizing on the shift to mobile, growing the number of marketers using our ad products, and making our ads more relevant. We believe that the market increasingly understands that we have the leading mobile ad products and are the only platform that delivers people-based marketing at scale. 
+The shift to mobile is changing the way people consume video. As Mark said, video grew dramatically on Facebook in 2014, especially around global events like the World Cup and the ALS ice bucket took a challenge. 
+In just one year the number of videos posted per person on Facebook increased 75% globally and 94% in the US. Today, over 50% of people in the US who come to Facebook daily watch at least one video per day. 
+Globally, over 65% of Facebook video views occur on mobile. Marketers have followed this trend and are using video to help people discover and learn about their brands. 
+In Q4, we expanded autoplay video ads internationally. During the holiday season, we saw many clients telling their stories creatively through video. 
+2014 was also the year we began scaling Instagram ads. In Q4, we rolled out Instagram ads in Australia and Canada. Marketers are excited to have access to the 300 million people who use Instagram and the creativity it inspires. 
+We're seeing beautiful, creative and great results from brand marketers across verticals, from insurance and tax, to retail and entertainment. For example, as one of our first Instagram video advertisers, Banana Republic developed a series of videos to promote its new BR clothing line. The video showed fashion sketches from the new collection and drove a 23-point lift in ad recall. 
+While it's still early, and we are being deliberate in our rollout, we believe that Instagram will become core to advertisers' mobile brand-building efforts. We also made progress growing a number of marketers using our ad products. 
+Custom Audiences, our suite of proprietary targeting products, has become an essential tool for segmenting current and potential customers. Conversion tracking, a way from marketers to measure the impact of the campaigns online, is also seeing wider adoption. We've made it easier for businesses of all sizes to plan and manage their ad campaigns, and for small businesses to use our targeting tools. 
+Travel company Thomas Cook recently used Facebook in Belgium to reach a broad audience, and used Custom Audiences to send targeted messages to existing customers, based on the places they'd expressed interest in. They reached 30% of the Belgian population in just one day and achieved a 3.85 times return on investment. Results like these are attracting more marketers of all kinds to our platform. 
+Finally, we made great progress improving ad relevance and measurement. To do this, we made significant investments in both our core measurement and targeting tools, as well as Ad Tech. 
+Earlier in 2014, we introduced ad buying capabilities based on reach and frequency metrics, which is similar to how brand marketers buy TV ads, and therefore enables better cross comparison. We improved our Ads Manager product to give better insight into ad campaigns, audience and impact. 
+In the fall we relaunched Atlas to help marketers reach real people and measure results across multiple devices. Omnicom was our first global client. And this month we announced a partnership with Havas to further expand globally. 
+We also invested in Audience Network which helps marketers extend their campaigns off of Facebook, and LiveRail, which provides publishers with video tools to monetize their inventory more efficiently. 
+Heading into 2015, we are excited to build on the progress we've made with our core ad products, as well as with newer areas like video Instagram and Ad Tech. It's still early days in all of these efforts. There's a lot of hard work to do and we plan to invest aggressively. 
+Our ultimate goal is to be a critical business partner to our clients, providing people-based marketing at scale to build their brands and move their products off shelves. Over the past few weeks I've had a chance to meet with many of our largest global clients and agency partners and talk about how we can drive real business results for them, making every impression count and every dollar they spend improve their bottom line. 
+Our clients are excited by the opportunity to use video Instagram and ads on and off Facebook to reach the right people with the right message. In turn, as our ads become more relevant, we provide a better experience for the people who use Facebook. 
+Coming off our biggest year ever I want to say a special thank you to the Facebook teams around the world. To our global sales, engineering, product design and infrastructure teams, your accomplishments over this past year are the reason our business is in such a great place. 
+To our entire company, I feel lucky to work with you as we stay focused on our priorities and work together to help connect the world. And to our clients, thank you for your partnership and your trust in us. 
+Heading into 2015, we have big opportunities and a lot of work ahead. Thanks. And now here's Dave. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl. And good afternoon, everyone. Q4 wrapped up a strong year for Facebook. In 2014 our revenue growth 58% to approximately $12.5 billion and we generated over $3.6 billion in free cash flow. 
+We are very pleased with the continuing growth of our network. In December, the number of people using Facebook on an average day increased by 18% compared to last year, to 890 million. The daily number represents 64% of the 1.39 billion people who used Facebook during the month. 
+Mobile remains the primary driver of our growth. We ended the year with 1.19 billion people using Facebook on mobile in the month. We also continued to see solid growth with Instagram, Messenger and WhatsApp recently crossing 300 million, 500 million at 700 million MAUs, respectively. 
+Turning now to the financials, all of our comparisons are on a year-over-year basis unless otherwise noted. In addition, as a reminder, our non-GAAP measures exclude stock-based compensation and the amortization of intangibles. 
+Total revenue in Q4 was $3.9 billion, up 49%, or 53% on a constant currency basis. Given how significantly exchange rates have continued to move, we anticipate that this currency headwind will increase in 2015. I will give more color on this later in the call. 
+Ad revenue was $3.6 billion, up 53% or 58% on a constant currency basis. Mobile ad revenue in Q4 doubled to $2.5 billion or 69% of ad revenue, compared to approximately $1.2 billion or 53% of ad revenue last year. Desktop ad revenue was up approximately 1% despite the fact that overall desktop usage was down. 
+In Q4, the average price per ad increased 335%, while total ad impressions declined 65%. Similar to last quarter, these price-volume trends were primarily driven by the redesign of our right-hand column ads, which rolled out in the third quarter. 
+Total payments and other fees revenue was $257 million, up 7%. Note that the growth was driven by revenue from acquisitions made in the past year. 
+On an organic basis payments revenue from games, which represents the substantial majority of our payments and other fees revenue, declined 10% compared to last year. As previously noted, we expect this trend to continue as desktop usage declines. 
+Turning now to expenses, our Q4 total GAAP expenses were $2.7 billion, up 87%, and non-GAAP expenses were $1.6 billion, up 50%. GAAP expense growth was driven primarily by significant stock-based compensation and amortization expenses related to the WhatsApp acquisition. Non-GAAP expense growth was driven primarily by increases in headcount related costs, cost of revenue, and marketing expenses. 
+On a full-year basis, our 2014 GAAP expenses were $7.4 billion, up 47%, and our non-GAAP expenses were $5.3 billion, up 34%. We ended the year with roughly 9,200 employees, up 45%. Overall, we remain very pleased with our ability to attract and retain top-tier talent. 
+GAAP operating income was $1.1 billion in Q4, representing a 29% operating margin, down from 44% last year, again primarily due to expenses related to our recent large acquisitions. Non-GAAP operating income was $2.2 billion in Q4, representing a 58% operating margin, consistent with the margin last year. 
+Interest and other income and expense was a net expense of $19 million in Q4, versus a net expense of $3 million in Q4 last year. This increase in expense was primarily due to foreign exchange losses resulting from the periodic remeasurement of our foreign currency balances during the period. 
+In Q4, we benefited from the reinstatement of the R&D tax credit. Our GAAP tax rate was 37%, but would have been approximately 42% excluding the benefit of the tax credit. Our Q4 non-GAAP tax rate was 31%, and would have been approximately 32% excluding this benefit. 
+Q4 net income was $701 million, or $0.25 per share, and non-GAAP net income was $1.5 billion or $0.54 per share. In 2014, we spent $1.8 billion on CapEx and generated over $3.6 billion of free cash flow. We ended 2014 with $11.2 billion in cash and investments and a net operating loss carryforward of approximately $4.5 billion. 
+Turning now to the outlook, let me start with revenue. We are still in the early stages of building out many aspects of our ads business and we remain optimistic about our long-term opportunities. Looking at 2015, there are a couple of things I want to note. 
+The first involves how the recent movements in exchange rates might impact our 2015 revenue. Assuming exchange rates were to remain constant at today's level, we would expect that our total revenue in 2015 would be approximately 5% lower than it would be under 2014 exchange rates. Note this 5% represents the expected reduction in 2015 total revenue, not the reduction in the year-over-year growth rate. 
+And, second, we are reporting revenue from Atlas, LiveRail and the Audience Network on a net, not a gross, basis. So, the growth in those products will have less of an impact on our overall reported revenue growth in 2015. 
+Turning now to expenses, we are tightening our ranges modestly given the better visibility into 2015 spending. We expect that our full-year 2015 total GAAP expenses will increase 55% to 70% compared to 2014. We expect that our 2015 total non-GAAP expenses will increase 50% to 65%. 
+A simple way of thinking about our investments is across three categories -- people, product and infrastructure. On the people side, we enter 2015 with 45% more employees than we did a year ago. And we will continue to invest in and grow the talent base throughout the year. 
+In terms of product, we are investing to build great experiences for people, marketers and developers, ranging from our existing products and services to newer initiatives such as Ad Tech, Internet.org, Oculus, and WhatsApp. We'll also invest in marketing to support all of these initiatives which, as I noted, was a driver of expense growth in Q4. 
+Turning to infrastructure, we continue to build out our global infrastructure to enable billions of people around the world to connect, message and share with each other. We'll be investing in data centers, our network and servers to grow our existing services and support newer initiatives such as video and our global connectivity efforts through Internet.org. 
+We anticipate our 2015 CapEx will be in the neighborhood of $2.7 billion to $3.2 billion. We expect stock-based compensation for 2015 to be in the range of $3 billion to $3.3 billion, approximately half of which is related to our prior acquisitions, most notably WhatsApp. 
+We expect amortization expenses for 2015 to be approximately $700 million to $800 million. Finally, we anticipate our Q1 and full-year 2015 GAAP tax rates to be in the mid to high 40%s and non-GAAP rates to be in the mid to high 30%s. 
+In summary, Q4 caps off a great year for Facebook in which we executed well, and also made some very important investments for our future. In 2015 we are focused on continuing to execute on the business and investing in our long-term mission and success. 
+With that, Courtney, let's open up the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) 
+Heather Bellini with Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          I just had two quick questions. Sheryl or Mark, I was just wondering, from a brand advertising perspective, is there a way you could share with us how your conversations with these advertisers have been trending over the past 12 months, how they've been evolving, and how they are thinking about the video opportunity? 
+And then, Dave, I just wanted to follow up on your question about total expense guidance, because in the past you've given a 5-point range, I believe, for total expenses and this year it's 15. Granted, you did tighten it, which we appreciate. And just wondering the parameters around how we think about the low end versus the high end? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [3]
+--------------------------------------------------------------------------------
+
+          It's a great time for the brand question because over the past few weeks I've spent a lot of time kicking off 2015 with our largest agency partners and largest clients. I would say that people remain really excited about Facebook, but people are bigger believers, because we've had an opportunity to do more measurement over the past year. 
+So, I think there are two things about the Facebook platform that are really exciting for brand marketers. The first is the creativity and storytelling. And certainly, as you mentioned, video is a big part of that because video is a format that marketers have used for a long time to build emotional connection to brands. 
+The second is measurement. What clients want and what they should want is an ability to look at their ad spend and see how effective it is, not just in the brand lift metrics, even though those are important, but in moving products off shelves. Over the past year and a half, the investments we've made in building out that measurement have paid off. 
+So, when I sit down with clients at the beginning of this year compared to last year, we have more actual case studies of marketing we've done with them. We've been able to A-B test Facebook ads versus no Facebook ads, and what the effectiveness is on their sales. And I think across the board, we are showing very healthy, very competitive ROI. 
+The opportunity and the challenge, now, is to scale. Even for our largest clients globally we still represent a really small part of what they do. So, it's on us to prove to them that the results we're showing them in these smaller tests can happen in more brands, more countries with a larger part of their business. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Heather, it's Dave. 
+Just following up on that, where we land in the range of guidance on expenses will depend on a number of different factors. It's going to depend on how successful we are at hitting our recruiting goals, how much we ramp in areas like marketing, how quickly we deploy our capital against our CapEx plan, and then how we execute against our plan of ramping investments in new areas like Oculus, WhatsApp, Internet.org, et cetera. 
+We feel good about where we are. We're going into 2015 on a high note. So, I feel like we're making these investments from a position of strength, and excited about the opportunities to put more capital to work in 2015. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Eric Sheridan with UBS. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Mark, I wanted to follow up on your comment around search. It's early days, but what the Company is seeing in terms of the way people are interacting with the new search functionality inside Facebook, broadly. And then maybe tying it back to advertising, what that might mean for closing the loop with some of your small- and medium-sized business advertises, and maybe even the Places initiative, long-term, thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [7]
+--------------------------------------------------------------------------------
+
+          Sure. Our view on this is that there is a lot of unique content that people have shared in Facebook, a lot of personal content, recommendations from friends that you can get, that you just wouldn't be able to get through a traditional web search service or other app. We are on this multi-year voyage to basically index all the content and make it available to people and rank it well. 
+We started off by launching Graph Search, which I think included more than 1 trillion different connections in the first system. The second round of the search progress that we just started rolling out at the end of last year was Post Search, which now has indexed more than I think 1 trillion posts. The sizes of these corpuses are bigger than anything in a traditional web search corpus that you'd find. 
+It's an interesting and fun challenge to make this work. We're seeing that people immediately understand how they can use this and find content that they've seen in newsfeeds before or that they've posted with just a few keywords. We're excited about that but there's a lot more to do. 
+So, I'd say we're not really thinking about advertising in it yet. On the scale that our community operates, 1 billion searches per day is actually not that big compared to what we think the opportunity here should be. And we are just continuing to keep on working on it because there's just a lot of unique value that people should be able to get from their friends on Facebook through search. 
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+          John Blackledge with Cowen. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [9]
+--------------------------------------------------------------------------------
+
+          I just wondered if you could provide your view on Facebook as a video platform given that video views per day increased to 3 billion in December from 1 billion in September of 2014. And how we should think about video content mix over the next couple of years. 
+And same kind of topic, if you can give a sense of user and advertiser feedback on the autoplay video ads, that would be great. Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [10]
+--------------------------------------------------------------------------------
+
+          I'll talk about the consumer products and then Sheryl can jump in about ads. 
+What we're seeing, and I alluded to this a bit in my opening remarks, is that there's been this evolution of content on Facebook over the last 10 years towards richer format that conveys more of the moments that people care about. So, if you go back five years ago, a lot of Facebook was primarily text and a little bit of photos. 
+Now, I think the primary mode that people are using to share is photos. And I wouldn't be surprised if in the future that shifted more and more towards videos. 
+So, we're thinking about how to enable consumption first of the content that people were sharing. And this year an increased focus on new opportunities around production. That way it's easier for people to capture the moments that are important to them, create higher-quality moments and pieces of content out of those, and increase their experiences through that. 
+So, there's a lot more to do here. And I think that this is going to be one of the big trends over the next three to five years, is the growth in video and richer content in our service. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [11]
+--------------------------------------------------------------------------------
+
+          From a consumer and marketer feedback on video ads point of view, those two things really go together. It's exciting that we've gotten to 3 billion video views per day because that means consumers are using video ads and enjoying them on Facebook and in newsfeed. 
+The way we think about our ads product is we want them to blend in with the consumer experience. So, the fact that we have this much consumer video on Facebook, means we have an opportunity to grow our ad business, and that's exciting for marketers. 
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+
+          Justin Post with Merrill Lynch. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [13]
+--------------------------------------------------------------------------------
+
+          It looks like you did about $9 of revenue in the US per MAU, which is over a $30 run rate, which is impressive. 
+Sheryl, maybe first question to you. How do you grow that from here? Is it usage? Is it more higher ad load? Is it the mix of ads? Or is it targeting? Maybe some thoughts on how you grow from there. 
+And then, Mark, as you look at your other three platforms; WhatsApp, Instagram, Messenger, and other things you probably have in mind -- can they monetize anywhere as well as Facebook if you look out to your five-year plan? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [14]
+--------------------------------------------------------------------------------
+
+          Thanks for the question. When you think about what's happening, certainly the growth has been good. But it's still true that marketing dollars have not followed consumer time in the same percentages. 
+In the US, mobile gets 25% of consumer media time but only 10% of the ad budget. And to take one comparable example, that means that for every consumer hour spent on print, marketers spent $1, and they spend $0.07 per hour on mobile. Which means that we have an opportunity to grow. 
+One of the most important ways we grow is not just bring more marketers into Facebook, having them use more of our ad products, but, as you mentioned, better targeting. A more relevant ad is a better ad experience for consumers, but also drives a much higher return for marketers. And since we're running an auction, as our ads get more relevant and we provide higher ROI, we should be able to continue to grow. 
+I think we've done a good job over the last year making our ads more relevant. I think most people on this call would say that you see more relevant ads than you used to a year ago. But I still think some of the Facebook ads still have room for improvement in terms of relevance. And, so, we see a lot of room for improvement there, both in the ROI we deliver and in the experience we can provide consumers. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [15]
+--------------------------------------------------------------------------------
+
+          I'll add something to that just on the side of how we think about value through Facebook and then I will talk about the other apps. In terms of the product development that we do here, we have four major groups inside the Company. This is how our Company is organized. 
+We have one which is focused on growing the community; one which is focused on increasing content consumption and people's engagement; another which is focused on efficiency and helping people get the most value out of each moment that they're spending on Facebook; and then the fourth group is our core business which is focused on helping people to see the best ads and basically make the most money per moment that people are spending at the lowest cost and most efficiency in terms of serving people. 
+There is, I think, big upside in each of those four categories. Our community is growing. I mentioned in our comments up front that time spent across our services grew by 10% year over year per person, which is pretty meaningful. Utility and efficiency are increasing. And, of course, the ads business per person and the efficiency of our services are both increasing, as well. 
+So, I'm pretty excited about that and think we are organized in a way where we can continue executing against that. 
+That other opportunity is Instagram, Messenger and WhatsApp. I'm really excited about. And I do think that they're going to reach the level where they contribute to our business in a pretty big way. 
+But it's really important to get this right and not rush it. What I'd say around messaging is we're pretty early in that cycle. We are about where Facebook was in around 2006 or 2007, where, at that point, Facebook is really just a consumer product. There were no businesses in the ecosystem. 
+And a lot of people were telling us go put better ads in. And that felt wrong. I didn't think that that was going to be the right way to build the product or build the business. 
+So, instead, what we did was we built pages, which was a way for businesses to interact for free in the system and start creating organic interactions between people and businesses so we could figure out what the people using Facebook wanted from businesses within Facebook. And we build more tools for pages and businesses to engage. Our recent success with advertising is really just built on some of those organic interactions between people and businesses. 
+What you see in Messenger and WhatsApp now is we're still at the early end of that curve where the interaction is still primarily people to people, and businesses are starting to figure out, in the case of WhatsApp -- much less in Messenger, so far -- what the organic interaction is. But we're going to have to go through a whole cycle of figuring out how that works before it really makes sense to start monetizing them in a big way. But, yes, I'm a big fundamental believer that these are going to be very big contributors to our businesses over time, but we just have to do it right. 
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+
+          Ben Swinburne, Morgan Stanley. 
+
+--------------------------------------------------------------------------------
+Ben Swinburne,  Morgan Stanley - Analyst    [17]
+--------------------------------------------------------------------------------
+
+          Two questions. Sheryl, can you talk about where we are in the North American market versus your other regions in terms of advertiser maturation and acceptance of the Facebook platform? The growth rates in North America continue to be really impressive despite it being your business when you look at the ARPU trends. And compared to the other regions those seem to be moderating a bit. 
+And then I was wondering, Dave, if you could talk about the pricing growth which actually accelerated from Q3 to Q4? Can you give us some color there? I know there were changes to right-hand rail but anything else you would add about why there was such a huge acceleration in pricing growth. Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [18]
+--------------------------------------------------------------------------------
+
+          North America remains a really important market for us. And, as you said, we've had growth we are very happy with. It's still true that for any client, no matter how big they are for us, we represent a really tiny part of their ad spend. And we represent an under-investment in terms of where they can reach their consumers. 
+So we believe by continuing to make these investments we can really continue to grow. We get 20% of people's time on mobile phone in the US between Facebook and Instagram. We don't get close to that in terms of anyone's marketing spent or the time they spend. 
+What we say to our clients over and over again is that we want to drive their business. And that's probably the most important thing we're doing for these large North American spenders, is around the measurement work we've done. 
+Two years ago we were not able to measure all the way through to purchase off the shelves, and now we can. Yesterday, we rolled out a product we call Lift, which is really the next iteration of our measurement capabilities. It enables large customers to go in and set up ads with control test groups so that they can A-B test; this group of people saw a Facebook ad, this group of people didn't. And they can measure all the way through to conversion of whatever they are measuring, whether it's an online conversion to a sale. 
+We think the measurement out there online and digitally is not particularly accurate. People don't have real people-based measurement. Through our investments in Atlas and through our investments in the core Facebook measuring tools, we think if we can show the ROI marketers are getting, and we can increasingly do so, we can continue to penetrate the North America market. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+          Ben, it's Dave. 
+Also just building on what Sheryl said, worth noting that the drop in the value of international currency is impacted by results outside the US. So, some of what you're seeing here is the result of that. 
+It reduced year-over-year revenue growth rates by 7% to 8% in the different international regions. That's a big reason why you see the US doing much better, as well as the fact that that's just a more advanced market in what we've done in terms of just building up the advertiser base and getting adoption of our best targeting products, as Sheryl was talking about. 
+Going to your question on pricing growth, I would just reiterate what I said in my comments. It's largely due to the right-hand column redesign and then also this shift to mobile where we don't show right-hand column ads. That's really what's causing the pricing shift. 
+Then, fundamentally, we just continue to get better at targeting. That drives better engagement. And as we get better engagement, that drives better ROI for our advertisers, which ultimately, I think as Sheryl commented on earlier, gets reflected in better pricing for our ads. And that's a big opportunity for us. 
+And we are seeing that we're getting better and better at driving engagement from the ad units that we have, and getting that right ad in front of the right person. So, that's a big factor, as well. 
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+          Brian Wieser with Pivotal Research. 
+
+--------------------------------------------------------------------------------
+Brian Wieser,  Pivotal Research Group - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. 
+First, I was wondering if you could talk about the degree to which you think premium video content, where it's not necessary to optimally capture budgets from advertiser that might otherwise have gone to TV? You have a couple of initiatives around ABC and NFL. So, I was curious to hear your thoughts on that. 
+Separately, among clients who are using Atlas, and especially those who are new to Atlas, do you get a sense that their spending on digital media is changing? Or, if so, how? And, alternately, are they just happier with their campaign management tools? Thanks very much. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [22]
+--------------------------------------------------------------------------------
+
+          On video ads, what really matters is that consumers are using video on Facebook because that gives us an opportunity, one, to provide a great consumer experience, but, two, to have ads match that consumer experience. If there wasn't consumer video on Facebook, video ads in your newsfeed would be very jarring. As a percentage of the videos you're seeing, video ads fit nicely into that experience. 
+I don't think it matters as much what the video content is. So, while we're certainly exploring some premium content -- as you said, we have an NFL Verizon test out there in the public eye -- we're already seeing pretty explosive growth without that kind of premium content in the system in large numbers. And, so, we'll continue to figure out. 
+We are certainly open to increasing video content either way, but we haven't quite figured out what the mix needs to be. And right now the growth is very strong. 
+In terms of Atlas, we just relaunched this fall and we're just seeing those deals get done in broad adoption. So, I think it's too soon for us to report that Atlas drives an increase in digital spend or an increase in any particular kind of spend. 
+But here's what we believe really deeply, which is that Atlas is going to revitalize marketing by making the measurement more accurate. If you look at how digital ads are being measured, they are being measured based on a cookie-based world that assumes that people have one device, largely a PC, and that's just not true. 
+Consumers have phones, they have tablets, they have PCs, as well. And the ability to understand that that's one person to serve an ad and measure all the way through correctly, we think it's going to massively improve the efficiency in the system as it gets adopted. 
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          Peter Stabler with Wells Fargo. 
+
+--------------------------------------------------------------------------------
+Peter Stabler,  Wells Fargo Securities - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          One for Sheryl. Sheryl, as you push further toward monetizing off-platform inventory, wondering if you could speak to the state of your relationships with premium publishers? There is a narrative out there we sometimes encounter that publishers are growing a bit concerned about the power you guys wheel, particularly as you push into monetizing off the platform. Thanks very much. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [25]
+--------------------------------------------------------------------------------
+
+          Our audience network efforts are still pretty new. We have a goal of serving more relevant ads to people off Facebook, which will provide greater reach for Facebook marketers and also a better opportunity to monetize for publishers. 
+We're seeing some nice results. Shazam reported that using Audience Network increased their revenue from Ad Networks by 37%. We believe that working with publishers, if we can increase the value of their inventory by providing more relevant and targeted ads, they are going to be really happy with that opportunity. And we are in the early stages of finding those partners. 
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+
+          Anthony DiClemente with Nomura. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities Intl - Analyst    [27]
+--------------------------------------------------------------------------------
+
+          First for either Mark or Sheryl on the subject of public video content and what you guys are doing to increase the amount of video in the newsfeed. Are there things in terms of actors, celebrities, public figures that you can do to economically incentivize those creators of, let's say, the higher-quality user-generated content onto the Facebook platform, be it a revenue share, what have you, relative to the economics for those types of folks on competing online video platforms? 
+And then just one quick one for Dave. You mentioned -- I just had to ask -- you'd be the shifting the accounting for Facebook Audience Network and LiveRail for revenue to be net of TAC in 2015 versus gross in 2014. 
+I'm just wondering why do that? And is there anything you can help us with in terms of order of magnitude of that shift? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [28]
+--------------------------------------------------------------------------------
+
+          On premium video content, we haven't figured out exactly how important this is to the ecosystem or how much we're going to invest or what kind of monetization we're going to offer. Video is growing quite nicely through the ecosystem right now. 
+We have made a lot of investments in public content, working with public figures to use the Facebook platform. We are by far the largest social platform and increasingly you're seeing public figures, everything from news broadcasters to journalists to public figures, do a lot on Facebook. And that's important to us because it provides the kind of sharing people want. 
+People come to Facebook to share with their friends and family but they also come to Facebook to connect with everyone from politicians to journalists to celebrities they want to connect with, and get news. And we've definitely seen public content grow as a percentage of what people get. 
+We also had some nice wins with the Golden Globes this year. Other things we're doing to go deep, we're doing some partnerships. We did In Davos at CNBC to show how we can help content creators increase their distribution and reach people directly on Facebook. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [29]
+--------------------------------------------------------------------------------
+
+          Anthony, it's Dave. 
+Just to be clear, the net revenue recognition for those products, that's how we did it in Q4, as well. Those are all small today. But there's not a change in accounting in 2015. That's how we accounted for those products in Q4. 
+As far as the net versus gross we just evaluated all the facts and circumstances and made the judgment that net revenue recognition was the most appropriate treatment here. 
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          Ross Sandler with Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          Just following up on the video concept, how important is it that Facebook host the videos versus sharing clips from third-party players in the feed? What percent of that 3 billion streams daily is Facebook-embedded versus from other players? And are you able to monetize videos from third-party players today or is there a way to work around that in the future? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [32]
+--------------------------------------------------------------------------------
+
+          The stat that we shared of 3 billion a day is all native on Facebook. There are probably other shares from other video services, as well. But the way that those look in our services are if they're links to other sites. 
+The reason why I think native video is so valuable for people using our service is that, when someone uploads a video to Facebook directly, we can optimize how it's delivered. We can make it autoplay. We can find the right quality and bit rate to send down to the person based on their connection over time, and optimize all kinds of different things. 
+So, what I think people are finding from public figures to everyday videos that people are uploading is that the best experience that you can get is by uploading content native to Facebook, which is I think, a big part of the growth that we are seeing there. 
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+
+          Colin Sebastian with Robert Baird. 
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Co. - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          I wonder if it's possible to distinguish how much of the growth in advertising revenues can be attributed to changes in organic compressions and how you balance the desire of business partners to contribute content to feeds versus monetization? Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [35]
+--------------------------------------------------------------------------------
+
+          I'm not sure I exactly understand the question. But let me see if I can take a crack at it, Colin. 
+We're seeing, obviously, great growth in DAU which is up 18%. We're seeing growth in time spent across the network, up 10% per DAU. So, you've got those underlying drivers of engagement driving growth. 
+We're also monetizing at higher rates because we're able to get better targeting into the ads and get better conversion for advertisers. So, that's reflected in better pricing. 
+So, there's a number of different factors that are coming into play. But, clearly, driving organic growth and engagement is critical in the business and we're seeing good success there. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [36]
+--------------------------------------------------------------------------------
+
+          One theme that I'd just add to emphasize here, because I think there have been a couple of questions to this effect, is our primary strategy for growing the ad business is increasing the quality of the content, not increasing the number of ads per story that people are seeing on Facebook. There are impacts like, as people consume more content on Facebook, within the ratio of ads, the organic content that we will show, they might see more ads. 
+But overall, our strategy is much less about increasing the volume of ads and much more about increasing the quality of the content and the quality of the targeting to get the right content to the right people. This is a pretty controversial strategy internally and we weren't sure if that was going to work out. But for the last year it's really fueled our growth in a good way and we feel very confident that this is the right path going forward, as well. 
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+          Carlos Kirjner with Bernstein. 
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein & Company, Inc. - Analyst    [38]
+--------------------------------------------------------------------------------
+
+          I have two quick questions. 
+First, when you say that time spent increased 10% year on year, is this roughly uniform across your geographic regions? 
+And, secondly, Mark, I think during your remarks in every earnings call, you talk to your investors for a considerable amount of time about Facebook's efforts to connect the world, and specifically about Internet.org which suggest you think this is important to investors. Can you clarify why you think this matters to investors? And, importantly, why you think Facebook can make a significant difference at scale, given that your [ann over pupil] user in emerging markets is about $5, and to connect any user who has no device or coverage may be at risk in terms of dollars? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [39]
+--------------------------------------------------------------------------------
+
+          It matters to the kind of investors that we want to have, because we are really a mission-focused company. We wake up every day and make decisions because we want to help connect the world. That's what we're doing here. 
+Part of the subtext of your question is that, yes, if we were only focused on making money, we might put all of our energy on just increasing ads to people in the US and the other most developed countries. But that's not the only thing that we care about here. 
+I do think that over the long term, that focusing on helping connect everyone will be a good business opportunity for us, as well. We may not be able to tell you exactly how many years that's going to happen in. But as these countries get more connected, the economies grow, the ad markets grow, and if Facebook and the other services in our community, or the number one, and number two, three, four, five services that people are using, then over time we will be compensated for some of the value that we've provided. 
+This is why we're here. We're here because our mission is to connect the world. I just think it's really important that investors know that. 
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Co. - Analyst    [40]
+--------------------------------------------------------------------------------
+
+          And, Carlos, on the time spent per DAU, we're just giving the one point. We're not breaking anything out by region. 
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          Paul Vogel with Barclays. 
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          I'm just curious, given the impact that currency had on the quarter on growth rates outside the US, is there any market you could call out, particularly, that were either better or worse that might be masked by the currency swings, number one? And, number two, I'm just curious if currency does stay where it is, does it all impact your spending plans or how and where and when you'll invest? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [43]
+--------------------------------------------------------------------------------
+
+          Paul, it's Dave. 
+Taking your second part first, we are really making investment decisions on short-term fluctuations in currency. So, I would say, in general, no, it's not affecting those decisions. 
+There are certainly big macro effects that are going on, and part of those are what's driving a lot of the currency fluctuation, as well. So, you have regions that are certainly growing more quickly and regions that are growing more slowly. 
+So, from a macro perspective, the United States is doing better in terms of growth versus Europe versus Latin America. You see those compounded in both currency and macroeconomic conditions in those regions. I'd say generally we've got more favorable market conditions in which to operate in the US. 
+Overall, I would say the business is driven by the fundamentals of us continuing to execute against our plan. Whether you're in a market that's suffering a little bit from a macroeconomic headwind, we still have the best mobile product in that market and we are growing. 
+So, I think, at the end of the day, it's the fundamentals of our business that are going to drive our success, and we're focused on that. But wanted to at least give some color around how the currencies might impact the 2015 results. 
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+          Robert Peck with SunTrust. 
+
+--------------------------------------------------------------------------------
+Robert Peck,  SunTrust Robinson Humphrey - Analyst    [45]
+--------------------------------------------------------------------------------
+
+          I have two quick questions. Mark, you haven't spoken much yet today about the e-commerce opportunity in front of Facebook, particularly the buy button. Can you elaborate a little bit on plans around e-commerce and what you see that opportunity? 
+And then, Dave, I was wondering, for investors, could you maybe go through your view on how you look at capital efficiency and ROI, so that, whether it be acquisitions or CapEx or even OpEx, how you look and see you are getting a good return on that spend? Thanks so much. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [46]
+--------------------------------------------------------------------------------
+
+          Q4 is a really important quarter in general, but it's a particularly important quarter for e-commerce. So, it's a timely question. 
+When you think about buy on Facebook, it's a small task in the US we started last quarter. It enables people to buy on pages. 
+To be clear, you're not buying from Facebook, you're buying directly from the merchant. And it's really an SMB product to give them capability they haven't had. 
+We'll see what happens in terms of where people convert, whether it's on Facebook. But we think the opportunity to connect consumers with the products that they then purchase is a really big one. Where we play in that most directly is the time and attention consumers have, as well as the information to do very relevant advertising, and we're going to stay focused there. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [47]
+--------------------------------------------------------------------------------
+
+          Robert, I think the bulk of the investment that we're doing is really focused on the capital and the OpEx to deliver against the core mission of enabling billions of people to connect and share. So, for the most part, we're looking at what do we need to deploy to deliver against the mission to deliver against our overall financial results. There are places where we can individually take out specific projects, whether it be M&A or specific capital investments, and then we'll look at those on an IRR basis for specific projects. 
+But you have to recognize that we're basically one large business, and we're operating against capital deployment against delivering, against the objectives of that business. That's the bulk of the spend that we do. But certainly we look at things on an ROI basis on an individual project basis, as well. 
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+          Arvind Bhatia with Sterne Agee. 
+
+--------------------------------------------------------------------------------
+Arvind Bhatia,  Sterne, Agee & Leach - Analyst    [49]
+--------------------------------------------------------------------------------
+
+          Just quickly on WhatsApp, I know the focus will be user growth for a while. But in the future, as you do turn on the monetization engine, just curious what are some of the primary ways that you are assuming growth will come from advertising or games perhaps. 
+And also, on WhatsApp user growth, would you be able to call out where that's coming from? Is there any particular areas that are stronger? And curious how that's doing in the US? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [50]
+--------------------------------------------------------------------------------
+
+          You are right that the focus for WhatsApp is on helping to connect a lot more people. When Jan and team joined us, one of the first things that we agreed on, and why I think it made sense for them to join, is that now they can focus for a few years on getting to 1 billion more than that and continuing to scale. 
+Beyond that, SMS is an incredibly global and universal product. And I think WhatsApp just has a huge opportunity to serve billions of people. 
+In terms of what the business looks like, at the end of the day, it's a distribution business, like Facebook and Instagram. How you most effectively convert that into business opportunity for customers, whether that's through payments or ads or other different kinds of structures, we'll figure that out, what the optimal thing will be. 
+But the first order thing to do is to help serve billions of people here, help continue to increase engagement. And if people are spending a lot of time in WhatsApp, sending more than 30 billion messages a day, which is really crazy when you think about the volume there compared to the global SMS volume overall. And I think if we do that, there will be a number of opportunities. 
+People asked me this question a while ago, about how we thought about games on Facebook, as well. I always thought about our canvass business on desktop, even though it was payment, as actually the same thing as our business on mobile around app install and engagement. 
+What developers tasked for is distribution. And whether they're doing that through payments or ads or whatever it is, it kind of is all the same. The most important thing is to help people connect, help people and businesses connect, create business opportunities. And then you get a small amount of the value that you are creating on top. 
+So, that will play out over the next set of years. It's one of the intellectual challenges that I'm really looking forward to tackling. 
+
+--------------------------------------------------------------------------------
+Operator    [51]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney with RBC Capital Markets. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [52]
+--------------------------------------------------------------------------------
+
+          Sheryl, the size of the ad revenue that Facebook is generating and the growth, these are large budgets that are shifting over to Facebook. Any commentary on where you think those budgets are coming from? What are the source of funds? 
+And then I know, David, the engagement levels seem to be rising. This seemed to be a little slip in the engagement levels, that DAU over MAU ratio in Asia and the rest of world, at least sequentially. Is that just noise or is that a reason to panic? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [53]
+--------------------------------------------------------------------------------
+
+          I don't think there's any single source of where the dollars are coming from. Certainly as consumer time and attention is shifting to mobile, the marketer time and attention, we pay a lot of attention to the marketer segments we work with. So, we're seeing strong growth from brand, from direct response like e-commerce, from SMBs and developers. 
+We stay pretty focused, not really on the source of where the money is coming from but what are the objectives people are spending against on Facebook so that we can meet all the different objectives. We understand that in order to continue to grow -- and we want to continue to grow -- we're going to have to serve multiple objectives on the Facebook platform, and that's what we're focused on. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [54]
+--------------------------------------------------------------------------------
+
+          Mark, I think the simple story is we're really pleased with how we're executing on the engagement front. 64% of people coming to Facebook monthly, coming on an average day, is, we think, a great stat. I think small changes are pretty much noise. We're really happy with it. 
+We talked about things like the video engagement. Mark shared some stats like how much photo sharing is going on across our properties. Overall, I think engagement is a great story for us and we are really happy with it. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [55]
+--------------------------------------------------------------------------------
+
+          Great. Thank you, everyone, for joining us today. We appreciate your time and we look forward to speaking with you again. 
+
+--------------------------------------------------------------------------------
+Operator    [56]
+--------------------------------------------------------------------------------
+
+          This concludes today's conference call. You may now disconnect. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Jan-29-AMZN.OQ-136951423128-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2014 Amazon.com Inc Earnings Call
+01/29/2015 02:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com, Inc. - VP of Finance, Global Consumer Business
+ * Tom Szkutak
+   Amazon.com, Inc. - SVP and CFO
+ * Phil Hardin
+   Amazon.com, Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Ben Schachter
+   Macquarie Equity Research - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Ron Josey
+   JMP Securities - Analyst
+ * Jason Helfstein
+   Oppenheimer & Co. - Analyst
+ * Brian Pitz
+   Jefferies & Company - Analyst
+ * Gene Munster
+   Piper Jaffray - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Katy Huberty
+   Morgan Stanley - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Mark Miller
+   William Blair and Company - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Kaizad Gotla
+   JPMorgan - Analyst
+ * Carlos Kirjner
+   Sanford C. Bernstein - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to the Amazon.com Q4 2014 financial results teleconference. (Operator Instructions). Today's call is being recorded.
+For opening remarks, I will be turning the call over to the Director of Investor Relations, Phil Hardin. Please go ahead.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q4 2014 financial results conference call. Joining us today is Tom Szkutak, our Chief Financial Officer; and Brian Olsavsky, Vice President and CFO of our Global Consumer Business. 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, January 29, 2015, 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 2013.
+Now I will turn the call over to Tom.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Phil. I will begin with comments on our fourth-quarter financial results. Trailing 12-month operating cash flow increased 25% to $6.84 billion. Trailing 12-month free cash flow decreased to $1.95 billion. In the supplemental financial information and business metrics portion of our earnings release, we include a few additional free cash flow measures. We believe these measures provide additional perspective on the impact of acquiring property and equipment with capital and finance leases.
+Trailing 12-month capital expenditures were $4.89 billion. Capital expenditures does not include the impact of property and equipment acquired under capital and finance lease obligations. Return on invested capital is 9%, down from 13%. ROIC is TTM free cash flow divided by the 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 483 million shares compared with 476 million one year ago.
+I will turn the call over to Brian for additional financial highlights.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - VP of Finance, Global Consumer Business    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Tom. Worldwide revenue increased 15% to $29.33 billion, or 18% excluding the $895 million unfavorable impact from year-over-year changes in foreign exchange. Media revenue decreased to $6.95 billion, down 4%. Excluding FX, media revenue was flat year-over-year. EGM revenue increased to $20.64 billion, up 21%, or 24% excluding FX. Worldwide EGM increased to 70% of worldwide sales, up from 67%. Worldwide paid unit growth was 20%. Worldwide active customer accounts were approximately 270 million. Worldwide paid Prime members increased 53% year-over-year.
+Worldwide active seller accounts were more than 2 million. Seller units represented 43% of paid units. Fulfillment by Amazon, or FBA, units represented more than 40% of seller units. Worldwide active Amazon Web Services customers exceeded 1 million.
+Now I will discuss operating expenses, excluding stock-based compensation. Cost of sales was $20.67 billion or 70.5% of revenue compared with 73.5%. Fulfillment marketing, technology and content, and G&A combined was $7.62 billion or 25.9% of sales, up approximately 300 basis points year-over-year. Fulfillment was $3.33 billion or 11.3% of revenue compared with 11.1%. Tech and content was $2.41 billion or 8.2% of revenue compared with 6.6%. Marketing was $1.49 billion or 5.1% of revenue compared with 4.3%.
+Now I will talk about our segment results. And consistent with prior periods, we do not allocate to segments our stock-based compensation or the Other Operating Expense line item. In the North America segment, revenue grew 22% to $18.75 billion. Media revenue grew 1% to $3.54 billion. EGM revenue grew 27% to $13.53 billion, representing 72% of North America revenues, up from 69%. Other revenue grew 43% to $1.67 billion.
+North America segment operating income increased 40% to $1.02 billion, a 5.4% operating margin. In the international segment, revenue grew 3% to $10.58 billion. Excluding the $872 million year-over-year unfavorable foreign exchange impact, revenue growth was 12%. Media revenue decreased 8% to $3.41 billion, or a decrease of 1%, excluding foreign exchange. And EGM revenue grew 10% to $7.11 billion, or 19% excluding foreign exchange. EGM now represents 67% of international revenues, up from 63%.
+International segment operating income was $20 million, down from $151 million in the prior year. Consolidated segment operating income increased 18% to $1.04 billion or 3.5% of revenue, up approximately 10 basis points year-over-year. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income was $591 million compared to operating income of $510 million in the prior year.
+Our income tax expense was $205 million. GAAP net income was $214 million or $0.45 per diluted share compared with a net income of $239 million or $0.51 per diluted share.
+Now I will discuss the full-year results. Revenue increased 20% to $88.99 billion or 20%, excluding year-over-year changes in foreign exchange. North America revenue grew 25% to $55.47 billion, and international revenue grew 12% to $33.52 billion or 14%, excluding year-over-year changes in foreign exchange. Consolidated segment operating income decreased 9% to $1.81 billion or 10%, excluding the favorable year-over-year impact from foreign exchange. And operating margin was 2% compared to 2.7% in the prior year. GAAP operating income decreased 76% to $178 million.
+Turning to the balance sheet, cash and marketable securities increased $4.97 billion year-over-year to $17.42 billion. Inventory increased 12% to $8.30 billion, and inventory turns were 8.6, down from 8.9 turns a year ago as we expanded selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 9% to $16.46 billion, and accounts payable days decreased to 73 from 74 in the prior year.
+And now back to Tom with guidance.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Brian. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including the high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy and consumer spending. It's not possible to accurately predict demand; and, therefore, our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as settling intercompany balances in foreign currencies amongst our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rate can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements; record any further revisions to stock-based compensation estimates; and that foreign exchange rates remain approximately where they've been recently.
+For Q1 2015, we expect net sales of between $20.9 billion and $22.9 billion, a growth of between 6% and 16%. This guidance anticipates approximately 460 basis points of unfavorable impact from foreign exchange rates.
+GAAP operating income or loss to be between a $450 million loss and $50 million in income, compared to $146 million in income in the first quarter of 2014. This includes approximately $450 million for stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between zero and $500 million in income compared to $502 million income in the first quarter of 2014.
+I will conclude my portion of today's call with an update on our reportable segments. We expect to change our reportable segments to report North America, International, and Amazon Web Services, beginning with first-quarter 2015. We remain heads-down focused on driving a better customer experience through price, selection, and convenience. We believe putting customers first is the only reliable way to create lasting value for our shareholders.
+Thanks. And with that, Phil, let's move to questions.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [6]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Tom. Let's move on to the Q&A portion of the call.
+Operator, will you please remind our listeners how to initiate a question?
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions). Brian Pitz, Jefferies and Company.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Just a quick question. You had a strong holiday season -- 100 million more items shipped for free this holiday -- while FBA units was up 50%, and fulfillment expense remained relatively flat. How did you manage that? Are the new sortation centers essentially the key to controlling shipping costs? And what percent of units sold are FBA? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [3]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of the last part of your question, the percentage of FBA units of third-party paid physical units are over 40%. And in terms of the fulfillment discussion, we certainly -- Q4 is our most seasonal quarter. You can see that we get a little bit better leverage, I should say, than we've gotten in other quarters; again, most seasonal quarter. Not a lot to add to that, but we continue to ship on behalf of obviously our retail offerings as well as FBA, that's included in that.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies & Company - Analyst    [4]
+--------------------------------------------------------------------------------
+
+          Great, thanks.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Katy Huberty, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Katy Huberty,  Morgan Stanley - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          There's a headline on the tape referencing improving productivity in 2015. So I just wondered if you could clarify what areas of the business you are focused on in terms of productivity. And then what are some of the projects or areas that we should be prepared to see a large uptick in investment in 2015?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [7]
+--------------------------------------------------------------------------------
+
+          Yes, I think what you are referring to, as I mentioned on the earlier call, that we do an annual planning process. We actually start it in the late summer, early fall. We go through that process; we take a break for the seasonal holidays, and then we get back to it. So we're in the process of finalizing it right now. And the teams are putting even more energy and attention on driving what we would call fixed expense and variable expense productivity, as well as other efficiency projects. So there's many, many different pieces that go into that. But certainly we've added a lot of people and structural over the last several years. And so we have been putting focus on that, but we're just putting even more focus on it as we finalize our plans for 2015.
+
+--------------------------------------------------------------------------------
+Katy Huberty,  Morgan Stanley - Analyst    [8]
+--------------------------------------------------------------------------------
+
+          And what areas should we expect big upticks in, in investment, in 2015?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [9]
+--------------------------------------------------------------------------------
+
+          You'll have to -- in terms of investment, certainly we're going to continue to support the growth of the business. You should expect that we'll be spending more in terms of CapEx to support our Web Services business, which is growing very fast. You should expect us to add fulfillment capacity. As we've done in prior years, we have updated you a bit as we've gone along. And so we'll do that from time to time during the year, as well, in 2015. So stay tuned on that.
+
+--------------------------------------------------------------------------------
+Katy Huberty,  Morgan Stanley - Analyst    [10]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [11]
+--------------------------------------------------------------------------------
+
+          Ron Josey, JMP Securities.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [12]
+--------------------------------------------------------------------------------
+
+          Real quickly on fulfillment costs, it looks like overall costs accelerated quite a bit, to around 17% growth in 4Q from 30% in 3Q. I'm wondering if anything specific led to that improved overall growth from -- is it maybe the key of a rollout? And then, quickly, I think there was mentioning around breaking out AWS results. Wondering if any reason now? Perhaps it's getting to a level that you have to do it? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [13]
+--------------------------------------------------------------------------------
+
+          Yes, in terms of the fulfillment piece, there's not a lot of callouts on that. We had unit growth of 20% year-over-year. Certainly, our FBA is growing at a faster rate; the sellers are up 65% over year. It's greater than 40% of our units. And, again, the teams continues to work on getting productivity there. In terms of AWS, yes, we just think it's an appropriate way to look at our business for 2015. And so our plan is to start breaking it out as of Q1 of this year.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+          Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Kaizad Gotla,  JPMorgan - Analyst    [15]
+--------------------------------------------------------------------------------
+
+          Thanks. This is Kaizad Gotla in for Doug. I think you noted Prime is growing faster internationally than it is in North America. So can you help us reconcile that with the difference between your North America and international EGM growth rates?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [16]
+--------------------------------------------------------------------------------
+
+          If you take a look -- yes, what I had mentioned was Prime, worldwide, is up 53% year-over-year, so it's growing very fast globally. It's 50% growth in the US, and even higher in international. And so what I was -- the reason -- both are contributing to the growth rates that you're seeing, but we're certainly at an earlier stage in international. So it's an opportunity for us. But in terms of the number of Prime members relative to the US is smaller, so it's an earlier phase. So again, as we continue to grow that, it's an opportunity for us, and certainly something that we're focused on.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Carlos Kirjner, Bernstein Research.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Sanford C. Bernstein - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          I have two questions. Can you comment on your view of the relative value proposition of Prime in European markets and Japan? Is it similar to the US? You know, two-day shipping and all the other benefits, or is it different because -- we think, for example, that penetration of Prime in the European markets is much lower. And you have told us that the number of Prime SKUs is much lower in the UK, for example. So, what's the fundamental cause of that? Why is it that Prime in the UK is not as developed as in the US? Is it timing or is it the proposition?
+The second question is about AWS. You have a leadership position now, and it's a very large market. And it's easy to see from the outside that you are hiring aggressively, both in engineering and sales. Given the size of the opportunity and your position, what specifically prevents you from hiring faster, developing more products, investing more? How do you balance -- what prevents you from doing that? Why wouldn't you invest twice or three times as much in AWS? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [19]
+--------------------------------------------------------------------------------
+
+          In terms of -- I'll take the AWS one first. We are expanding very rapidly. We are -- have been hiring a lot of great people over the past few years, and several years. We do think it's a big opportunity. We're making sure we keep the hiring bar really high to make sure we're bringing great resources, like we do across all of Amazon. And we're super-excited about the opportunity, so we are investing very heavily.
+You see that certainly in our CapEx numbers. And the assets that we are acquiring with some of our capital leases, you see that represented. So again, we are investing very heavily, both in terms of people as well as capital for that business, and we share your excitement about the business.
+In terms of the Prime piece, that proposition is a bit different by geography. And we continue to make it better in all of the geographies that we have Prime. That's something that we're focused on. The shipping speed is different by geography a bit, and so -- but the focus is all about how we make sure that we get a great experience for customers in those geographies.
+But the one thing is different is -- you mentioned is that the proposition or the timing -- so the proposition is a little bit different. But we'll continue to work on making a better for all the geographies we have it in. But the timing is different.
+We did launch in the US first, and we launched in other geographies following that; so, as a result, it's just earlier in these other geographies. So we still think it's a very good opportunity, and something that we're focused on.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+          Mark May, Citigroup.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          One on -- I am sorry if I missed this. What's your thought or outlook for pricing in the AWS Cloud business for this year? It was obviously quite fierce last year. Do you think it will be quite as competitive in 2015?
+And then in the media business, we've been hearing data points about a slowdown in the e-book space. Are you seeing that? And what's your outlook? Do you see any hope for the media segment to improve as a result of that? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [22]
+--------------------------------------------------------------------------------
+
+          In terms of the first question, we have continued to lower prices for customers in Web services. Certainly that's something that we've been focused on since early launch. It's something that we continue to focus on. It's hard to predict what will happen going forward, so really can't comment on what we might or might not do there. But, certainly, it is something that we've had since launch. We've had many, many -- it's in the high 40s, in think, in terms of pricing actions there. So we're very excited to make sure that we have great prices for customers.
+In terms of that media, you are seeing an overall media growth, globally. You are seeing some softness in the growth rate there. I just want to point out, certainly one of the larger factors, or largest factor, that's in that number is -- keep in mind that we have -- we do game consoles that are part of the media growth numbers or the media absolute numbers. And last year was a very strong year for new console launches. And so what happens is when you have those launches, you also have video games that are -- the video game sales themselves are also strong. So, for example, if you look at North American media growth rate in Q4 of this past year, you're seeing that impact. So that's what you're seeing there.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney, RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Tom, can ask you a high-level question?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [25]
+--------------------------------------------------------------------------------
+
+          Sure. Go for it, Mark.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Okay. Amazon has always pitched itself in terms of price, selection, and convenience to customers. And I saw this great survey work that was done by Morgan Stanley in the last couple of weeks about this global survey that indicated a little bit of the shift in consumers' interest in online commerce, more towards convenience. You must have a pretty good feel at Amazon for whether that broad value proposition to consumers is shifting; if it's shifting to be slightly less sensitive to price over the last couple of years, and more towards convenience.
+Are you seeing that kind of shift? There's a lot of implications if that is, in fact, what's happening.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [27]
+--------------------------------------------------------------------------------
+
+          I would say it this way. In terms of customer reaction, you see it really across the fundamental inputs that we've talked about for a long time. So in other words, in terms of speed of delivery and convenience, we see that with Prime members. Prime members are buying more. It's more convenient. They are getting their physical product to them faster versus being not a Prime member. So we certainly see that, so that certainly speed of delivery helps.
+We also see -- we need to make sure, and it's something that we're always focused on, is making sure we have great prices. And that's every single item across categories, across geographies. So it's something we've focused on. We do think that's important for customers. And we need to be -- have the selection be in stock when a customer comes to our detail page. It matters.
+So I don't view it as a shift. I view it as -- there's certainly a lot of visibility and transparency around all of these. That's what shopping and operating a business online does. There's just a tremendous amount of transparency. We think -- we like that world. And that's something that we continue to focus on those inputs so that we can be successful in that world. And that's not something new. That's something we've been focused on for a long time.
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+          Jason Helfstein, Oppenheimer.
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [29]
+--------------------------------------------------------------------------------
+
+          Two questions. One, just if you can clarify any impact of the Fire phone in the quarter. And then secondly, can you talk about how fuel prices impact your model? And I know the shippers, they use a trailing index to calculate fuel, how those savings would show up, or if you would pass those on to third parties, et cetera. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [30]
+--------------------------------------------------------------------------------
+
+          Yes, there's not -- I don't have really any callout for the Fire phone. We continue to sell. I had mentioned we had a little bit over $80 million of inventory at the end of Q3, and it will continue to sell through that in Q4.
+In terms of fuel prices, not a lot to call out there in terms of impact on the quarter. Certainly, over a long period of time, if it's sustainable, we should see some benefits there.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          Gene Munster, Piper Jaffray.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray - Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Over the past couple of years, it's just been a little bit of a roller coaster with margins for investors. There's points of optimism followed by points of frustration. And there's really some optimism here in this report. Is there anything that you can help investors with to understand just how you think about different cycles of investing, to try to smooth out some of this roller coaster mentality that happens with the stock? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [33]
+--------------------------------------------------------------------------------
+
+          Well, in terms of -- I would describe it this way, Gene. We have a lot of opportunities in front of us that we've talked about. And we're also being selective with those opportunities. We have added a lot of resources over the past few years. We certainly have been in a heavy investment cycle. I mentioned earlier, we're in the process of finalizing our plan for 2015. We always put energy into various productivity measures. But we're putting even -- the team is putting even more focus on those efforts as we finalize our 2015 plans.
+We'll have to see where that ends up, but putting more energy and focus around our various fixed productivity, variable expense productivity, efficiency projects. And again, a wide range of different activities. And so, that's what we're doing, and you'll have to stay tuned to see how that progresses as we go.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Ross Sandler, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          I had two questions. First on India, can you talk about the India opportunity broadly, and maybe some advantages you may have versus some of the local peers in terms of leveraging your scale? That market appears to be just on fire right now, so just a little bit of color on India.
+And then on Prime, can you talk about the Prime member behavior in terms of purchasing frequency? How it looks today versus maybe a Prime member that joined two years ago? I know it looks a lot different from those very early Prime adopters from six, seven years ago. But just more recently, over the last couple of years, is the behavior consistent as you grow the base? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [36]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of India, we think it's very, very early. We are investing, certainly, in India and we think it's a very interesting opportunity. We have a very good team there, and we're excited to participate. And again, we think it is very early, so we like the opportunity there.
+In terms of Prime, there's not a lot I can help you with on that, but I would say is this: certainly as you think about customers who are not Prime that become Prime, we see a very sizable step-up in their purchasing patterns. And so, the customers are certainly buying a lot more from us.
+And one of the things that we're seeing -- another thing that we're seeing is certainly, as Jeff references in the quote, Prime has evolved. It is both a physical and digital offering. It's unique that way. We see, for example -- although it is still very early, and we're learning and investing in this area -- but I take video content, for example. What we see is customers that come in who come in through our Prime pipeline for video, for a free trial, those customers are converting at higher rates than other channels. We see that customers that are streamers, video streamers; even though we have high renewal rates, they are renewing at even higher rates than others.
+We see those people who are customers who are streaming have a very similar purchase patterns on the physical product side as those who don't. And so we view that as a positive. So it's very integrated from a customer experience standpoint, which we think is great.
+And so those are the things that we're seeing in Prime right now. And with Prime being almost 10 years old, growing at 53% year-over-year on a sizable base, tens of millions, we think is very interesting. And it's something that we're very focused on as we continue forward.
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+          Eric Sheridan, UBS Investment Research.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [38]
+--------------------------------------------------------------------------------
+
+          On the topic of China, wanted to know if you could help us either qualitatively or quantitatively understand what that trajectory or the size of the business is in China. And then maybe the trajectory around investments needed to compete in China, and how you think about the opportunity there long-term, looking through the lens of the competitive landscape, and maybe Amazon's particular skill set on going to market in China. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [39]
+--------------------------------------------------------------------------------
+
+          Sure. We haven't broken out the size of the business. I can't help you much there. But we continue to work on the customer experience there. The team has some interesting ideas that you'll have to stay tuned on of how to make that experience better, and we continue to work on it. So, there's not a lot more that I can add to that.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+          John Blackledge, Cowen and Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [41]
+--------------------------------------------------------------------------------
+
+          Just a couple questions. In North American media, aside from the video game impact, just wondering if there are any other factors driving the low or flattish growth year-over-year. And then, CapEx was up about 40% in 2014. It has kind of bounced around over the years. Just wondering if you can give us a sense of the level of growth in 2015. Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [42]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of the North American media, a number of different, certainly, puts and takes there. But certainly, by far, the biggest one is the one I called out, which is the video game consoles. So if you look at the growth rate in Q4 last year, meaning 2013, and Q4 2014, you see a big difference. And the biggest, the most sizable difference there is certainly the video game consoles portion, and the video games associated with those.
+So another way to say it is, the video game consoles and video games portion of that is down year-over-year. And obviously, years ago, we put the video game consoles as part of North American media to keep it with video games, and their kind of larger ASP items, as well, to go in there. So certainly having an impact on that when you look at the growth [row] and you compare 2013 growth -- Q4 2013 growth to Q4 2014 growth there.
+In terms of CapEx, we're not giving guidance on the 2015 spend. But given the high usage rates that we've had in Web Services, you should expect that we'll be spending CapEx to support that growth. And we'll certainly be adding new fulfillment centers as we go. Also, keep in mind that we do also finance capital. So if you look at our capital lease activity, point to that -- that's also increased in activity over the last few years.
+Certainly a number of different investments that are going -- different types of CapEx that go into that financing; but the biggest piece is certainly infrastructure to support our business, primarily on the AWS side. So, again, that's also included in that number.
+
+--------------------------------------------------------------------------------
+Operator    [43]
+--------------------------------------------------------------------------------
+
+          Heath Terry, Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [44]
+--------------------------------------------------------------------------------
+
+          Tom, I was hoping you could give us some kind of sense of the impact on delivery times and conversion rates that you saw during this holiday season from the investments that you made in fulfillment, particularly the sortation centers that were added before the holidays. And then also, to what degree you've seen some leverage, or some of the slower growth in fulfillment costs, from moving more of the fulfillment obligation to first-party-owned infrastructure?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [45]
+--------------------------------------------------------------------------------
+
+          Sure. In terms of the sort centers -- and I would say just in -- I would say, in addition to sort centers, what's happened over the course of the last several years is, with all the fulfillment centers that we've added, we've actually gotten selection closer to customers. And so, that's helped us from a delivery speed standpoint. It has helped us from a cost standpoint in terms of transportation cost, being closer to customers. And so, it's a natural result of the footprint that we've added.
+In terms of sortation centers, there's a lot of different benefits to that. But certainly one of them is as you get closer and closer -- certainly throughout the year it's helped us with holiday deliveries; it's helped us with Sunday deliveries. And as we get closer to, in this case, December to the holiday -- end of the holidays, it has certainly helped us from a delivery to customer standpoint. So we're very pleased with the performance of those sortation centers. And really the global team, fulfillment team around the world, I think they did a terrific job during the holiday season, as they did throughout the year.
+
+--------------------------------------------------------------------------------
+Operator    [46]
+--------------------------------------------------------------------------------
+
+          Mark Miller, William Blair and Company.
+
+--------------------------------------------------------------------------------
+Mark Miller,  William Blair and Company - Analyst    [47]
+--------------------------------------------------------------------------------
+
+          There's quite a disparate performance between North America and international, in terms of the profit change year-on-year, up nearly $300 million; North America down over $100 million. So could you just help us understand why the international performance is so much weaker? Perhaps give us some color on the established markets in Europe, relative to emerging markets. And in the past, you've also discussed Japan. And then is there an inflection point where international profits we could expect to head up again?
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [48]
+--------------------------------------------------------------------------------
+
+          Sure. The first one is certainly the growth rates, the real growth rates, are slower in international versus North America; certainly would have an impact. The second is we continue to invest in international in terms of adding capacity for infrastructure, for fulfillment capacity. As our -- if you look at our international growth rates, the unit growth rates are actually growing at a higher rate than revenue.
+And then emerging geographies; we talked about India earlier. Very excited about India. We are investing in India. We are also investing in China. So those are certainly impacting the results as well.
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+          Justin Post, Bank of America Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          I wanted to ask about gross margins. They were up quite a bit year-over-year, and it looks like, in our numbers, EGM beat and media missed. So, any thoughts on the mix shift there helping or hurting gross margins? What are the key drivers for that line, and what are your -- can AWS continue to drive that in 2015? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [51]
+--------------------------------------------------------------------------------
+
+          Certainly AWS -- mix of business is having an impact. AWS is certainly part of that, and impacting that. Also just to keep in mind, our third-party growth is growing at a faster rate than retail, and so certainly that's having an impact. And then obviously continuing to lower prices for customers, as well as working with our partners on the vendor side to support those activities from a pricing standpoint. So those are the dynamics.
+And in terms of 2015, beyond the guidance that we're giving, there's not a lot of call-out there. But we've had a great success of being to grow our retail offerings. Our Marketplace side has grown very nicely over the years, including 2014. The team has done a great job there. Fulfilled by Amazon, in terms of number of sellers, continue to grow there. The percentage of paid physical units are approximately 40%, or a little over 40% of the total there. So that has become much more meaningful over the past several years; so, very happy about that. So all those contribute to the numbers that you just talked about.
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+          Colin Sebastian, Robert W. Baird.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [53]
+--------------------------------------------------------------------------------
+
+          One question, as a follow-up on AWS, and specifically some of the announcements related to WorkMail and WorkSpaces. This would signal that Amazon is moving up the stack towards a more of a SaaS offering. Is that the right interpretation? And, if so, should we expect a broadening of those SaaS product initiatives? Thank you.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [54]
+--------------------------------------------------------------------------------
+
+          You know, very happy to have the launch, make the launch that you mentioned. We think it's exciting. It's certainly -- we're excited overall about Web Services offerings. The team has done an incredible job in terms of innovation, as well as operating these large services at scale. So they're doing a terrific job. In terms of what we might or might not do in the future, we're not talking about what that roadmap is, so you'll have to stay tuned.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+          Ben Schachter, Macquarie Equities Research.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Equity Research - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          [Can you] just give any color on how you are evaluating the opportunities to show video advertising against the ever-increasing video content? Thanks.
+
+--------------------------------------------------------------------------------
+Tom Szkutak,  Amazon.com, Inc. - SVP and CFO    [57]
+--------------------------------------------------------------------------------
+
+          Yes, we really aren't using advertising too much in that area. You've seen it a little bit on some of our original content. But beyond that, we really can't comment. We think the experience we have is great for customers. We get a lot of positive feedback on the content that we have there, and the uninterrupted content, if you will. And so wouldn't speculate on what we might or might not do there, but we're getting great feedback from customers.
+
+--------------------------------------------------------------------------------
+Operator    [58]
+--------------------------------------------------------------------------------
+
+          James Cakmak, Monness, Crespi & Hardt.
+James, your line is live. Please proceed with your question.
+James, if you have muted your line, please un-mute it.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [59]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us on the call today, and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [60]
+--------------------------------------------------------------------------------
+
+          Thank you, ladies and gentlemen. This concludes today's conference. Thank you all for your participation.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
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exam/original-files/Problem_1_Sample/2015-Jul-23-AMZN.OQ-140462931809-Transcript.txt

@@ -0,0 +1,676 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2015 Amazon.com Inc Earnings Call
+07/23/2015 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com, Inc. - CFO
+ * Phil Hardin
+   Amazon.com, Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Scott Tilghman
+   B. Riley Caris - Analyst
+ * Stephen Ju
+   Credit Suisse - Analyst
+ * Kerry Rice
+   Needham & Company - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Ron Josey
+   JMP Securities - Analyst
+ * Brian Pitz
+   Jefferies LLC - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Gene Munster
+   Piper Jaffray & Co. - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Paul Vogel
+   Barclays Capital - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Nomura Securities Intl - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * Carlos Kirjner
+   Bernstein - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Greetings. Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q2 2015 financial results teleconference. At this time, all participants are in a listen-only mode.
+After the presentation, we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks I will be turning the call over to the Director of Investor Relations, Phil Hardin. Please go ahead.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello. And welcome to our Q2 2015 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks.
+The following discussion and responses to your questions reflect management's view as of today, July 23, 2015 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 2014.
+Now I'll turn the call over to Brian.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Phil. I'll begin with comments on our second quarter financial results.
+Trailing 12 month operating cash flow increased 69% to $8.98 billion. Trailing 12 month free cash flow increased to $4.37 billion, up from $1.04 billion. In the supplemental financial information and business metrics portion of our earnings release, we include a few additional free cash flow measures. We believe these measures provide additional perspective on the impact of acquiring property and equipment with cash and through capital and finance leases.
+Trailing 12 month capital expenditures were $4.61 billion. Capital expenditures do not include the impact of property and equipment acquired under capital and finance lease obligations. The increase in capital expenditures and capital leases reflects additional investments in support of continued business growth due to investments in technology infrastructure, the majority of which is to support AWS, and additional capacity to support our fulfillment operations.
+Return on invested capital was 17%, up from 6%. ROIC is trailing 12 month free cash flow divided by average total assets, minus current liabilities, excluding the current portion of long-term debt over five quarter ends.
+Combination of common stock and stock based awards outstanding was 488 million shares, compared with 480 million one year ago. Worldwide revenue grew 20% to $23.18 billion, or 27% excluding the $1.39 billion unfavorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 22%.
+Worldwide active customer counts was approximately 285 million, excluding customers who only had free orders in the preceding 12 month period, worldwide active customers were approximately 265 million, up from approximately 237 million in the comparable prior year period. Worldwide seller units represented 45% of paid units, up from 41% in the comparable prior year period.
+Now I'll discuss operating expenses excluding stock-based compensation. Cost of sales was $15.16 billion or 65.4% of revenue, compared with 69.3%. Fulfillment, marketing, technology and content and G&A combined was $6.95 billion or 29.9% of sales, up approximately 130 basis points year-over-year. Fulfillment was $2.74 billion or 11.8% of revenue compared with 11.8%. Tech and content was $2.70 billion or 11.7% of revenue compared with 10.4%. Marketing was $1.1 billion or 4.7% of revenue compared with 4.7%.
+Now I'll talk about our segment results. As a reminder, in the first quarter we changed our reportable segments to report North America, International and Amazon Web Services. Consistent with prior periods, we do not allocate to segments our stock-based compensation or the other operating expense line item.
+In the North America segment, revenue grew 26% to $13.8 billion. Media revenue grew 6% to $2.62 billion or 7% excluding foreign exchange. EGM revenue grew 31% to $10.99 billion or 32% excluding foreign exchange. EGM now represents 80% of North America revenues. North America segment operating income increased 113% to $703 million, a 5.1% operating margin. Excluding the $9 million favorable impact from foreign exchange, North America segment operating income increased 111%.
+In the International segment, revenue increased 3% to $7.56 billion. Excluding the $1.37 billion year-over-year unfavorable impact from foreign exchange, revenue growth was 22%. Media revenue decreased 12% to $2.09 billion or increased 3% excluding foreign exchange. EGM revenue grew 10% to $5.43 billion or 31% excluding foreign exchange. EGM now represents 72% of International revenues.
+International segment operating loss was $19 million compared to a loss of $2 million in the prior year period. International segment operating loss includes $89 million of unfavorable impact from foreign exchange.
+In the Amazon Web Services segment, revenue increased 81% to $1.82 billion. Amazon Web Services segment operating income increased 407% to $391 million, a 21.4% operating margin. Excluding the $71 million favorable impact from foreign exchange, AWS segment operating income increased 314%. Consolidated segment operating income increased 166% to $1.07 billion or 4.6% of revenue, up approximately 250 basis points year-over-year.
+Excluding the $9 million unfavorable impact from foreign exchange, CSOI increased 168%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income was $464 million compared to a loss of $15 million in the prior year period.
+Our income tax expense was $266 million. GAAP net income was $92 million or $0.19 per diluted share, compared with a net loss of $126 million or a loss of $0.27 per diluted share.
+Turning to the balance sheet. Cash and marketable securities increased $6.02 billion year-over-year to $14 billion. Inventory increased 12% to $7.47 billion, and inventory turns were 8.9, down from 9.1 turns a year ago, as we expanded selection, improved in-stock levels and introduced new product categories. Accounts payable increased 18% to $12.39 billion, and accounts payable days increased to 74 from 71 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and customer spending. It's not possible to accurately predict demand and therefore our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such a settling intercompany balances and foreign currencies among our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rate can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements, record any further revisions to stock-based compensation estimates and if foreign exchange rates remain approximately where they've been recently.
+For Q3 2015, we expect net sales of between $23.3 billion and $25.5 billion, or growth of between 13% and 24%. This guidance anticipates approximately 620 basis points of unfavorable impact from foreign exchange rates. GAAP operating income or loss to be between a $480 million loss and $70 million of income, compared to a $544 million loss in the third quarter of 2014. This includes approximately $580 million for stock-based compensation and amortization of intangible assets.
+We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $100 million and $650 million, compared to a $136 million loss in the third quarter of 2014. We remain heads down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.
+Thanks, and with that, Phil, let's move on to questions.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Brian. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions)
+Our first question comes from Mark May with Citi. Please proceed. Your line is live.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. Clearly a lot of things that were working well in the quarter, but maybe just focusing in on AWS which is -- seems to be quickly emerging as your largest contributor to operating income. Can you maybe provide a little more color on what drove the acceleration and just the overall growth in the business, if you could talk a little bit about the addition of new customers versus average spend per customer and I think in the past you've talked about what unit growth was for AWS?
+And then in the press release you talked about expanding AWS into some new International markets. Can you give us a feel for how much of AWS's business today is domestic and what kind of opportunity you have there to expand AWS outside the US.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Yes, Mark. Thanks for your question.
+So we will not be providing the granular customer detail, unfortunately, but I will say the growth of 81% was up from 49% in Q1. You'll remember that we're lapping a number of large price decreases in Q2 of last year, so it was somewhat expected, but a very strong quarter in AWS. We did open a region in India
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [4]
+--------------------------------------------------------------------------------
+
+          We've announced a region in India.
+The other thing to mention is just we continue to see really strong usage growth. It's outpacing the revenue growth of 81%, obviously. And so we're really excited about it.
+From a distribution of customers, it is a global business. We have regions spread throughout the world. We've got 11 regions at this point and have announced plans to launch a region in India in the future.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Eric Sheridan with UBS. Please proceed. Your line is live.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Great. Thank you for taking the question. There's been some recent press reports talking about investments in India. Wanted to know, you've talked a little bit about that market in the past, whether there was any update there in terms of how you're thinking about approaching that market and the level of investments that might be needed to compete in the market. Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+
+          Certainly, Eric. What I could say about India is that when we say a positive surprise, we double down on it. That's kind of our policy. India is that kind of surprise.
+We're very happy, very encouraged early on with what we've seen, the ramping of the business, the level of invention going on for both customers and sellers. We're over 25 million ASINs, which is the largest online store in India, and continue to improve pricing and fast delivery.
+So we're super excited about India. I will not get into specific investment levels right now, but we continue to ramp up our investment there.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [8]
+--------------------------------------------------------------------------------
+
+          Thanks so much.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Justin Post with Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [10]
+--------------------------------------------------------------------------------
+
+          Thank you. A couple questions. We follow this coming for a long time and profits seem to move around quite a bit year-over-year and year against year. Just wondering how you think about that? Is that just the nature of your big bets and that's just going to continue or is there a way to smooth that out?
+And secondly, in AWS, it does seem like pricing competition has come down and we've been to a lot of your events and it seems like you're emphasizing pricing a little less to your customers. Can you talk at all about the pricing environment in cloud? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [11]
+--------------------------------------------------------------------------------
+
+          Sure. Let me start with that second question. So as Phil mentioned, we're seeing continued increases in usage, both sequentially and year-over-year. We're also seeing great efficiency in the business on a cost basis. Innovation is accelerating, not decelerating. We had over 350 significant new features and services and we believe that's what's resonates with customers.
+Pricing is certainly a factor. We don't believe it's always the primary factor. In fact, what we hear from our customers is that the ability to move faster and more agilely is what they value.
+I'm sorry, the first part of your question was?
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [12]
+--------------------------------------------------------------------------------
+
+          I was asking about just how the profitability really moves, pretty big swings year-over-year. Is that the nature of your just big bets and that can continue or is there a way to smooth that out going forward? How do you think about that?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [13]
+--------------------------------------------------------------------------------
+
+          Sure. Well, here's how I think about it. We have two things, at least two things going on. We're continuing to drive operational improvement in every business that we're in. But we're also investing in large opportunities that are in front of us, particularly in Marketplace, Prime and AWS.
+If you saw our shareholder letter this year, I think Jeff Bezos put it really well. He said we're going to look for things that are important to customers, customers love them, businesses that can grow to be a large size, that can generate a high return on invested capital and are durable and can last for decades. We will continue to invest in the businesses that we think fit that profile, and we're always looking for a fourth or fifth business that fits that profile.
+As far as lumpiness, admittedly it is lumpy and we will continue to work on both those tracks going forward.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [15]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Mark Mahaney with RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Okay. Thanks. I don't know if Tom's listening in. That's a great exit on his part.
+On International retail, you had nice acceleration there. Could you give us a little bit more of the why behind that? Why would international revenue growth, particularly in EGM, accelerate pretty materially? Is that the impact of the buildup of Prime in international markets, and also in the US, too, but more spend per Prime customer as they go through this evolution that's just layering on? Is that what it is? What is causing that acceleration? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [17]
+--------------------------------------------------------------------------------
+
+          Certainly. We saw good acceleration in both North America and international this quarter. North America was up 200 basis points sequentially and international was up 800 basis points. And half of that you'll remember we've spoken about the impact of the Japanese consumption tax that was instituted last April 1 of 2014.
+It had a measurable impact on our run rate, our growth rate, last year, particularly in Q2. And so we're lapping that, which sequentially makes up half of the 800 basis point sequential gain. But independent of that, yes, you're right, Prime membership continues to grow.
+Faster outside -- data we gave you at the end of the year, it's growing faster outside the US than it is in the US. We're happy with both growth rates, quite frankly. I would say the Prime membership to Prime Flywheel, the additional benefits we're adding to Prime, not only in North America but also internationally, and additional selection, both retail and FBA which feeds the Prime Flywheel.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Okay. Thanks a lot.
+
+--------------------------------------------------------------------------------
+Operator    [19]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Brian Nowak with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Nomura Securities Intl - Analyst    [20]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for taking my questions. I have two.
+The first one on the North America retail profitability was up nicely. Can you just talk to some of the drivers of that? Is it more top line and more Prime subs coming on, or is it more on the logistics side and what's driving the North America improving profitability?
+And then the international profitability, is there any way you can help us understand the profitability of the more mature international markets like UK and Germany relative to the US at this point?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [21]
+--------------------------------------------------------------------------------
+
+          Sure. So let me start with North America. 5.1% operating margin was up from 3.9% in Q1 and 3% last Q2. You hit a nail on the head. A lot of it is the top line growth, but it's also a lot of the efficiency we're seeing, particularly on the fulfillment and marketing lines, which for the whole Company were flat year-over-year on a percent of revenue basis.
+So we are getting very good top line growth, a lot of that is fueled by Prime, Prime adoption, and we are dropping a lot of it to the bottom line with many of the efficiency projects. In international we had not split countries out. What I can say is that if you adjust for foreign exchange, the operating margin is up slightly both sequentially and year-over-year. What you're seeing there is obviously colored by our investment, our increased investment in India based on the momentum and success we've been seeing there so far.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Nomura Securities Intl - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          Okay. Great. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Douglas Anmuth with JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for taking the question. Just two things I wanted to ask. First on Prime Day, Brian, if you could give a little more color there on the early take-aways that you have, and also more importantly how you think that sets Amazon up for the back-to-school season and also the holidays later in the year?
+And then also can you just comment on the headcount, which I believe is up 18,000 or so sequentially, which I believe is the biggest number that you've ever added in a quarter? Is there anything in particular that stands out there or just more fulfillment centers, more geography expansion as well? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [25]
+--------------------------------------------------------------------------------
+
+          Let me start with that second question first. Yes, headcount was up 38% year-over-year. The vast majority of that is in operations where we're adding people for our new FCs and call centers. We continue to look for smart, innovative people who want to build on behalf of customers and so we are -- but this particular quarter is colored a bit by the operations growth.
+If you look at Prime Day, we're thrilled with the results of Prime Day. Surpassed all of our expectations. Any metric we look at, we think it was a huge success. Customers saved millions. New Prime members signed up at higher rates than we've ever seen. People bought more devices than on any other day. So it's a great success.
+My hat's off to the operations team and all the people who worked on that because it was a Christmas in July, quite frankly. Bigger day than Black Friday as we've said and orders increased 266% year-over-year. I'll also point out that worldwide FBA unit order growth approached 300%. Not only was it a great day for Amazon, it was also a great day for our sellers, which was great. So while not breaking out the impact of Prime Day specifically, it's incorporated into our guidance.
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Carlos Kirjner with Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Bernstein - Analyst    [27]
+--------------------------------------------------------------------------------
+
+          Hi. Thanks for taking my questions. I have two. I may be delusional, but if I add your capital leases and CapEx that suggests that AWS capital (inaudible) is at least 80% if not much higher. What gives you confidence that if AWS continues to grow so fast and consuming so much capital, two years out you'll be able to fund its growth from the retail business? And secondly, can you help me understand why you are not rolling out Prime Now and Fresh faster? What specifically are the bottlenecks there? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [28]
+--------------------------------------------------------------------------------
+
+          Let me start with that second one. Prime Now you said and Amazon Fresh. We are moving very quickly on Prime Now. We've now expanded to nine cities, three more in the quarter, including our first international city in London. So we're moving quick. But we would always like to move quicker, obviously.
+On AWS, I think your question's more around the ability to fund AWS. No comments specifically on that. We do realize it's a capital intensive business and we have modeling that shows that it's going to be a very -- it is a very good business for us and that's what we aim for is long-term return on invested capital and free cash flow.
+So we're certainly cognizant of the capital part of that calculation. So not much more I can add on that, Carlos.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Bernstein - Analyst    [29]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Heath Terry with Goldman Sachs. Please proceed.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, guys. Wondering if you can touch a little bit more on AWS margins? Is there a level, particularly when you've been able to maintain pricing strength the way that you have been, where you feel like margins start to become and the leverage that you have there starts to become a catalyst for lowering prices or is that purely a competitive decision? And as you think about AWS longer term, is there a framework or structure that you use to think about where margins in that business should be?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [32]
+--------------------------------------------------------------------------------
+
+          Sure. Thanks for your question, Heath. Yes, I'll point out that we have continued to lower prices. We've had multiple price cuts this year. We're now up to 49 since launch in 2006. So it is a fundamental part of our business model. So is innovation. And as I said, we have over 350 new features and services that have also significant features and services that have launched this year.
+As we were just talking with Carlos, the capital investment is very large as well. So we continue to fund it and we're super excited with customer reception that we're getting and the feedback we get from large customers and so we're thrilled with the business and price reductions are part of that model. And again, as I said earlier, we're in the long haul, in this for the long haul. We are looking for return on invested capital, free cash flow and happy customers in this space.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [33]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. Really appreciate it.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Youssef Squali with Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          Thank you. I guess another question on AWS, if I may? So want to go back to something that you said, Brian. You said that you've seen greater efficiency in that business from a cost standpoint. I was wondering if you could maybe parse that out a little more for us? Were you referring to OpEx or CapEx?
+And if you're referring to CapEx as well, have you -- do you feel that you've reached that escape velocity that should allow CapEx as a percentage of revenues, pricing aside, to now allow you for constant decline in that metric? CapEx as a percentage of revenue for that particular business? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+
+          Yes, what I can tell you is we have seen great efficiency on the cost side. The cost to generate the capacity for AWS. I'll also say that Amazon is one of the primary large customers of AWS, so we see it on the consumer side of the business as well, although that's not included in AWS revenue. It's in intercompany relationship. So we get a double whammy there. We're getting great efficiency from our external AWS business, but also from our own use of AWS services.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [37]
+--------------------------------------------------------------------------------
+
+          Okay. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+          Your next question comes from Ron Josey with JMP Securities.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the questions. Just a quick follow-up on Heath's question on the price reductions, Brian, you said earlier in the year. Can you just compare maybe the reductions earlier this year, versus the ones across the board from last year and 2Q 2014?
+And a follow-up just on the third party units. I think you mentioned third party units are now 45% or maybe 47% of total units. Is there a natural limit there or does it matter as long as the customer experience through FBA is seamless. Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [40]
+--------------------------------------------------------------------------------
+
+          I'll comment on the units first. We're really following the model of giving our customers as many choices as possible and letting them choose whether they want to buy first party or third party. I think we're working really hard to make sellers succeed on the platform. Brian touched on the success that our FBA sellers had with Prime Day. We see FBA as a tailwind for the third party business in general.
+When we surveyed those sellers in the past, in 2014 about 71% of sellers saw a 20% or greater increase in sales when they entered the FBA program. So we're really happy with what that's doing for third party business. We're working really hard to give customers as many option as possible and allowing them to choose. We don't really have a specific target there. It all comes down to customer choice.
+On the price reduction question, we've got a long track record of driving cost out of the business. And you can certainly see where we've even done that over the last several quarters if you look at the margins in AWS. We've also lowered prices for customers 49 times since launch and so it can be lumpy but over the long haul that's the model we followed.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [41]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+
+          Our next question is from Paul Vogel with Barclays Capital.
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [43]
+--------------------------------------------------------------------------------
+
+          Great. Thank you. Just a question on the content side. Any update on how engaged folks are, the video side of Prime, and their shopping behavior number one? Number two, any update on your plans for growth on the content cost side? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [44]
+--------------------------------------------------------------------------------
+
+          Sure. On the engagement of Prime customers, excuse me, PIV customers, we've seen buying habits that look like normal Prime customers or other Prime customers from the group that comes in through the digital pipelines. We also see a higher pick-up in retention rates and free trial conversions. So we're very happy with the linkage between our digital offerings and the Prime customer base.
+On the content side, I will say that one of the factors in the sequential guidance, Q2 to Q3 being lower is two things. What we're talking about is the fulfillment center, additional fulfillment center cost we see this time every year as we get ready for Q4, but also additional step-up in content spend where we spend a lot of our content in Q3. You'll see extensions of a lot of the successful shows that we've had so far this year, a new pilot season including Man in the High Castle and Hand of God, so stay tuned for that.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [45]
+--------------------------------------------------------------------------------
+
+          Or seasons of Man in the High Castle and Hand of God.
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [46]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Gene Munster with Piper Jaffray.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [48]
+--------------------------------------------------------------------------------
+
+          Good afternoon and congratulations. Just want to follow up on a previous question. In past calls you talked about an increased focus on productivity. Is that still a focus of yours? And separately, any thoughts in terms of how robotics are impacting, any updates in terms of number of robots in fulfillment centers? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [49]
+--------------------------------------------------------------------------------
+
+          Sure. Thanks for your questions, Gene. On robotics first, we don't have any new numbers to share with you, but we're super excited with the progress of that business. We had very high expectations for Amazon robotics and its impact on our warehouse cost structure and we've been very pleasantly surprised by the job being done by that team. That's looking great.
+Efficiency, yes, as we talked about in the last few calls we have more emphasis on variable and fixed productivity. I think that's evident in the Q2 results that you've just seen. To give you a little more color on that, I would say what does that look like. Defect reduction and process improvements are probably something we've always done and worked on, both to lower our cost but also improve the customer experience and also the seller and vendor experience.
+We're using software and algorithms to make decisions rather than people which we think is more efficient and scales better and will be more accurate, especially as we insert machine learning into those decisions. As I said earlier, we benefit from the efficiency gains of the AWS business as on the Amazon side as well. We look to increase the leverage of our fixed assets, particularly our fulfillment centers and throughput of the fulfillment centers and just generally getting inventory closer to customers as we add and expand warehouses and the sort centers that we added primarily last year. All have helped our cost structure.
+So just a little more color on maybe some specifics on the efficiency area.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          Great. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [51]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Brian Pitz with Jeffries & Company.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [52]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. You now halfway through 2015, any update or insights on your fulfillment center buildout plans for the year? If you can't disclose that, can you maybe just give us a general sense of focus and strategy, how should we be thinking about domestic versus international, as well as sortation versus traditional? What's kind of the path to build out over the next 6, 12, 18 months? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [53]
+--------------------------------------------------------------------------------
+
+          Sure. So we ended the year last year with 109 fulfillment centers around the world and 19 US sort centers. Typically, we're looking at what the demand would be for peak as we figure out what we need. Still a little early in the year to comment on that.
+In the past we've given an update sometime around Q3 on that. Continuing to build as we have demand and like, Brian said, we like to be close to customers and benefit from having inventory close to customers as well. So like I said, a little early for the update at this point, but something that we're looking at and something the team's working really hard on.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [54]
+--------------------------------------------------------------------------------
+
+          Great. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+          Our next question is from Colin Sebastian with Baird equity research.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          Thanks. Congrats on the great quarter. In the retail business obviously a lot of variables driving growth there. You're seeing higher Prime membership levels for one, but I wonder how much of that growth you can also break down by some other factors, for example, we're seeing a notable increase in selection across longer-tail categories?
+And then secondly, in the press release no mention of Fire phone. I think almost every other product was mentioned. Can we just chalk that one up now to a learning experience and an example of where Amazon is showing some discipline around investments, or how should we think about that? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [57]
+--------------------------------------------------------------------------------
+
+          So I'll start with the Fire phone question. We have a policy of not commenting on our roadmap, so can't give you anything there. We obviously do learn from everything we do and value the feedback we get from customers. But nothing to share at this point.
+In terms of growth, we continue to see selection as a strong driver of growth. Prime is obviously very important as well. We really haven't teased those apart. FBA becomes very important as well. We've talked about some of the tailwinds we see there and sort of the linkage between Marketplace and Prime that FBA provides.
+All those things are going on. As you see in EGM, strength across a lot of the categories there. There was no single category we're really calling out, but continue to see good selection growth and good Prime growth as well.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [58]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [59]
+--------------------------------------------------------------------------------
+
+          Our next question is from Ross Sandler with Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [60]
+--------------------------------------------------------------------------------
+
+          Thanks, guys. So Brian, I know you guys don't like to provide guidance beyond the next quarter, but philosophically if we go back a few quarters, you've characterized 2015 as a year where you believe that some of the heavier investments made in prior years should start to benefit and pay off and we're clearly seeing that in AWS and in North America retail. And it looks like you're still investing heavily on international retail.
+If we look out 2016, 2017, is there any high level philosophical commentary about whether you see next year as another year of these types of trends that you're seeing now, or are there any bigger investment areas, particularly in the retail business that you might be looking to take advantage of?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [61]
+--------------------------------------------------------------------------------
+
+          Thanks for your question. I can't forecast into the future on that, but I will reiterate the investments we have going on right now, which, again, we're looking to invest to strengthen the Prime platform. That includes video content, including Amazon Originals, Prime Music, Prime Now, we have a robust device business, including a launch of a new Paperwhite Fire TV Echo with general availability and numerous other products that we're very excited about. That roadmap, we know those devices drive customer engagement and sales. We build fulfillment centers so we can add selection and we can add FBA partners and then we add things like same day delivery which we talked about.
+On the AWS side, we continue to invest in that infrastructure. We talked about opening -- announcing the region in India, so there's expansion there's as well. Feature expansion, services expansion, internationally, very similar to the US on a number of the Prime fronts, but also the investment in India.
+And then a few other things you may have seen in our press release today. The launch of Mexico, which we're very excited about, and Amazon Business, so lots of -- as I said, lots of investment in front of us but we operate in two paths. We're definitely working for operational efficiencies in the business that we're in. We're investing wisely in things that we think are big and important. And it's not a static activity.
+We continue to evaluate those investments, take into account what customer response is and make changes. So I think you can look forward to continuation of that into the future.
+
+--------------------------------------------------------------------------------
+Operator    [62]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Kerry Rice with Needham & Company.
+
+--------------------------------------------------------------------------------
+Kerry Rice,  Needham & Company - Analyst    [63]
+--------------------------------------------------------------------------------
+
+          Thanks a lot. You've talked a lot about operational efficiencies. I know you guys have partnered with the post office and deliveries.
+Can you talk a little bit about how that is potentially benefiting and maybe the longer term strategy with the post office? And then you guys haven't necessarily broken this out, but I think you do generate a fair amount of revenue from advertising. I think that's in the other category. Is there anything that you can provide on advertising revenue? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [64]
+--------------------------------------------------------------------------------
+
+          Sure. So I'll start with the first part of that question. We definitely are delivering a lot of packages with the post office. I think most notably they did a lot of the Sunday delivery that you saw when we started launching Sunday delivery.
+We try lots of things for fulfillment. We're constantly working to provide the best experience to customers and be as efficient as possible. And so we're happy with all the partners we have and continue to work with them to provide the best experience possible.
+For advertising, I would remind you that certain parts of the advertising roll up into other. Some actually roll up to EGM and media as well. So it's a business we're really excited about. We're taking a customer-centric approach as we build that to make sure we're providing engaging business, engaging ads to customers and making sure we keep the customer front of mind.
+It's a business that the team is excited about and working hard on.
+
+--------------------------------------------------------------------------------
+Kerry Rice,  Needham & Company - Analyst    [65]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [66]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Stephen Ju with Credit Suisse.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [67]
+--------------------------------------------------------------------------------
+
+          Thanks. Brian, just a follow up on the India question earlier. To my knowledge, foreign e-commerce operators such as yourself are not allowed to have first party retail operations. But given the fulfillment enhanced customer service has always been a high focus item for you guys, what steps have you taken in the country to make sure that the consumer experience there is as good if not better for the inventory on which you have no direct control?
+And secondarily, similar to China you have a pretty large population base and internet penetration currently that's probably comparable to what was the case when you acquired Joyo. Can you provide any color on how the general operating environments are the same or different, and do you expect your growth trajectory there to be similar to what you saw in China? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [68]
+--------------------------------------------------------------------------------
+
+          Your first question was about the infrastructure and how we're managing the customer experience in India. So FBA, Easy Ship and some of those programs are important to us. They're very valuable for sellers to make it easy for the seller to get their goods to the customer. They're great from a customer experience standpoint because we can do what we do best with the logistics. And so there is a lot of investment, a lot of efforts going on in that front.
+I would say that India and China are totally different and I think, as Brian mentioned, India is a country that we're doubling down on based on the success we've seen there so far. And so very happy with the trajectory we're on there and excited to be investing and have the opportunities we do at that point.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [69]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [70]
+--------------------------------------------------------------------------------
+
+          Our next question comes from John Blackledge with Cowen & Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [71]
+--------------------------------------------------------------------------------
+
+          Great. Thank you. So it appears that Amazon is growing its share of household budget driven by many factors, Prime growth and strong growth in large verticals like apparel among others. Specifically on apparel, just wondering how you view the breadth of Amazon's apparel offering? Any color on that segment's performance in the second quarter and how do you view Amazon's apparel opportunity going forward? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [72]
+--------------------------------------------------------------------------------
+
+          Yes, thanks for your question. We have not broken out specifically apparel, but we're super excited about that business. It's growing very well. We like our position in it. We think our website is very, very atune to selling online. So we're very happy with that.
+It is a big business for us, not only in North America but also Internationally. So you mentioned a couple other consumables categories. I will say we are very happy in our consumables and hard line categories as well. We drive a lot of repeat business with things like Prime Pantry and subscribe and Save and others. So very happy with the EGM business as a whole.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [73]
+--------------------------------------------------------------------------------
+
+          Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [74]
+--------------------------------------------------------------------------------
+
+          Our final question comes from Scott Tilghman with B. Riley.
+
+--------------------------------------------------------------------------------
+Scott Tilghman,  B. Riley Caris - Analyst    [75]
+--------------------------------------------------------------------------------
+
+          Thanks. Wanted to just follow up on a couple things. Three quick questions.
+First off on international, I was wondering if you could compare and contrast relative performance of media and EGM, moving in different directions? Second, there have been a couple questions about shipping, but most notable is that we had a couple price increases from the majors hit at the beginning of the year and it seems like your costs are coming down. I was wondering if you could comment on that?
+And then third just following up on Brian's question around the FCs. I was wondering how many of the facilities lend themselves to expansion rather than having to put up a new facility. Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [76]
+--------------------------------------------------------------------------------
+
+          Sure. Let me start with the first question on international media and EGM. I think we're seeing similar trends in both geographies, both segments that EGM growth is much -- is very strong. Media growth has been consistent for the last four quarters. We do like the work being done by the media teams.
+There's a lot of pipeline of invention, things like Prime Instant Video, Prime Music, all feed the Prime pipeline and Prime ecosystem, if you will. They work great with our devices, by the way. And they drive other non-media sales. So they're very tied together, although certainly the EGM is outpacing the media segment or excuse me, media businesses right now.
+On transportation costs, not a lot to add there. Again, we are -- we have a combination of doing our own shipping and using third party carriers. So the rate increases are staged and we see those quite frequently, nothing to add there.
+On the FCs and whether we would expand or build new, I think we're looking to always to get the most out of the fulfillment centers that we have. And as we need new facilities, we place them closer and closer to customers. So that can have its benefits as well. Not much more to add on that one.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [77]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
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+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Jul-29-FB.OQ-141107486910-Transcript.txt

@@ -0,0 +1,560 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2015 Facebook Inc Earnings Call
+07/29/2015 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook, Inc. - VP of IR
+ * Dave Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Brian Pitz
+   Jefferies LLC - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Paul Vogel
+   Barclays Capital - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Wieser
+   Pivotal Research Group - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Peter Stabler
+   Wells Fargo Securities - Analyst
+ * Anthony DiClemente
+   Nomura Securities  - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook second-quarter 2015 earnings call.  All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.   
+(Operator Instructions) 
+This call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's second-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and the Dave Wehner, CFO. 
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 
+During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at www.investor.fb.com. 
+And now, I'd like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah, and thanks, everyone for joining today. This was a good quarter for us. We've continued to make good progress in the growth of our community with 1.49 billion people now using Facebook each month and more than 1.3 billion people using Facebook on mobile. We've also continued to make gains in engagement. More than 968 million people worldwide now use Facebook daily, and 65% of our monthly actives are daily actives. 
+Several products in the Facebook app are reaching global scale, too, now with more than 450 million people using events each month, and more than 850 million people using groups. And, when it comes to time spent across Facebook messenger and Instagram, people are now spending more than 50 -- sorry, 46 minutes per day on average and that doesn't include WhatsApp. 
+Our business performance has grown with our community. This quarter, our total revenue was more than $4 billion for the first time, and advertising revenue grew by 43% year over year. These results reflect the ongoing investments and improvements we've made and the quality, performance, and usefulness of our services. And, continuing to make progress here remains our biggest priority. 
+Now with that in mind, I'd like to talk about how we're working on this across our current products, our next-generation of apps, and our long-term innovation efforts. Over the next few years, our main focus is on helping our existing communities and businesses reach their full potential. An important part of our strategy is continuing to deliver great experiences across all our products. This means improving the speed and reliability of our apps and building new infrastructure to support our global scale like our new data center in Texas. 
+Over the last six months, we've improved the performance of our core app reducing crashes on iOS by more than 30% and some Android phones by more than 40%. On messenger, people can now send messages up to 20% faster, and it's twice as fast when you start the app. These are just a few examples of how our engineering focus is delivering better experiences for everyone in our community. Another part of delivering great experiences is helping people connect with the content they want. 
+This quarter, we've continued to focus on improving people's experience in newsfeed by making it easier to find more relevant and engaging content from friends and the entire community. Connecting people with more great video content is an important part. Video continues to be some of the richest and most engaging content for people and publishers, and since the start of the year, pages are also sharing more than 40% more videos. This quarter, we updated our newsfeed ranking to help people see more of the videos they care about and also began testing new options for video monetization to help our partners build their businesses. We're excited about the potential for continued work here. 
+The focus we've had on video also supports our efforts to connect more people around important public moments and events. From the 59 million people who generated more than 300 million interactions around the Copa America to the 26 million people who changed their profile photos for Pride, or the more than 150 million people who are notified that their friends were safe after the Nepal earthquake. Facebook has clearly become the home for global conversations about things that people care about. 
+And, when it comes to serving businesses on our platform, this quarter we continued to focus on delivering more useful tools and resources to help them achieve their goals. Helping marketers to tell more visually engaging stories through video and carousel ads is an important focus as well as supporting small businesses. There are now more than 40 million small businesses, small and medium-size businesses, using pages on Facebook. So, we have a big opportunity to create value for communities all over the world. And, Sheryl is going to talk more about this in a moment. 
+Next, let's talk about how we're building our next generation of services which we also expect to be important parts of our business over the next few years. With Instagram, the continued growth in the size and engagement of the community shows how this is becoming one of the best places to get a realtime snapshot of the world. For moments from the US presidential campaign trail to NASA's first photos from Pluto, people are using Instagram in a lot of interesting ways. This quarter, we made some big improvements to the app including upgrading our search and Explore functionality and introducing trending content which we expect will provide even more engaging experiences. 
+On messenger, this quarter we rolled out a number of new features including mobile video calling, a new way to share locations, and the option to sign up for messenger without using a Facebook account. We also continue to make good progress building out the messenger platform. We expect these improvements to continue making messenger a more useful and engaging experience for lots of people. More than 700 million people now use messenger, and we've reached more than 1 billion downloads on Android. These milestones are a good sign that we're on the right path here. 
+With WhatsApp, we're pleased with our continued growth, and the team is continuing to roll out new features to serve the whole community. We've continued to improve the web experience for WhatsApp as well as launching voice calling to more people and on more devices. With search, we are continuing to build a better experience for our whole community. We recently crossed 1.5 billion searches per day, and we've now indexed more than 2 trillion posts. This is a huge set of unique experiences and perspectives and by allowing people to unlock this knowledge, we have a huge opportunity to create value for the world in the coming years. 
+Finally, let's talk about our other efforts that we expect to deliver impact over the longer term. With Internet.org we have a lot of momentum with our goal of connecting everyone in the world to the Internet. A year ago, we launched the Internet.org app for the first time in Zambia. And, since then, we've made free basic Internet services available to more than 1 billion people in 17 countries. 
+Our results show that Internet.org is working. After launching free basic services, mobile operators are seeing people adopt mobile data 50% faster than before. And, more than one-half the new people coming online through Internet.org choose to pay for data and access more Internet services within their first 30 days. 
+We recently made changes to the Internet.org program for both developers and operators that will give people -- that will give more people access to even more free services. With the Internet.org platform, now it's easy for any developer to create services that integrate with Internet.org. And, just this week, we announced a portal for operators that makes it easy for them to quickly launch free basic services in new countries. 
+We're also making progress on our efforts to connect people living in some of the most remote communities on earth. Our connectivity lab is working on new technologies for connecting communities that include drones, satellites, and laser communication systems. And, we'll be sharing more of our progress here very soon. 
+And, with Oculus, we've announced that the Rift will ship to consumers in the first quarter of 2016. The team recently introduced details about the full hardware and software experience that people can expect including our new touch controllers. Oculus is going to be the best VR experience in the world when it launches, and I'm really excited for us to begin delivering on the promise of virtual reality. 
+So, that's how we focused our efforts over the last quarter. We're preparing for the future, but we're also working to deliver better experiences and value to our community today. And as usual, I want to thank our whole community including our employees, our shareholders, and our partners. Thanks to you, our community is getting stronger and stronger every day, and we're making progress on our mission to make the world more open and connected. 
+So, thank you. And now, here's Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hi, everyone. We had another strong quarter and a great first half of the year. Ad revenue grew 43% year over year, 55% on a constant currency basis. Mobile ad revenue grew 74% year over year, making it over three-quarters of total ad revenue. Our growth was broad-based across all marketer segments and industry verticals. Similar to Q1, we're pleased with the adoption of our ad products across all regions and we saw strong revenue growth in North America and Asia-Pacific in particular. We're staying focused on our three main priorities: capitalizing on the shift to mobile, growing the number of Facebook marketers, and making our ads more relevant and effective. 
+First, capitalizing on the shift to mobile. People are spending more time on their mobile devices and on Facebook apps. We continue to get more than one out of every five minutes on smartphones in the US, and mobile usage is driving our growth globally as well. We believe we have the best performing mobile ad product in the market, and video is making it even better. With so many consumer videos being watched on Facebook, video ads are a natural part of the newsfeed experience. 
+For marketers, video has always been a compelling format. Now Facebook enables mass reach and cross-device targeting and measurement abilities far superior to what other platforms offer. Mobile video was a major theme at the Cannes Lions Festival last month for some of the biggest winners like Under Armour's I will what I want, with Droga5; and Procter & Gamble's, like a girl with Leo Burnett; used mobile video on Facebook as part of their campaigns. 
+Our second priority is growing the number of marketers using our ad products. In Q2, we announced that 40 million small and medium businesses have active Facebook pages, and this number continues to grow. Earlier this month, I hosted SMB roundtables in Berlin and London. I got to hear firsthand how advertising on Facebook is helping SMBs sell their products, grow their businesses, hire new employees, and even expand to other cities and countries. 
+One of the business owners I met was Kelly Wright, a single mom who started selling dresses from her home. She began by shooting videos of her dresses on her mobile phone and promoting them on Facebook for just a few pounds. Using Facebook as her only marketing channel, Kelly grew her business, [Christalee] Fashions, to over GBP3 million annually, and she now has 10 employees. We're increasing our engagement with the global SMB community and have now held more than 80 local boost-your-business events around the world, meeting thousands of businesses and getting their feedback on how we can make our products work better for them. 
+We're also building out our leadership teams around the world. In recent weeks, we've added senior talent to our International teams including a new head of Latin America and new regional leadership in several countries in EMEA. We also opened an office in Johannesburg, our first in Africa. 
+Our third priority is making our ads more relevant and effective. Better, more engaging, and relevant ads are good for people and marketers. And, we're working hard to improve them. We continue to innovate at a rapid pace by introducing new ad formats and new tools for marketers. This quarter, we expanded carousel ads which show multiple images in one ad unit. We introduced dynamic product ads which allow marketers to upload their product catalog and show the right product to the right person at the right time. We also introduced a new ad format called lead ads, a simpler way for people to connect with companies they're interested in hearing from. 
+We continue to focus on providing world-class products and tools for direct response advertisers. Booking.com a Priceline Group Company, is using Facebook link ads featuring book now buttons to drive reservations. In Q2, Facebook ads drove a meaningful increase in room reservations for booking.com, helping them meet their ROI goals for the campaign. They are now expanding their use of Facebook ads across multiple markets. 
+We continue to make progress with ads on Instagram. In Q2, we launched Instagram ads in Brazil, Germany, and Japan. We also introduced additional capabilities for marketers including carousel ads on Instagram which brands are using in creative ways. For example, to showcase a spring fashion collection, gradually reveal a full panorama, or show different views of a location. 
+Over the coming months, Instagram ads will be available to more advertisers with new formats, better targeting, and the ability to buy online as well as through third-party planners. As we ramp Instagram ads, we remain focused on quality and relevance to ensure the best experience for people and the highest performance for marketers. And, as always, our highest focus is on the consumer experience with Instagram. 
+Measurement is a key priority as we work to expand our share of global marketing budgets. Since we introduced conversion lift, which measures the direct impact that Facebook ads have on sales, we've seen adoption from marketers across verticals. When Acura launched the TLX, the largest launch in their history, they used Facebook video to show the TLX in scenarios that quickly captured people's attention like imitating a roller coaster. They then used our retargeting technology to show more detailed ads only to the people who watched the videos. Using conversion lift, they proved that Facebook ads directly drove vehicle sales. 
+To help marketers target and measure campaigns both on and off Facebook, we're continuing to build out our ad tech platform with Atlas, LiveRail, and the Audience Network. Entertainment Company Live Nation knew that people browsed for concert tickets on mobile devices, but they were never able to measure whether they converted into sales. Using Atlas, Live Nation was able to link their mobile ads to 66% more ticket purchases for one of their largest artists. This shows the promise of Atlas to measure cross-device conversion. We're pleased with the progress we're making on all three of our main priorities, and we plan to stay focused. 
+Now, here's Dave. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. Q2 was another strong quarter for Facebook. We generated $4 billion in revenue and $1.3 billion in free cash flow. Strong community growth and engagement underpinned our financial performance. In June, approximately 968 million people used Facebook on an average day, an increase of 17% compared to last year. This daily number represents 65% of the 1.49 billion people who used Facebook during the month of June. That MAU number grew by 173 million year over year, and by this measure, the second quarter was our strongest in terms of community growth since 2013. 
+Mobile remains the key driver of our growth. In June, approximately 1.31 billion people accessed Facebook on mobile devices, up 23% from last year. We also saw strong growth in our next generation of services with Instagram, Messenger, and WhatsApp now exceeding 300 million, 700 million, and 800 million MAU, respectively. 
+Now, turning to the financials. All of our comparisons are on a year-over-year basis unless otherwise noted. Additionally, our non-GAAP measures exclude stock-based compensation and the amortization of intangibles. Total revenue was $4 billion, up 39%, or 50% on a constant currency basis. Ad revenue was $3.8 billion, up 43%, or 55% on a constant currency basis. The strengthening of the US dollar has continued to have an unfavorable impact on our revenue. Had foreign exchange rates remained constant with Q2 2014 levels, our total revenue this quarter would have been approximately $330 million higher. 
+Regionally, we saw strong North American ad revenue growth of 55% in the quarter, and APAC growth also remained strong at 48%. Europe and the rest of the world ad revenue grew more slowly at 30% and 22%, respectively, as currency had a significant negative impact on each of those regions' year-over-year growth rates. 
+Mobile was the engine of our revenue growth. Mobile ad revenue in Q2 was $2.9 billion, up 74% from last year, and represents 76% of our advertising revenue. Revenue from ads served on personal computers was down approximately 8%. 
+In Q2, the average price per ad increased 220% while total ad impressions declined 55%. Similar to last quarter, these price volume trends were primarily driven by the redesign of our right-hand column ads which rolled out in the third quarter of last year. To a lesser degree the shift of usage towards mobile where we don't have right-hand column ads also contributed to the reported price volume trends. 
+Total payments and other fees revenue was $215 million, down 8% compared to last year. The decline was driven by a 19% year-over-year reduction in payments revenue related to games played on personal computers, offset primarily by the addition of other revenue related to acquisitions closed in the second half of 2014. 
+Turning now to expenses. Our Q2 total GAAP expenses were $2.8 billion, up 82%, and non-GAAP expenses were $1.8 billion, up 57%. Similar to last quarter, stock-based compensation and amortization expenses related to the WhatsApp acquisition contributed significantly to the year-over-year growth in GAAP expenses. Non-GAAP expenses growth was primarily driven by increases in headcount-related costs, cost of revenue, and marketing expenses. 
+We ended the quarter with 10,955 employees, up 52% compared to last year.  With 873 additional employees, Q2 was one of our strongest quarters in terms of hiring, and the majority of the new employees were added in R&D. Our Q2 GAAP operating income was $1.3 billion, representing a 31% operating margin. Non-GAAP operating income was $2.2 billion, representing a 55% margin. Our Q2 GAAP and non-GAAP tax rates were 44% and 36%, respectively. Q2 GAAP net income was $719 million, or $0.25 per share, and non-GAAP net income was $1.4 billion, or $0.50 per share. In Q2, capital expenditures were $549 million, and we generated $1.3 billion of free cash flow. We ended the quarter with $14.1 billion in cash and investments. 
+Turning now to the outlook. Let's start with revenue. Since the first quarter of 2014, we have seen year-over-year advertising revenue growth rates decline each subsequent quarter. We expect this trend to continue in Q3 and Q4 as we continue to grow off a much larger base and face currency headwinds due to the strong dollar. In addition, we expect our total payments and other fees revenues to decline on a year-over-year basis for the remainder of the year. The decline in the second half of the year should be closer to the 19% year-over-year decline we experienced in the payments business alone, as we will be lapping periods in which we added other fees revenue from acquisitions closed in the second half of 2014. 
+Turning to expense guidance. Based on our second-quarter results, we are narrowing the expense guidance range for 2015. We now expect the year-over-year growth rate for total 2015 GAAP expenses to be between 55% and 60%, narrowed from the prior range of 55% to 65%. And, we expect the year-over-year growth rate for total 2015 non-GAAP expenses to be between 50% and 55%, narrowed from the prior range of 50% to 60%. We anticipate our 2015 capital expenditures will be in the neighborhood of $2.5 billion to $3 billion, down slightly from the prior range of $2.7 billion to $3.2 billion. 
+We continue to expect stock-based compensation in 2015 to be in the range of $3 billion to $3.3 billion, approximately one-half of which is related to our prior acquisitions, most notably, WhatsApp. We expect amortization expenses in 2015 to be approximately $700 million to $800 million. And, lastly, we anticipate our Q3 and full-year 2015 GAAP and non-GAAP tax rates to be consistent with the rates in the second quarter. 
+We have had a great first half of the year with solid revenue performance underpinned by healthy community growth across all of our services and regions. We have many exciting opportunities ahead, and we are investing in the talent and resources to capitalize on them as we seek to build long-term shareholder value. 
+With that, Operator, let's open up the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) 
+Anthony DiClemente, Nomura Securities. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities  - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          I have one for Mark and one for Dave. Mark, Facebook has had so much success in terms of the engagement -- the growth of the engagement.  I'm just wondering if there's a framework that you use to think about how much of that success is due to the core value proposition of Facebook itself continuing to resonate with people at its most basic level as opposed to the product innovation that you detailed in your prepared remarks or new use cases, which are more of a driver in your mind? 
+And then, second one for Dave, CapEx being down as a percentage of revenue in the 2Q and you lowered the guidance, it doesn't feel like you are in the midst of ramping investment in the infrastructure. I wonder as you look at the assets, you have so much growth, you have the shift to bandwidth-intensive content, and applications. Do you feel like you have been more efficient in terms of your CapEx spend?  Or, at some point, should we anticipate a reacceleration to CapEx? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          I can talk to the first part. So, at some level, I do think that the core mission and promise of helping to connect people with their friends and family is very fundamental. And, everyone has friends and family and wants to stay connected. And, uses a variety of tools and ways to do that in the world today, which are often very inefficient, and the Internet offers new opportunities to make that a lot better. 
+When you look at the specific products that -- and the work that we're doing -- there is this process that we've followed that we basically will look at an area of our products that people are using.  So, for example, going back a few years, newsfeed was -- it has always been since we rolled it out a very central part of the product. But, we're looking at the stuff with increasing rigor now where we organize the Company into these product groups. And, each product group leader will not just look at the product as one thing but what are the key three or four or five use cases which often can really be their own product lines on their own, and we go through and build those out to be world-class. 
+I think a lot of the success that we've seen has been because of some of the work that we've done a few years back at this point in products like newsfeed.  That team has executed really well.  But, when I look forward, I'm very excited about doing the same thing for messaging and groups and video. There's many different use cases. You don't want to just look at these as one thing. There are a bunch of different use cases, and we want to be the best at each of them.  And, if you have good people leading those teams, then I think you can deliver that over time. So, I think, yes, is the answer to your question. The mission is fundamentally, deeply important to people, but that has to be coupled with good thorough execution of each of the available opportunities. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Yes. Anthony, it's Dave. So, on CapEx, we are absolutely investing in the infrastructure, and 2015 is an investment year.  So, we are ramping CapEx versus 2014. The guidance is $2.5 billion to $3 billion, and that's up from $1.8 billion last year. We've got a lot of infrastructure investment that we're making across data centers, servers, network, we are clearly investing for the growth of both Facebook at its core, and then also the additional services that we're bringing on. So, we're proud about the efficiencies that we've had. 
+The infrastructure team has done an outstanding job in driving good efficiencies through things like the open compute project which allows us to leverage an open source strategy to lower our costs on server and other expensive hardware. So, it has been a great strategy for us.  But, given the growth we have in the business, given the opportunity we have before us, we are very much in investment mode in terms of the infrastructure. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Douglas Anmuth, JPMorgan. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Mark, you talked about Oculus Rift shipping in 1Q 2016. Can you talk more about what you're most excited about in terms of the primary applications when it's into the mainstream?  And then, Dave, can you also help us understand the cost structure more here as that product ramps? And then, Sheryl, if you could help us understand how broadly Instagram will open up to advertisers by year-end? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [7]
+--------------------------------------------------------------------------------
+
+          I can talk about Oculus. So, the reason why Facebook is excited in this space is I can give you two reasons for this. One is there's this continued progression of people getting richer and richer ways to share what's on their mind. So, if you go back 10 years, most of how people communicated and shared was text. We are going through a period where now it's mostly visual and photos. We are entering into a period where that's going to increasingly be primarily video. And, we're seeing huge growth there. But, that's not the end of the line. There's always a richer way that people want to share and consume thoughts and ideas, and I think that immersive 3-D content is the obvious next thing after video. 
+So, if you look at what the initial use cases are going to be around that, I think it's a lot of the stuff that you hear people talking about.  Video, I think, will be huge. So, just taking that to be 3-D and immersive.  Gaming will be huge.  Those are both areas that Facebook has been involved with. Once you start to get more of a critical mass, I think you can start to get social applications which is what we as a Company are more interested in over the long term. And, think have a huge amount of potential. In addition to the video and gaming stuff which I just think is going to be awesome in the next few years as well. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [8]
+--------------------------------------------------------------------------------
+
+          Doug, it's Dave. Just on the question of how Oculus would affect the cost structure, it's premature for us to be giving guidance on the cost structure in 2016. But, I think one of the things to recognize here is that we're still early with Oculus. We haven't announced any specific plans as it relates to shipment volumes for the consumer for Rift. But, VR is still early and in the development stage so it would be early to be talking about large volume shipments. Obviously, we're investing on the research and development side on Oculus in 2015, and that's factored into our expense guidance for this year. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [9]
+--------------------------------------------------------------------------------
+
+          On Instagram, we are opening up to more advertisers. I talked about some of our global rollouts in the past quarter. We're also opening up more capabilities, which means more formats like direct response, more ways to buy like self-serve.  That said, and it's important to understand this, while we think there's a lot of interest and a great opportunity, we're going to be really thoughtful and strategic about how we ramp revenue. Instagram remains small relative to Facebook, and it's going to really take time to have significant impact on our growth. 
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          Heather Bellini, Goldman Sachs. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [11]
+--------------------------------------------------------------------------------
+
+          I wanted to ask a little bit more about as you start to speak with more advertisers on the Instagram opportunity, how are you and they thinking about the differences in how they'll engage with their customers across both platforms? And, I guess what I'm getting at is do you see Instagram targeting a different type of advertiser?  Or, do you expect people to leverage both platforms and almost think of them as separate areas to budget for? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [12]
+--------------------------------------------------------------------------------
+
+          I think one of the things that's interesting about Instagram is while the ads are really visually appealing and that brings to mind certain verticals like fashion or autos -- things where the visual really matters.  What we're seeing is that lots of different verticals can use the platform really well. So, a recent example, HTC working with their agency, Swift, did Instagram videos to raise awareness of their mobile device warranty program. So, they targeted 18 to 34-year-olds. They did five short videos with these funny moments of where you're about to break your phone, and they got a 6-point lift in awareness of what is a warranty program.  I think that's not something you would think of typically as Instagram. 
+In terms of Instagram and Facebook, we believe that marketers are looking to connect with people in a really deep way, connect with the right people, and our targeting we think is really strong compared to other any other platform at the right time. And, that really means mobile. We see such engagement on both Facebook and Instagram along with the different targeting and ad formats. We believe we'll be able to have and are already starting to have relationships with marketers which grow across both platforms. 
+Our focus with our marketing partners is their business results. I talked about in my remarks how we're looking for conversions.  We're trying to help them measure if you do a car ad for us, how many vehicles were driven off the lot? We see what products you use within Facebook or Instagram or Facebook and Instagram as less important as the best product for the right marketer at the right time to drive their business results. And, we like having more abilities, more products, more apps to work with so that we can drive this business results. 
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          Brian Nowak, Morgan Stanley. 
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          In early June, you rolled out some new CPC measurement methods about how the changes and the clicks and the CPCs are measured. I'd be curious about early findings you see in ad engagement growth, average price per ad?  And then, the advertiser feedback or change in budgeting since you've rolled out these CPC measurement changes. 
+And then, the second one -- on the North American advertising results were really strong.  I think you have accelerating growth. Sheryl, could you call out any specific ad products that are driving this faster North American ad growth? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [15]
+--------------------------------------------------------------------------------
+
+          On the first, we're always trying to improve our ad products so marketers can buy what they want and pay as they want to pay. We recently announced that we're updating the definition of CPC so that includes only websites and apps. But, you can also buy on a cost per engagement basis, and that includes likes, comments, and shares. It's too early to see any direct impact, but I think it's part of the innovation that you'll see from us as we continue to roll out different ways that marketers can use our tools, different ways they can pay, different results they can target. 
+When you look at our overall growth, our growth is very broad-based. We're broad-based against all of our segments of marketers so brand and direct response, SMBs and developers. Definitely, a part of the story here is video. Our video demand is very deep. People love the format of video. It has long been used to reach people in a compelling way, and we can do targeting in a way that's really unique. 
+So, I'll share another example. Wendy is working with their agency, VML, launched their jalapeno fresco spicy chicken product, and they were trying to reach millennials and spicy food lovers. Working with us, they did five video ads, and on our platform they could not just do the video format, but they could target millennials and people who like spicy food which is very specific targeting. They got an 8-point lift in ad recall and a 4-point lift in purchase attempts among their millennial target, and so what that shows is our growth is being driven by the ability of us to do this broad-based consumer media advertising but do it in a more targeted way. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [16]
+--------------------------------------------------------------------------------
+
+          I think, Brian, you were also commenting on North America. Obviously, it's probably -- everybody realizes this.  But, that the big disparity between the US-Canada growth rates versus the other regions like Europe and the Rest of World are the currency headwinds which had a very significant impact to the year-over-year advertising growth rates in those regions. 
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          John Blackledge, Cowen and Company. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Couple questions on video. Mark, I think you mentioned potentially some new options for video monetization. Maybe could you discuss some of the new options that we may see implemented? More broadly, how does video content evolve on Facebook from what we see today? Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+          On the options on video monetization, it's going to be -- still our focus is going to be on continuing to grow autoplay and continuing to leverage the video unit in newsfeed. That's going to be the primary driver of video growth for us. So, that's really the main focus. We've got other areas that we're experimenting with like suggested videos which are going to be very much like those ads in a feed of suggested videos. Which are also an opportunity for us, but essentially the focus is going to be on monetizing through feed ads for video. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [20]
+--------------------------------------------------------------------------------
+
+          I think you got it. 
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          Justin Post, Merrill Lynch. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          I think on the call you said time spent was 46 minutes per day. Any comparable metric from past quarters?  And then, how would you -- if you can't give us that -- how would you gauge the overall engagement of Facebook?  Just for the core site?  Maybe some help about what you're seeing there?  And, what products are really having an impact? Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [23]
+--------------------------------------------------------------------------------
+
+          I think in terms of engagement the product is having the biggest impact is newsfeed continuing to do very well. So, newsfeed at the core is proving to be just a great experience for users. It's getting better.  We continue to invest in that. As people spend more time with newsfeed, we get better about understanding what they like and getting the content that they care about in front of them.  So, we're investing on that front. We're also doing more with public content. That's having an impact.  So, we're seeing across the board, good improvements to newsfeed videos -- another contributor there as well. So, that's what we're seeing in terms of driving engagement. 
+Engagement across the different regions as we think about it from a DAU to MAU perspective was at record levels in the quarter so we're pleased with that. And, we continue to see time spent growth across the platform. So, on all those measures, we really like what we're seeing, and we like the investments that we're making to make that newsfeed experience even better. 
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+          Ross Sandler, Deutsche Bank. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [25]
+--------------------------------------------------------------------------------
+
+          I just had two questions.  One for Mark and then one clarification for Dave. Mark, question on the messaging app. So, the vibe at F8 from the first-day keynote at the end of the day, Brian Acton and David Marcus were basically presenting different strategies in terms of their long-term philosophy around monetization of those two platforms. So, if you look out three to five years, do you see the opportunity with Messenger and WhatsApp as being similar?  Or, can you talk about the strategy there? 
+And, is the engagement for the messaging apps similar, higher, lower than the average for the core Facebook app in terms of daily visits? And then, Dave, you mentioned that you expect ad revenue to decelerate. I'm guessing that's a function of some of the FX headwinds. Can you talk about that on a currency-neutral basis? Relative to the 55% in the second quarter? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [26]
+--------------------------------------------------------------------------------
+
+          I can take the second part first. So, in terms of the -- also you had asked about the growth rate in the back half of the year. I'd reiterate what I said in my comments, the business continues to perform very well driven off the strength of our mobile newsfeed ads business. And, really consistent with the trend we've seen in the last several quarters, we would expect that year-over-year ads growth rate to decline modestly in Q3 and Q4. It's really because we're delivering growth against a much larger scale newsfeed business in the prior-year period, and also of course, headwinds are an impact as well as you mentioned. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [27]
+--------------------------------------------------------------------------------
+
+          And, I can talk to the messaging strategy questions. So, the playbook that we're going to run with Messenger and WhatsApp is kind of similar to how we thought about building a business in Facebook and newsfeed.  Where if you go back to 2006 and 2007, there were a lot of people who were encouraging us to just put Banner ads and inorganic content into the experience.  And, what we decided was that over the long term, the ads and monetization would perform better if there was an organic interaction between people using the product and businesses. So, instead of focusing on ads first, what we did was we built pages, and we made that free.  That way as many businesses as possible could get into the network. And, we built insights to make it so that businesses knew how they were driving business when they used pages for free and could post into newsfeed.  And then, on top of that whole ecosystem, we then had the opportunity to build what has turned into a newsfeed business that we're really proud of, right.  That we think is driving a lot of value and good content for people are using the platform and helping a lot of businesses find customers and sell their products and grow overall. 
+Messaging, I think, is going to be pretty similar. We're right now -- some people in WhatsApp use the service in order to message businesses.  Messenger is, I think, more people to people today.  We're working on a lot of different things that make it so that people can get value from interacting with businesses. We launched some of them at F8. We have a number of other things that we're working on across Messenger and WhatsApp. 
+But, the long-term bet is that by enabling people to have good organic interactions with businesses, that will end up being a massive multiplier on the value of the monetization down the road when we work on that and really focus on that in a bigger way. So, we would ask for some patience on this to do this correctly. And, the game plan will be more similar to what we did in Facebook with newsfeed. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [28]
+--------------------------------------------------------------------------------
+
+          And, Ross, you also asked about I think the impact of Messenger on our user statistics and the daily users. The vast, vast majority virtually -- all of Messenger users are using newsfeed as well. So, Messenger-only usage is not having a material impact on our overall usage stats. 
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+          Mark May, Citi. 
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [30]
+--------------------------------------------------------------------------------
+
+          I had one on search. I think you mentioned 1.5 billion daily searches. Just kind of curious, what portion of those our commercial, if you will?  Not so much lookups for friends and family, but more commercial-oriented? And, can you give us an update of where you are in the process of building out an even more robust search experience on Facebook and across the other family of apps? 
+And then, on Instagram, just a question on how we should be thinking about the ramp as well as the long-term opportunity? I guess the question would be in your tests, have you noticed any meaningful difference in Instagram users' willingness to see or interact with ads in their newsfeed as compared with an average Facebook user?  Recognizing that probably Instagram's audience is more geared towards some of the developing markets in the US relative to the Facebook? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [31]
+--------------------------------------------------------------------------------
+
+          Sure. On the search experience, and Mark can add anything if he'd like.  But, on the search experience from a monetization perspective the vast majority of the searches are for people or posts, and there can be -- there's the potential for there to be commercially-relevant content in people's posts, people searches.  Which is the largest part of searching is not something that we think is really a monetizing category, but there is certainly great content that people are finding using post-search.  But, it's really the focus is really to try and allow people to discover content that's been shared on Facebook that's relevant to them. And, that's going to be the focus in the near term. And, as people consume more content on Facebook, there's opportunities to show them ads in feeds. There's an opportunity there, but it's really around engaging with content that you want to find on Facebook. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [32]
+--------------------------------------------------------------------------------
+
+          On Instagram, we haven't noticed any difference in willingness to engage with ads between the platforms for Instagram and Facebook. But, we've ramped really slowly, and we're very, very cautious.  And, again, we're going to continue to focus on the user experience, focus on the community growth, and monetization will follow. 
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+
+          Ben Schachter, Macquarie. 
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          A couple questions. One, given your success with standalone apps, should we expect to see more apps in the future?  And, could one of those focus specifically on video? And then, on Oculus.  The monetization for that?  Should we expect an app store-like model where you'll be sharing revenue with the content partners? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [35]
+--------------------------------------------------------------------------------
+
+          We work on a lot of different things. I don't think we'd rule out the things that you just mentioned, but we don't have anything specific to talk about today on either of them, I think. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+
+          Obviously, a big part of our investment strategy is investing in this next generation of apps, and the focus there is on growing the communities around Messenger, WhatsApp, and of course, Instagram. That's all going really well, and that's a big focus of our investments. 
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney, RBC Capital Markets. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [38]
+--------------------------------------------------------------------------------
+
+          Two questions. David, the sales and marketing expenses this quarter were almost flattish sequentially. You don't normally see that in your business. Was there anything -- any particular reason behind that, and why you didn't have that area grow? I assume it will continue to grow going forward. 
+And then, Mark, you had made a comment about -- I think you were referring to Instagram becoming one of the best places to get a realtime snapshot of the world.  And, it reminds me or makes me think about some other leading platforms on the Internet, and I wonder how does that happen with Instagram? Is that something that you're already seeing users use Instagram to make that happen?  Or, is that something that you have to tweak the user interface and change the product a little bit in order to try to have people think about it that way? How does it become that realtime snapshot of the world? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [39]
+--------------------------------------------------------------------------------
+
+          So, on the sales and marketing expenses, Mark, I think you're going to see that be lumpy. That's just due to product marketing. And, that's just not going to necessarily be a steady quarter-to-quarter trend so you're going to see that be lumpy.  But, yes, we are investing more in general in sales and marketing over time so you'd expect to see that line grow in line with the expense guidance that we're giving.  So, it's definitely an area that we'll be investing in on an ongoing basis, and I wouldn't read too much into the quarterly trend there. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [40]
+--------------------------------------------------------------------------------
+
+          Yes. In terms of Instagram, I just think Kevin and the team are doing amazing work. The clarity of focus and clarity of the vision that Kevin and Mike have has been exceptional. And, this is something that they've always focused on. They've cared deeply about it since the first conversations I've had with Kevin. And, I think it takes real composure as a leader to scale something from to [many X] where it was just a few years ago and build up the organization and be able to continue pushing the products forward every day to be able to do that. I think it's rare that you get someone who's as talented as the folks who are leading this, and they're just doing an amazing job. 
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          Paul Vogel, Barclays. 
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Similar follow-up question to Mark's.  Your DAU to MAU number has been exceptionally strong and moving up. I'm going to guess a lot of that is mobile-related so I guess that would be question number one. Is it a lot mobile? And, the second question would be around this realtime issue?  Are you seeing more realtime usage of Facebook?  And, are you developing more products specifically around realtime usage of Facebook as a platform? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [43]
+--------------------------------------------------------------------------------
+
+          I think a lot of it is that we're getting better and better at ranking and showing people the content they want.   So, part of it is that there's of course a bigger opportunity when people have their phones with them all the time.  But, I think that there are plenty of other worlds that we could be living in where we wouldn't have necessarily executed on that opportunity. The execution is hard. And, just having something that's appealing universally to people wanting to stay connected with their friends -- that's an important piece of it.  But, the team has just done really good work in terms of ranking the content and making the experience faster and building out better ways to get feedback from our community on what kinds of content they want to see in newsfeed. And, helping people have the tools that they need to share the social content and news and video content that they want. That way it exists in the corpus of content that can be shown. I just think the team is doing really good work on all of these, and I'm really proud of them. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [44]
+--------------------------------------------------------------------------------
+
+          Paul, there's no doubt that mobile has the beneficial effect on our engagement. In the US, two out of three smartphone users check their phone as soon as they wake up in the morning. It's just having that experience readily available in your pocket is tremendous, and we just see that being helpful across the business as it relates to mobile engagement. 
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+          Brian Weiser, Pivotal Research. 
+
+--------------------------------------------------------------------------------
+Brian Wieser,  Pivotal Research Group - Analyst    [46]
+--------------------------------------------------------------------------------
+
+          You mentioned 40 million small businesses have active pages. I'm wondering if you can update us on how many individual small businesses -- or businesses in total [are] buying ads right now.  And, separately, I was curious about current thoughts on how ad-type businesses will evolve?  If you see an integrated marketplace evolving?  Or, if you see a discrete demand by side businesses -- sorry, demand and supply-side businesses evolving? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [47]
+--------------------------------------------------------------------------------
+
+          On the first, we announced that we have over 2 million advertisers who are buying ads on Facebook. And, the process for that is often that small businesses become organic users. So, those 40 million small business pages that are using it once a month. And then, we're able to move them on to being advertisers. The best way we've done that is by simplified ad products.  82% of the people who start advertising with us, start with our really simple ad products. Do you want to pay a few dollars or a few pounds or a few euro to sponsor this post -- is a really easy on-ramp for a small business. 
+In terms of the overall ad tech world, I think a lot is happening and there is a lot that's going to evolve in the whole ecosystem. Our focus is on bringing people-based marketing and the effectiveness and relevance of Facebook ads off of Facebook. So, we can give marketers and publishers the tools to reach people across all of their devices, and importantly for our business, is connect the dots between online marketing and business outcomes.  You heard on this call me give a few examples of where we're already able to connect what happens in terms of ads with real sales of real products. For us, this is an important investment, and it's a very strategic. We are going to put the time in to make this work rather than look for any short-run, specific return. 
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+          Peter Stabler, Wells Fargo Securities. 
+
+--------------------------------------------------------------------------------
+Peter Stabler,  Wells Fargo Securities - Analyst    [49]
+--------------------------------------------------------------------------------
+
+          Drafting off that, Sheryl, wondering if you could update us on Atlas? We understand Atlas in and of itself is not likely to be a major revenue driver, but we do see it as a strategically important piece of your tool set.  Wondering if you could comment on agency adoption?   Is it going according to plan? Are you happy with it? 
+Secondly, on SMB, just wondering -- the 80 events that you've held around the world.  In terms of learning coming out of those, you talked a little bit about how folks get introduced as users and that makes sense. Is the tool set simple enough today for SMBs to grasp? Or, are there significant additions that you need to make to the tool set to accelerate the growth of SMB advertisers? Thanks very much. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [50]
+--------------------------------------------------------------------------------
+
+          On the first, Atlas is really important because it's solving a measurement problem which is that the current systems for serving and measuring ads are really flawed. They basically assume that you are one person on one device, and we know that's not true. They're only about 65% accurate in demographic targeting.  They don't work on mobile because they are cookie-based.  They don't work on multiple devices.  They don't go off-line to online, and they overemphasize the last click and reach. 
+And so, our focus with Atlas is helping people really understand the results they get with ads. You heard my Live Nation example earlier where we are able to connect Facebook ads and our platform directly to ticket sales. We never could have done that without Atlas measurement. 
+In terms of the migration process, this is an enterprise sale. We have to work client by client, then they have to choose us.  Then, they have to migrate their systems. And so, it's going to take time. What really matters is that when we get that migration and we are seeing it, we are able to show them the value because it makes their buying much more effective because they understand real results in a new way. 
+In [tune] with SMBs I would say two things. One, our products aren't simple enough yet because they can never be simple enough for SMBs. But, two, our products are probably the simplest ones out there. And so, I think we're leading, and I think we have a lot more to do. If you look at even in the United States, which is a very advanced market, I think it's something like 35% of SMBs don't have a web presence of any kind. But, a great majority of those do have a Facebook page, and that's because setting up a web presence for an SMB is complicated and expensive.  You can't just start a webpage, but it is easier and free to start a Facebook page until  you see broad adoption. 
+We also make a lot of things that they couldn't do in other platforms available on us. So, over 1 million SMBs have posted a video on Facebook. Which is pretty amazing because I doubt 1 million SMBs have ever run what is a video or TV ad. That's because you can shoot it on your mobile device, you can upload it.  You can do that for free, or you can pay us for the ad. And so, I think our tools are the simplest. But, I think we still need to do better because what we hear from SMBs is simple, fast, inexpensive, showing them real return, and we're going to continue to focus on all of those things. 
+
+--------------------------------------------------------------------------------
+Operator    [51]
+--------------------------------------------------------------------------------
+
+          Eric Sheridan, UBS. Your line is open. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [52]
+--------------------------------------------------------------------------------
+
+          I wonder if I could get an update on the e-commerce initiatives including the partnership with Shopify?  And, how we should be thinking longer-term about e-commerce becoming a bigger and bigger part of the platform.  Sheryl you called out Priceline.com and the booking relationship during your prepared remarks. Curious how far that might go longer term?  Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [53]
+--------------------------------------------------------------------------------
+
+          E-commerce is one of our top categories of advertisers, and we are already driving a lot of product sales through Facebook.  But, importantly, our e-commerce initiatives are really about connecting consumers with marketers so that they can buy from companies. They are not buying through us. We are testing a buy button in the new shops section on pages, but again that buy button is letting people buy directly from their advertisers not from us. It's pretty early days. We're excited by what we see in the e-commerce vertical, and we're going to continue to invest in growing that vertical as part of our ads business. 
+
+--------------------------------------------------------------------------------
+Operator    [54]
+--------------------------------------------------------------------------------
+
+          Brian Pitz, Jefferies. 
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [55]
+--------------------------------------------------------------------------------
+
+          Questions on audience network.  Any updates here including a sense for the level of adoption you're seeing from developers? Also, any synergies with the mobile app install product? And, finally, any comments on ad price comparisons to traditional newsfeed ads? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [56]
+--------------------------------------------------------------------------------
+
+          We're seeing investment.  We're investing in the audience network, and we think it's important because it takes -- it makes the ads more relevant.  It's part of our overall Ad Tech push to bring the effectiveness and relevance of our ads off of.  We're growing the number of advertisers and publishers, and we're continuing to see growth and we'll continue to invest. 
+When you think about mobile app install ads, those are an important, but relatively small, part of our revenue. The important thing to understand here is that they're not only used by developers, they're used by all four marketer segments.  So, for example, HBO used our video retargeting mobile app install ads on Facebook to drive downloads at HBO now, and Facebook is now the number one channel driving subscribers. I think when people think about our mobile app install ads, they often think this only applies to developers and small companies. And really, it's them as well, but it's also companies like HBO which are using those ads to drive adoption and downloads. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [57]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us today. We appreciate your time, and we look forward to speaking with you all again. 
+
+--------------------------------------------------------------------------------
+Operator    [58]
+--------------------------------------------------------------------------------
+
+          Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Nov-04-FB.OQ-139744337761-Transcript.txt

@@ -0,0 +1,511 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2015 Facebook Inc Earnings Call
+11/04/2015 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook, Inc. - VP of IR
+ * Dave Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Paul Vogel
+   Barclays Capital - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian  Nowak
+   Morgan Stanley - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Rich Greenfield
+   BTIG - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Anthony DiClemente
+   Nomura Securities Intl - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the Facebook third-quarter 2015 earnings call. 
+(Operator Instructions)  
+This call will be recorded. Thank you very much. 
+Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's third-quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. 
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 
+During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website, at investor.FB.com. 
+And now I'd like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah. And thanks, everyone, for joining us today. 
+This was another good quarter, and we continue to grow the size and engagement of our community. 1.55 billion people now use Facebook every month. And more than 1 billion people use Facebook every day. On mobile, we continue to have a lot of momentum. 1.39 billion people now use Facebook on mobile devices, including more than 1 billion on Android. 50 million people also use Facebook Lite, our app for people on low bandwidth connections and one of our fastest-growing interfaces. This is a great sign for how our mobile strategy continues to make progress across markets, devices, and platforms. 
+When it comes to our business, we're also pleased with our results. This quarter, total revenue reached $4.5 billion and advertising revenue grew by 45% from a year ago. We've already accomplished a lot this year, and these results show how we're getting stronger as a community and as a business. But we want to serve the entire global community, not just the people who are on Facebook today. Connecting everyone is one of the fundamental challenges of our time; and to achieve this, we need to continue innovating faster and investing for the long term. That means continuing to invest in our core products and services, as well as technologies and strategies that allow us to achieve a truly global reach over time. 
+Let's talk about how we're doing this. And let's start with how we're improving our core products to better serve our existing communities and businesses. This quarter, we introduced some big updates on Facebook to give people more options for expressing themselves. We began rolling out an improved mobile profile design, including the ability to add a profile video instead of just a photo. We also started testing Reactions, a new version of the Like button that provides more ways of expressing love, awe, and sympathy. We think this going to provide a much more engaging experience. 
+Another way we're working to improve people's experiences on Facebook is by helping them to share many different types of content with different groups of people they care about. One example is our progress with Groups on Facebook. More than 925 million people now use Groups each month; and in some countries, more than half of the population is participating. From a youth organization in Chicago to aid workers dealing with the refugee crisis in Europe, we've seen many inspiring examples of people using Groups to collaborate. 
+Video is another area where we continue to make progress. On average, there are now more than 8 billion daily video views on Facebook and more than 500 million people who are watching daily. To offer even more engaging video experiences, we've added live video to our Mentions app for public figures and we now support interactive 360 videos and news feed. We've also rolled out new video tools for Pages and begun testing a dedicated video section on Facebook. Over the next few years, video is going to be some of the most engaging content online. And by continuing to innovate here, we have a chance to build the best place to watch and share videos. 
+When it comes to serving businesses, we continue to create a lot of value. We now have more than 2.5 million active advertisers on Facebook, and more than 45 million small- and medium-sized businesses actively using Facebook pages. This quarter, we continued to focus on helping marketers achieve results while using our ad products, including video and carousel ads, as well as on Instagram. And, as usual, Sheryl can talk more about this in a moment. 
+Now let's talk about how we're working to develop our next generation of apps and services. For Instagram, this was a busy quarter. The community celebrated its five-year anniversary and reached a new milestone of 400 million monthly actives. More than 80 million photos are now shared on Instagram every day; and the pace of adoption among public figures, organizations, and people around the world continues to grow really well. When President Obama visited Alaska in September, he used Instagram to document his trip.  And this is a great example of how Instagram is changing the way that people see the world. 
+With our efforts in messaging, we're also making progress at building WhatsApp and Messenger both into great platforms with global scale. Last quarter, WhatsApp reached 900 million monthly actives and continues to be on a path to reach 1 billion people and beyond. Messenger has over 700 million monthly actives and we continue to focus on improving the core messaging experience. A good sign of our progress is the more than 9.5 billion photos now sent monthly on Messenger. We're also building many different tools that can offer useful experiences to people beyond just traditional messaging. One example is M, a digital assistant we introduced this quarter that, over time, will use AI to help people complete tasks. 
+Finally, let's talk about some of our longer-term efforts in innovation to help connect the world. With Internet.org, we have a lot of momentum. We've now rolled out free basic internet services to people in 29 countries and overall brought more than 15 million people online. As we've rolled out the program, we've made a number of improvements based on feedback from communities and partners, including opening up our platform for free basic services to all developers who want to build. Meanwhile, our work on new technologies to connect people in the most remote regions continues to make progress. This quarter we revealed Aquila, our first aircraft designed to beam internet into communities down from the sky. And we also announced a partnership to bring internet to large parts of Sub-Saharan Africa, using a satellite which is launching next year. 
+And with Oculus, we're in a great position to begin delivering a new generation of shared immersive  experiences. We plan to ship the Rift headset early next year; and Gear VR, our mobile product with Samsung, is going to have its first consumer release this holiday season, retailing for $99. And we also announced new partnerships with Minecraft, Netflix, and Twitch, and many other content partners. Virtual reality has the potential to be next computing platform that changes all of our lives. It's important also to recognize that this is going to grow slowly, like computers and mobile phones when they first arrived. So we're committed to Oculus and virtual reality for the long term. 
+So that's how we've continued to make progress on our strategy this quarter. The results we've achieved show that our investments are creating a lot of value for our community and the world. I just want to thank the entire Facebook community -- our employees, our partners and our shareholders -- for helping us to continue moving forward. We've done a lot, but there's always more to do. 
+And now I'm going to hand it off to Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hello, everyone. 
+We had an excellent third quarter. Results were strong across the board. Ad revenue grew 45% year over year, or 57% on a constant currency basis. Mobile ad revenue was $3.4 billion and grew 73% year over year. Mobile now makes up 78% of our total advertising revenue. Our business grew across all regions and marketer segments. Like last quarter, we saw especially strong growth in our North America and Asia-Pacific regions. Overall, we're really pleased with marketer adoption of our ad products around the world. 
+Our results show that we continue to make progress on our three priorities: capitalizing on the shift to mobile; growing the number of marketers using our ad products; and making our ads more relevant and effective. First, capitalizing on the shift to mobile. People have already shifted to mobile and this shift is driving engagement on Facebook. The average American adult spends 25% of their media time on mobile, and Facebook and Instagram together continue to account for over 1 in 5 minutes on mobile in the US. Businesses are lagging behind consumers in making this shift to mobile and we believe we're well-positioned to help them catch up. Facebook pages are already the mobile solution for millions of businesses. Pages now offer better messaging capabilities, call to action buttons, and new sections that enable businesses to highlight important information. 
+We're also capitalizing on the shift to mobile by expanding ads on Instagram. This quarter on Instagram, we introduced new ad formats and objectives, opened up our API, and launched self-serve ad capabilities.  Instagram ads are now available in all countries where we offer Facebook ads, and marketers can manage campaigns across both platforms with the same targeting. We're really pleased with the marketer demand for Instagram ads. 
+Our second priority is growing the number of marketers using our ad products. In September at Ad Week, we announced that we have over 2.5 million active advertisers on Facebook.  With more than 45 million active SMB pages on Facebook, we think there's a lot of opportunity to turn even more of these businesses into a marketers. Marketers come to Facebook and Instagram because we have the best performing mobile ad products, and video is making them even better. Marketers have always loved using videos to tell stories. 
+As Mark discussed, video is a natural and growing part of our mobile news feed experience. Video on Facebook gives marketers not just mass reach, but better cross-device targeting and measurement than we believe is available on any other platform. We're especially pleased with the breadth of marketers using video on Facebook, from brands to direct response to SMBs. Over 1.5 million small businesses posted video, which includes organic video posts and video ads on Facebook in the month of September alone. 
+Video ads complement TV ads. According to a recent study with Nielsen Research, marketers using Facebook ads with TV ads saw  higher reach, ad recall, brand linkage, and likeability. To share one example, GMC used video and other ads on Facebook to extend the reach of their TV brand campaign highlighting their premium trucks and SUVs. The Facebook campaign drove a 13 point lift in ad recall and a 6 point lift in brand favorability. We recently introduced Target Rating Point, TRP buying, so that marketers can plan, buy, and measure video ads on Facebook the same way they do on TV. We're pleased with the feedback we're receiving on this from marketers and agencies. 
+Our third priority is making our ads more relevant and effective. We know relevant ads are more engaging for people and therefore drive better results for businesses. Products like carousel ads and dynamic product ads help improve effectiveness for marketers. Carousel ads show multiple images, and now videos, and drive 30% to 50% lower cost per conversion than single-image link ads. Dynamic product ads, which allow marketers to upload their product catalog, are driving ROI comparable to search. For example, Marriott uses DPA to retarget travelers based on their travel search habits, and they are now scaling globally across their portfolio of brands. LatAm e-commerce company Mercado Libre uses DPA to remarket over 38 million products in over 13 countries. Both are seeing high ROI and continuing to invest. 
+On the measurement side, Conversion Lift is helping clients see the real business results from their campaigns. Boost Mobile, a Sprint brand, showed ads to people eligible for device upgrades. Using Conversion Lifts, they were able to attribute a 4% lift in in-store sales to their Facebook campaign. 
+Finally, we're continuing to invest in ad tech across Atlas, LiveRail, and the Audience Network. This quarter, we expanded the ad format so publishers in the Audience Network can add to their mobile apps. On LiveRail this quarter, we began testing age and gender targeting. LiveRail can now deliver over 90% accuracy on age and gender segments across desktop, mobile web, and mobile apps versus a non-target rate of only 31% to 55% when not using LiveRail technology. 
+I want to take a moment to thank our clients around the world for their continued partnership and congratulate our global Facebook teams on great execution. Looking forward, we're going to stay focused on our priorities to continue to build a solid foundation for our long-term business. 
+Now here's Dave. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. 
+Echoing Mark and Sheryl's comments, Q3 was another strong quarter for Facebook. We generated $4.5 billion in revenue and over $1.4 billion in free cash flow. Growth in engagement of our community again provided a great platform for our strong financial performance this quarter. In September, we reached a new milestone, with over 1 billion people using Facebook on an average day, an increase of 17% compared to last year. This daily number represents 65% of the 1.55 billion people who used Facebook during the month of September. 
+Mobile continued to drive our growth. In September, approximately 1.39 billion people accessed Facebook on mobile devices, up 23% from last year. Additionally, our next generation of services continued to grow, with Instagram, Messenger, and WhatsApp now exceeding 400 million, 700 million, and 900 million monthly actives, respectively. 
+Now turning to the financials. All of our comparisons are on a year-over-year basis, unless otherwise noted. Additionally, our non-GAAP measures exclude stock-based compensation and the amortization of intangibles. Total revenue was $4.5 billion, up 41%, or 51% on a constant currency basis. Ad revenue was $4.3 billion, up 45%, or 57% on a constant currency basis. The strengthening of the US dollar continued to have an unfavorable impact on our revenue in Q3. Had foreign exchange rates remained constant with Q3 2014 levels, our total revenue would have been approximately $340 million higher. Regionally, US and Canada and Asia-Pacific were our strongest markets, producing ad revenue growth of 56% and 48%, respectively. Europe and Rest of World grew more slowly, at 33% and 29%, respectively, impacted by our currency exposure in both of those regions. 
+As Sheryl mentioned, mobile continued to drive our revenue growth. Mobile ad revenue was $3.4 billion, up 73% from last year, representing 78% of our advertising revenue. Revenue from ads served on personal computers was down approximately 8%. We have been very pleased with the sustained high growth of mobile advertising revenue. There are a number of important factors contributing to that growth, both from the supply and demand sides. 
+The drivers of year-over-year mobile revenue growth fell into three main categories. First, as Sheryl covered, we've continued to have success driving strong advertiser demand. Second, we've grown both the number of people using Facebook and the time that they spend with us. And third, the growth in advertiser demand and ad quality has enabled us to increase ad load over time. As we have grown mobile advertising, we have remained very pleased with overall engagement levels, user satisfaction with news feed, and the overall quality of the ads themselves. 
+Turning now to our overall price-volume metrics. In Q3, the average price per ad increased 61%, while total ad impressions declined 10% on a year-over-year basis. As I've indicated on prior calls, the changes in our reported price-volume metrics have been driven recently by the change in the number of right-hand column ads and the shift to mobile. These factors will have a less significant impact on the reported price-volume metrics going forward, now that a full year has elapsed since the redesign of right-hand column ads and now that mobile impressions have grown to become the majority of impressions. In fact, the quarter-over-quarter trends already point to that. In Q3, total ad impressions increased 7% sequentially and average price per ad increased 5%. 
+Total payments and other fees revenue was $202 million, down 18% compared to last year. The decline was expected and was driven by a reduction in payments revenue related to games played on personal computers. 
+Turning now to expenses. Our Q3 total GAAP expenses were $3 billion, up 68%, and non-GAAP expenses were $2.1 billion, up 51%. Similar to last quarter, stock-based compensation and amortization expenses related to the WhatsApp acquisition contributed significantly to the year-over-year growth in GAAP expenses. Non-GAAP expenses were driven by increases in headcount-related costs, cost of revenue, and marketing expenses. We ended Q3 with nearly 12,000 employees, up 44% compared to last year. We added over 1,000 employees to Facebook in the quarter and we are pleased with the continued strength in our recruiting efforts. 
+Our Q3 GAAP operating income was approximately $1.5 billion, representing a 32% operating margin. Our non-GAAP operating income was $2.4 billion, representing a 54% margin. Our Q3 GAAP and non-GAAP tax rates were 37% and 32%, respectively. Our Q3 GAAP net income was $896 million, or $0.31 per share, and our non-GAAP net income was $1.6 billion, or $0.57 per share. In Q3, capital expenditures were $780 million, as we continued to invest in servers, network infrastructure, and the buildout of data centers and other facilities to support the rapid growth of the business. We generated $1.4 billion of free cash flow and ended the quarter with over $15.8 billion in cash and investments. 
+Turning now to the revenue outlook. We remain focused on growing the number of people who use our services, increasing advertiser demand, and improving the quality and relevance of our ads. Across these dimensions, we continue to see healthy growth opportunities ahead for Facebook and Instagram. Given the strengthening of the US dollar over the past year, we will continue to face currency headwinds next quarter, particularly in Europe and Latin America. In addition, we expect our total payments and other fees revenues to decline sequentially from Q3 to Q4, similar to the trends that we have experienced over the last couple quarters. 
+Now turning to the expense outlook. We expect the year-over-year growth rate for total full-year 2015 GAAP expenses to be approximately 55% and for total full-year non-GAAP expenses to be approximately 50%. We anticipate our 2015 capital expenditures will be in the range of $2.5 billion to $2.7 billion. We continue to expect our 2015 stock-based compensation to be in the range of $3 billion to $3.2 billion, approximately half of which is related to our prior acquisitions, most notably WhatsApp. We expect amortization expenses for the full year 2015 to be approximately $700 million to $800 million. And lastly, we anticipate our Q4 and full-year 2015 GAAP and non-GAAP tax rates to be several percentage points above their respective Q3 rates. 
+In summary, Q3 was another strong quarter for Facebook. We are pleased with the growth and engagement of our community and the momentum in our business, which together support our ability to continue investing to build our next generation of services and execute on our mission of connecting the world. 
+With that, Operator, let's open up the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Thank you. 
+(Operator Instructions)  
+Your first question comes from Eric Sheridan with UBS. Your line is open. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the questions. Mark, maybe one for you and one for Sheryl. For Mark, on virtual reality and Oculus, how do you see the development of the entertainment and content ecosystem around virtual reality playing out in 2016 and beyond? And what's the role Facebook's going to have to play in maybe seeding some of the content and entertainment side of VR. 
+And then for Sheryl, any color you can give us on Instagram? We've obviously seen a ramp-up now in advertising on the property. How the Company's thinking about ad load monetization, some of the opportunities and how those will be balanced against engagement. Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          I can start off talking about Oculus and virtual reality. So the first thing that I want to stress here is that these kind of new platforms take a long time to develop. So we've said often that we think that virtual reality and augmented reality could be the next big computing platform. But just to put that in perspective and compare it to the development of previous computing platforms, like phones and computers, I think the first smartphones came out in 2003. And in the first year, I think BlackBerry and Palm Treo were the initial smartphones that came out. I think they each sold in the hundreds of thousands of units. So just to kind of give a sense of the time frame that we're thinking about this and how we expect this to develop, that's how we're thinking about that. 
+In terms of the actual content, first, we think gaming is going to be the most obvious market. There are around, I think, more than 200 million, almost 250 million people who have either an X-Box, a PlayStation or a Wii.  And we think that that audience is going to the type of people who are going to be very excited about the type of experiences initially that you can have with virtual reality. And the advantage of that is also that some of those can be single player experiences. They don't require a big network effect or a lot of people having the technology or large installed base. 
+Once we start getting a bit further along with that, then the next thing that we think is going to be huge is video and immersive experiences, both things that people can create, like the social content that they share on Facebook today, and more professional and premium content, both short form and longer form.  But we'll start to see some experimentation with that. There already is some very good content. But until there are millions of units out in the market, I don't expect that to be a big industry for folks to be investing a huge amount in in 2016. 
+Then when they're starting to get to be more units, just like every other major computing platform before that, what we expect is that a large portion of what people do in it will be communication and social behavior, and that's where Facebook really has the DNA and experience to, I think, build the best experiences.  And we're investing in trying to figure out what that's going to look like. That's ultimately a lot of what we're extremely excited about for a number of years down the road. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          On Instagram, we think that with Facebook and Instagram, we now have the two most important mobile platforms out there. And what we bring to this is a common ads infrastructure. So Instagram ads, now that we've rolled out as we have this past quarter and gotten to a really good product offering, combine the creative format of Instagram, which is very visually compelling and has a lot of engagement from people, with the back-end infrastructure and marketer base that Facebook has. 
+So now we have self-service ads rolled out. We've rolled out in all countries where we offer Facebook ads. We have new ad formats for Instagram, all of which can use the same targeting as we have on Facebook and all of which are increasingly tapping into our measurement capabilities. On ad load, we have a lot of experience rolling out ads into feed-based products and we monitor it very carefully and we're going to continue to monitor really carefully. 
+We're also excited about how they work together. To share one example, American Express, working with Digitas, rolled out carousel ads on Instagram that targeted travel-related interest groups for people who are 18 years and older. They then retargeted those same people on Facebook. And what they created was a really visual journey, using both the format that is Instagram, the format that is Facebook and combining the two platforms with their targeting. We've think we're at the very beginning of what's possible when we combine these two. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          The next question is from Heather Bellini with Goldman Sachs. Your line is open. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Great. Thank you. I had two quick questions, as well. One, Sheryl, just to follow up on what you mentioned about Instagram, obviously, it's a very visual experience. I'm just wondering, when you're talking to advertisers, are they viewing this as a separate channel?  So I think there's been some questions as to the incremental nature of Instagram. It would seem like it could be extremely incremental, given these are the two top platforms in mobile. I was wondering if you could talk a little about what the advertisers say about blending the experiences. 
+And also, a question for Mark. I was just wondering if you could share with us how we might see your content strategy evolve over time and, in particular, just wondering what your view is on longer form content on the video side?   Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [7]
+--------------------------------------------------------------------------------
+
+          To the Instagram question, what we see in the short run is that some of the spend on Instagram is incremental to Facebook and some isn't. Some clients are comfortable with Instagram and bringing a new budget to bear. Some clients are shifting some of their Facebook budget. For us in the medium to long run, we believe that we're not competing between Facebook and Instagram. We're competing with other forms of media. And if you want the most eyeballs, and we think the highest ROI, over time we think that will benefit Facebook and Instagram. 
+So for us, what we really want is people to experiment and learn and get to experience Instagram as they have on Facebook so that we can make the case and prove the ROI. And then we believe if you look at the consumer metrics of where people were spending their time, we will be able to gain share compared to almost anything else you can buy out there. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [8]
+--------------------------------------------------------------------------------
+
+          And to your question about long form content, the more natural starting point for us is shorter form content, which can either be social content or premium short form content. But the vast majority of the content that's consumed on Facebook, just talking about video right now, is people browsing through feed, they discover something interesting that they weren't necessarily looking for previously. That's very powerful, because that's a behavior that there isn't really anywhere else to do at scale on  the internet today in a great way. And then people watch it there or they bookmark it to watch later. 
+But if you're talking about watching inline and feed, that's not the place where you're necessarily going to see a TV show and then watch an hour-long clip right there. So what we're actually seeing is that a lot of the best -- or at least from my perspective -- TV shows that we see folks like Jimmy Fallon breaking up their show into clips that they can now share to be consumed over social media and on the internet in three- to five- or seven-minute segments, which are more of what people want when browsing through news feed. 
+I do think over time we will get to more different types of content and we'll build products that serve that. The current market of trying to help people share and experience all these shorter form clips is massive. We are nowhere near serving that as well as we want to. I actually think in a lot of ways, though, the more interesting question is not in the near term what we're going to do to develop ways to consume long form content, but what traditional media and content producers who have traditionally produced long form content are going to do to chunk their stuff up better, so that way it can be more easily consumed by this big community online. 
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+          The next question is Douglas Anmuth with JPMorgan. Your line is open. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [10]
+--------------------------------------------------------------------------------
+
+          Thank you for taking the question.  One for Mark and then one for Dave. Mark, you recently spent time in China and India. I was hoping to get some of your key takeaways, both in terms of Internet.org and also about Facebook's potential in China. 
+And then secondly, Dave, was hoping to get some early thoughts on OpEx for 2016, at least perhaps qualitatively, if you could walk us through some of the puts and takes for next year, Oculus in particular.  Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [11]
+--------------------------------------------------------------------------------
+
+          Sure, I can start off with the India and China question. They're very different situations. So India is a unique country where there are 1.25 billion people, more than 1 billion of them are not on the internet. It is the country in the world that benefits the most from connectivity. And there's a lot of research that we've seen and reports that third parties have put out that show that when you connect to places like India, it makes a very big difference socially and for the economy there. 
+A lot of us here, everyone we know is on the internet and we think about the internet as an entertainment and basic communication. But if you don't have access to a good school, then getting basic internet access could be your best educational information.  Or if you don't have access to a good doctor, then getting access to the internet could be the only way that you can learn about how to avoid certain diseases or how to raise your kids and help them avoid certain diseases and find jobs and a lot of stuff. 
+What we find through the research is that for every 10 people that get connected to the internet, a little less than, or right around one person gets lifted out of poverty and one new job gets created. We're very focused on this. It's a huge priority for the Indian government. And anything that we can do to help there, we think is very good for the world and we're invested in that and we're happy to support.  
+And Internet.org in India now, there are already more than 1 million people who now have access to the internet who didn't otherwise, because of our efforts. So we're proud of that. But obviously, that's still very early on. We're only working with one operator currently and part of the country, so there's a lot of room to expand that.  And that's just a big opportunity for the internet overall and for India over the next decade, and we hope to play a role in that. 
+On China, that is a more complex situation. Obviously, you can't have a mission of wanting to connect everyone in the world and leave out the biggest country. So over the long term, that is a situation that we will need to try to figure out a way forward on. For now, the thing that I would leave you with is that people think that Facebook isn't in China at all,  and that's actually not true. 
+Our consumer service isn't active there, but it actually is already one of the biggest advertising markets that we have.  Because there are a lot of really big and important Chinese companies who sell a lot of products to people outside of China.  And they use Facebook as one of their primary tools, in a lot of cases, to spread information about what they're doing and grow their customer base. So we're happy to do whatever we can to help develop the economies in both of those countries and they're both long-term efforts for us. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [12]
+--------------------------------------------------------------------------------
+
+          Doug, on your question on 2016, yes, we're not going to, obviously, give specific guidance at this time. That will be coming with our Q4 call. But we're focused on continuing to invest heavily in the business across our near-, mid- and long-term opportunities, and we see a bunch of great opportunities to invest there. So in the near-term, we're focused on growing the community and executing on our existing business.  In the medium term, we're focused on those next generation of services, Instagram, Messenger and WhatsApp.  And in the long term, we've got the investments we're making in things like artificial intelligence, VR, and obviously, the Internet.org efforts that Mark just spoke about. 
+Specifically with regards to Oculus and how that could impact the plan for next year, we're, as Mark said, very bullish about the long-term opportunity for VR and excited about the launch for Rift next year. But VR is still very much in the development stage, so it would be early to be talking about large shipment volumes. 
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          The next question is from Brian Nowak with Morgan Stanley. Your line is open. 
+
+--------------------------------------------------------------------------------
+Brian  Nowak,  Morgan Stanley - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. I have two, one for Mark and one for Sheryl. Mark, can you talk a little about what factors and metrics you consider when you're thinking about a multi-app strategy versus rolling out more products and offerings on Facebook?  There's a difference in Facebook Paper, Messenger, the video viewer on the platform. Just be curious how you think about multi-app versus adding more functionality to the mother ship. 
+And then for Sheryl, it sounds like there's still a lot of SMBs on the platform that are not yet paying advertisers. Can you talk about some of the biggest hurdles you need to overcome to get more SMBs paying and initiatives you have in place? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [15]
+--------------------------------------------------------------------------------
+
+          So I can talk to the multi-app question first. So we view the social space as almost this matrix. You can think about it as a two dimensional grid, where there's one axis is the richness of the content that people want to share. Then the other axis is the size of the audience, or intimacy of how people want to share. So on the first axis, you get everything ranging from text to links to photos to videos to immersive 360 videos and virtual reality content, and this progression. And on the other axis, you get everything ranging from one-to-one messaging to small group communication to communicating with all your friends at once to big interest groups to completely public. 
+And what we believe is that you can intersect at any point on that, and there will be something interesting to build. So a small group product for sharing video, that's like -- that's going to be a thing. A one-on-one product for sharing text or calling, that's clearly a thing. A public sharing and consumption product for video, that's a thing. And what we've tried to do is basically figure out the areas that we think are open and are not currently served by the set of products that the industry has built and figure out a way to offer those. 
+So one of the big opportunities that I'm really excited about right now is I think that there's a pretty big opening between very private messaging, kind of the one-on-one messaging products like Messenger and WhatsApp, and products like Facebook, where you share with all your friends at once, or Instagram, and in between there, what we're seeing is this huge growth of private groups. And Groups remains one of the, I think, least talked about products on Facebook.  But I just said earlier that we have more than 900 million people are using that every month. It's a huge thing and it's a big area that we can develop going forward. 
+So we experiment with all these things in terms of some of them make sense to naturally have inside the Facebook app because you're using the same set of friends and network and connections. Some of them get clear value by being separate, like Messenger, for example, where we can make sure that everyone has their push notifications turned on, which is extremely important for our messaging app. But overall, there's just a lot of stuff in this space and the amount that people want to share and communicate is boundless. And that's I think partially why we're seeing the growth that we are with so many of these products. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [16]
+--------------------------------------------------------------------------------
+
+          On SMBs, I think it's one of the most compelling opportunities we have for Facebook. And that's because I think we solve a really big problem for SMBs, which is how are they going to reach customers. In the United States, which is usually the most advanced market, 35% of small businesses have no web presence at all. And building a mobile presence is even harder than a web presence, because most people don't use the mobile web, and mobile apps are expensive to build and hard to get people to use, especially if you're a small business. 
+That's why there are 45 million SMB pages on Facebook. These are people who are using Facebook and this free product to create an online and increasingly,  a mobile presence. And then our job is to make sure that free product works for them and then over time, bring them into our paid products. 
+We have 2.5 million advertisers and over 80% of them started on Pages and then started with  simplified ad products; and that's what we've done over time and will continue to do that. And what you see is that it's as easy for them to use it as profile and we can give them opportunities to do things they otherwise couldn't do. So to what I said in my transcript before, 1.5 million SMBs posting videos in one month alone. 1.5 million SMBs have not posted or created video on any other platform.  But with us, it's cheap, it's very easy to use, and that gives us a way to continue to work with SMBs and increasingly grow our business with them. 
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          The next question is from Justin Post with Bank of America Merrill Lynch.  Your line is open. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          First one, Mark, could you talk a little about how much activity you see around Events on Facebook and maybe your views on whether Facebook could benefit from political activity or advertising?  And then Sheryl, could you talk a little bit about where ad loads are today? Is there still room there? And also just what your feedback you're getting on advertiser ROIs, is there still more room there?  Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+          I'll start with the question on ad load. It's Dave. And then Sheryl can follow up on the political question. So Justin, over time, ad load has been one of the factors driving year-over-year growth. It's just worth noting that it is up significantly from where we were two years ago. Looking forward, we continue to feel like there are good opportunities to grow the business. I talked about the three factors that contributed to growth this quarter, ad demand, users and engagement, and ad load.  And we see all of those continuing to be factors for growth going forward. And then Sheryl, did you want to take the question on the political? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [20]
+--------------------------------------------------------------------------------
+
+          And I'll take Events, too. Just as Mark said with Groups, Events are growing quickly on Facebook. We don't break out by product, but we're pleased with the growth. 
+On the elections and political activity and political advertising, we're excited about the elections,  because we think we give politicians and people a really compelling way to interact. If you wanted to feel like you were interacting with someone running for office before, you had to go to a town hall meeting. And increasingly, that's happening on Facebook. Between January 1 and October 7 of this year, over 68 million people on Facebook in the US made over 1 billion interactions about the campaign alone.  And every candidate and every member of Congress is on Facebook now. 
+In terms of the revenue impact, no one vertical drives our business. We have a very large and diversified business.  But we think we offer something pretty compelling,  which is the reach of Facebook with very unique targeting. So on Facebook, you can target an ad by district, by interest.  Ben Carson ran 240 different ads targeted at different audiences.  And so we're starting to see candidates use our platform to communicate, to advertise and to share. 
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          Next question is from Anthony DiClemente with Nomura. Your line is open. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities Intl - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          Thank you very much. Mark, on the subject of media content on Facebook, it seems like the big opportunity is for Facebook to be the portal with which to access the short form video content that you mentioned earlier, and maybe the idea is to keep the consumption of that content in line or inside the Facebook wall, the garden. So the follow-up question that I would have is how do you think you could best partner with the media providers and convince them the merits of bringing their valuable, in some cases expensive, content into the Facebook world, particularly at a time in media when they're really trying hard to guard their own existing ecosystems? 
+And then a question for Sheryl. I wonder if you could just touch on the relative growth of branded advertising versus direct response ads. You mentioned Total Ratings Point buying. Can you help us think about the mix of branded versus DR? And for you, do you think that DRP buying and video is going to shift your ad mix more towards branded over time?  Thanks.   
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [23]
+--------------------------------------------------------------------------------
+
+          I can talk about video and the business model around that. So you're definitely right that there's a certain class of content which is only going to come onto Facebook if there's a good way to compensate the content owners for that. And we've recently rolled out the business model for this, which is for premium content, we'll give a revenue share on a portion of the views to the content owners.  And we've got good feedback so far on that. We're working with a small set of partners to start, and we'll roll it out beyond that as that keeps on going. 
+But it's important to keep in mind that there are a few different reasons why people share content on Facebook, and that's just one of the use cases. So there are a lot of people who are sharing content socially, because they want to get a message out. That may not be business motivated. 
+There are a lot of folks who are business motivated, but who primarily post content in order to promote something or gain distribution for something and that, you can gain value without some kind of rev share. And that's why the video ecosystem has grown so quickly, even before we rolled out a revenue share. 
+And now the third class of content, which I think is going to be important, and increasingly important over time, is the one that you basically want to essentially trade the content for money.  And that is one where you need the rev share to unlock that. But we're getting good feedback on that upfront. So we're looking forward to seeing how that trends. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [24]
+--------------------------------------------------------------------------------
+
+          On to our marketer segments.  We don't break out by segment, but all of our marketer segments are growing. We're seeing strong growth in brand.  And we believe that's because we're delivering on the promise of personalized marketing at scale. We've worked hard on things that will help brand purchasers feel comfortable on the platform and measure their ROI. So that's where TRP buying comes in, allowing people who usually buy TV ads to plan, buy, measure Facebook ads the same way enables an apples-to-apples comparison that we believe is very strong for our ROI. We've also worked on brand awareness optimization, mobile polling to measure campaign effectiveness, and we're working client by client. 
+Our other segments are growing, as well. We're working hard in the direct response area, rolling out things like carousel ads and dynamic product ads. And one thing that's worth understanding is that all of these different marketer segments often work together. To share one example, Ikea wanted to boost their online sales when their stores were closed. So in Norway, most retailers are closed Saturday to Sunday night.  So they invested in carousel ads and only showed them when their stores were closed. And they turned a $35,000 investment in carousel ads into $2 million in sales, which happened precisely when they want it to happen. That's a direct response ad buy, because it's very specific, carousel ads product.  But it's also a brand play for them, as they strengthen their brand and get people to interact with them as they want them to. 
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+          The next question is from John Blackledge with Cowen and Company. Your line is open. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Great. Thank you. Two questions. With the explosive video consumption growth and growth in public content being consumed in the news feed, could engagement perhaps materially increase from current levels over the next couple years? 
+And then on WhatsApp, as it heads towards 1 billion [miles], and/or greater, could you give us a sense of how you're thinking about monetization of that platform and perhaps timing of the monetization? Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [27]
+--------------------------------------------------------------------------------
+
+          On engagement, John, I think we're obviously focused across a number of different dimensions to drive engagement. Videos had a big contribution there.  So that's certainly been helpful in terms of making news feed even more engaging and we'll continue to be focusing on a number of initiatives, public content and just sharing with your friends. So there's lots that we are working on engagement to continue to derive time spent. 
+On WhatsApp, I don't think there's a particular magical number with 1 billion users. The focus really for our messaging products is to continue to drive user growth and continue to build great products that are fast, useful, engaging and fun. And on that front, they're both doing great. Messenger has over 700 million users and WhatsApp, obviously, has over 900 million users. So the business side is not the main focus right now. We believe there are going to be opportunities as we further scale those properties. 
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+          The next question is from Paul Vogel with Barclays. Your line is open. 
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [29]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. Two questions. One, big picture, Mark, there's a lot of debate around what content is appropriate for Facebook to block and not block. I'm wondering if you could talk a little about how you decide what to censor and not censor in terms of on the content side. And then less big picture, but just in terms of fourth quarter, given it's a big retail quarter, any increased testing around direct retail on the platform? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [30]
+--------------------------------------------------------------------------------
+
+          I can answer the policy question, and then I guess Sheryl will take the other one. The guiding principle for us on this is that we want to give the most voice to the most people. And the idea is that there are all these different barriers that any given person has to being able to share and express everything that they want, from technical barriers -- it's really hard to communicate with someone if you're not on the internet and they're far away -- to product barriers -- it's hard to share videos if we don't have a good product for sharing videos -- to legal barriers -- it's hard to share content that your government says is illegal for you to share.  And at the end of the day, there's also policy, and you're in a community and we have community standards for how we think people should communicate in order to be safe. 
+Because even if you have all of the internet connectivity and the products and the legal framework that you need, if you don't feel safe saying what you want to express, then you're probably not going to share it. And we see a lot of that online and that's a pretty big issue. Everything from bullying to terrorism, there are lots of reasons why people might otherwise have the tools to share what they would want, but feel silenced. And that isn't giving the most voice to the most people. So we feel a responsibility to have policies for our community which limit hate speech and limit things which are going to create just an overwhelmingly uncomfortable environment for people that is going to silence other people's speech, in order to make sure that over the long term we are enabling the most people to be able to express as much as possible as they can. And that's the philosophy that we have. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [31]
+--------------------------------------------------------------------------------
+
+          On commerce going into the holiday season, commerce is a really important vertical for us and we're working hard to make our ads more effective. So what we're seeing from DPA ads and carousel ads, we're really happy with. We're seeing lower cost per conversion when people do multiple objectives and video. We're seeing lower post per click than single image link ads. And importantly, we're also creating better experiences for people. 
+Because when an ad is more targeted, more relevant, when you see a product you're interested in or a service you're interested in, that's a better experience. So we go into the holidays feeling that we have a really strong product offering, certainly the best product offering we've ever had, to connect people to the products they're going to buy this holiday. 
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+          The next question is from Rich Greenfield with BTIG. Your line is open. 
+
+--------------------------------------------------------------------------------
+Rich Greenfield,  BTIG - Analyst    [33]
+--------------------------------------------------------------------------------
+
+          Hello.  Thanks for taking the question. When you look at ad quality, I think when Facebook started, Sheryl, you were really adamant that you were focused on improving the ad quality and really making sure you were serving the highest quality ad to the right person. When you look at Instagram, I felt like you took incredible care to make sure that the advertising, like every ad was of the highest quality. As you've opened up the API, there's a tremendous amount of ads, some of them incredibly good quality, but some of them of lesser quality. How do you work to make sure that Instagram maintains what you started it with, which is incredibly beautiful ads that fit the platform, and so that you don't get criticized by users for pushing, not so much the amount of ads, but the type of ads? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [34]
+--------------------------------------------------------------------------------
+
+          You're right that quality is really important to us.  Because your experience on Facebook or Instagram is about the quality of what you see, both in terms of the organic posts you see from your friends or public people you're following and the ads, as well. And what we do is we monitor it carefully. We ramp slowly. We monitor engagement sentiment, quality of ads. We get a lot of feedback directly from people who use Facebook. They can X out the ads. If they do, we ask them why they're X'ing out the ads. And we just continue to monitor the metrics. 
+We're pleased with what's happened with quality on our platform overall. And a lot of the product innovations and investments I've been talking about on this call feed into quality. The carousel ads, they're not just that they're showing multiple products, it's that they're showing products that are more specifically directed at the person. And so a lot of the underlying things we do to build our ad systems don't just feed into revenue, they feed into quality.  And that's important, because over the long run, our quality today is our revenue tomorrow. 
+
+--------------------------------------------------------------------------------
+Operator    [35]
+--------------------------------------------------------------------------------
+
+          The next question is from Mark May with Citi. Your line is open. 
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [36]
+--------------------------------------------------------------------------------
+
+          Thanks. I had two, if I could. We noticed a very impressive acceleration in user MAU growth, I'm focused on in the quarter. It seemed like it was pretty much in every region of the world. What, if anything, can you attribute that to? I know that you seem to be running more TV ads, at least where I live. But wonder if anything you could attribute that to. 
+Secondly, again on video, as more and more people and businesses are uploading video, I assume that there's a lot of good video content on Facebook, but I don't see all of it. Question is really around video discovery. What strategies do you have going forward to improve video discovery from what is today more of a push based model to something that may be akin to a pull based model where I can enjoy all the great video content that's on Facebook?  Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [37]
+--------------------------------------------------------------------------------
+
+          Hello, Mark, it's Dave. Just on the user growth point, we're obviously pleased with the growth we're seeing across the globe.  In terms of DAU growth, the three largest countries were India, the US and Brazil. So we're seeing good, diversified growth. 
+Specifically, we've made a lot of initiatives to help improve and invest in the Facebook experience in emerging markets, and that has helped drive some of the acceleration and growth. So we've made a number of product and performance investments there, with Facebook Lite being a good example of that. The question then was on video and discovery. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [38]
+--------------------------------------------------------------------------------
+
+          And also just on the growth point, I just think the team that's working on that is executing extremely well. Sometimes it's not that you came up with some brilliant strategy, it's just like really good work consistently over a long period of time. And I think they are. 
+On video, yes, right now the strength in our system is definitely through helping people discover content that they hadn't really asked for through news feed.  And a lot of I think what we need to do is give people a way to see all of the videos that page that they like or follow is interested in sharing on Facebook.  And that's -- there's a pretty clear road map of stuff we're going to do over the next couple of years that I'm quite excited about to add some more dimensions to the video experience on Facebook. But we're just so early in this right now. It's pretty amazing how quickly it's growing, but there's a lot more to do. 
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+          The next question is from Ross Sandler with Deutsche Bank. Your line is open. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [40]
+--------------------------------------------------------------------------------
+
+          Great. I just have one for Sheryl. Sheryl, you mentioned that Marriott and Mercado Libre are both using DPA and seeing comparable ROI to paid search. That's a pretty incredible data point. So I guess the question is, what kind of lift in ROI and overall budget do you see as e-commerce or travel marketers migrate from your first few products, like custom audiences and other, to DPA?  And are the yields that you're getting from DPA ads higher than other formats, like video and app downloads and those types of things? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [41]
+--------------------------------------------------------------------------------
+
+          Our goal is to give marketers the highest return they can and over time, to capture the amount of budget that's equivalent to the percentage of media time we capture. And we're not there. Consumers have shifted to mobile and consumers have moved to Facebook and Instagram more quickly than ad budgets, and that's the opportunity we have in front of us. 
+What product you use really depends upon what you're trying to do. If you're trying to tell a brand story, then you want to do a video ad. If you're trying to sell a direct product, then you want to use DPA ads. And all of these products and all of the underlying targeting, like custom audiences, are designed to help people meet different objectives.  And we're trying to be really clear on that. If you're trying to move a brand objective, if you want to move favorability or brand sentiment, we can do that.  And that's often a video ad or one of our branded ads or you optimize for brand awareness. If you're trying to sell a product, you might want to use carousel ads or dynamic product ads.  And the targeting that is custom audiences underlies all of our product offerings. So our goal is to have lots of different things we can do for our marketers and measure them really deeply all the way through to business results. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [42]
+--------------------------------------------------------------------------------
+
+          And Ross, you just asked about yields. The way the auction system works, it's going to be just be whatever is the ad that is going to necessarily have the best return is going to win in the auction. So it doesn't necessarily mean you're paying a premium for a given product. And so if we've got a good DPA ad, that might win in the auction for a given user. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [43]
+--------------------------------------------------------------------------------
+
+          Operator, we have time for one last question. 
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+          Certainly. The final question is from Mark Mahaney with RBC Capital Markets. Your line is open. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [45]
+--------------------------------------------------------------------------------
+
+          Okay. Let me try going back to future use cases, and Mark, I think this was touched on a couple times. Can you talk about whether you're seeing greater attempts to do search, the search functionality on the site and how that could change over the next three to five years, and also comment on news and to the extent to which you're seeing a rising utilization by regular users of Facebook as a way to get news and what you can do to make that even easier for people, if that's something, a behavior you want to facilitate?  Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [46]
+--------------------------------------------------------------------------------
+
+          Sure. So on search, we already have one very big use case, which is people basically using our search engine to look up pages and people who are on Facebook. And that by itself is already one of the biggest search engines in the world. 
+The next big use case that we've really been working on for a couple of years now and I think is going to -- is starting to roll out and is growing quickly is people finding content on Facebook. So that's Trending. It's people finding posts that their friends or others had posted on news feed that they saw but might want to go check out later.  And I think this is going to be a very important part of the video experience, as well, because one half is push, going to news feed and not asking for content, but just coming across and discovering it. And then the other half is pull and going to some experience where you're asking for some type of content.  And getting to a point where we can do that very well is just going to add a whole new dimension to the service. 
+So that's something I remain very excited about. In some ways, it's taken a little bit longer than I'd expected to get to a point where it's growing quickly. The people and page look up part is doing very well. The post part has taken a bit longer, but I'm very excited about that going forward. 
+In terms of news, the biggest issue with news today in Facebook is that it is the slowest part of the experience. You go to load a video and it loads quickly. We made it auto play to load even quicker. You tap on a photo, you expect it to expand immediately.  But you tap on a link and often, it can take 10 seconds to load. And if you're on a 2G connection somewhere in the developing world, it could take 30 seconds to load. 
+The big initiative that we have here, which I'm really excited about, is Instant Articles. And the big thing that that does is just it lets publishers basically put the content on our servers ahead of time, and that way, when people tap on it, it loads instantaneously, and it can be a much more immersive experience.  And we've already found, from the initial experiments that we've done,  that the engagement is positive, and we're starting to roll that out more broadly. I think that's going to be a really big deal for improving the experience of reading news on Facebook,  and it's something that we've been working on for a while and I'm very excited about it. 
+So yes, I would expect that we will see an expansion of sharing and consumption of all of the different types of things that you asked about, news, video, search and the different experiences there.  And these are some of the big areas that we're investing in.  And they're long-term investments and they're big investments and we're going to keep on pushing on them.  But I think that's what we need to do to serve our community well and ultimately connect everyone in the world. So thank you, guys. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [47]
+--------------------------------------------------------------------------------
+
+          Great. Thank you for joining us today. We appreciate your time and we look forward to speaking with you again.   
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+          Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Oct-14-BAC.N-139658820022-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2015 Bank of America Corp Earnings Call
+10/14/2015 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Moynihan
+   Bank of America Corporation - Chairman of the Board and Chief Executive Officer
+ * Lee McEntire
+   Bank of America Corporation - SVP of IR
+ * Paul Donofrio
+   Bank of America Corporation - CFO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Thomas LeTrent
+   FBR Capital Markets - Analyst
+ * John McDonald
+   Bernstein - Analyst
+ * Eric Wasserstrom
+   Guggenheim Securities LLC - Analyst
+ * Nancy Bush
+   NAB Research - Analyst
+ * Mike Mayo
+   CLSA Limited - Analyst
+ * Glenn Schorr
+   Evercore ISI - Analyst
+ * Ken Usdin
+   Jefferies LLC - Analyst
+ * Matt O'Connor
+   Deutsche Bank - Analyst
+ * Steven Chubak
+   Nomura Securities - Anayst
+ * Betsy Graseck
+   Morgan Stanley - Analyst
+ * Jim Mitchell
+   Buckingham Research Group - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day everyone and welcome to today's program. (Operator Instructions). Please note this call is being recorded.
+It is now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Good morning. Thanks to everybody on the phone; thanks on the webcast for joining us as well. Welcome to our third-quarter results. Hopefully everybody has had a chance to review the earnings release. It is only available on the Bank of America investor relations website.
+So before I turn over the call to Brian, let me just remind you we have our new CFO that will be going through the results this morning, Mr. Paul Donofrio. And so we will -- we may make some forward-looking statements. For further information on those please refer to either our earnings release documents on our website or our SEC filings.
+So with that I will turn it over to Brian.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [3]
+--------------------------------------------------------------------------------
+
+          Thank you, Lee, and good morning everyone and thank you for joining us to review our third-quarter results.
+Today we reported $4.5 billion in after-tax earnings or $0.37 per diluted share. When we think about the quarter, the key messages we continue to make good progress in a tough revenue environment due to low interest rates and a sluggish economic recovery. In addition with the late summer's  volatility especially in the fixed income trading markets, are remaining challenging but with that we produced another good quarter of progress in all of the businesses.
+Before Paul takes you through the details of the quarter, I want to provide a little context from my vantage point. We have continued to make progress toward our full earnings capacity here at Bank of America and this quarter represents the fourth consecutive quarter of solid results following the resolution of our large legacy exposures in the third quarter of last year. When you think about it over the last four quarters we have reported over $16 billion in after-tax income. That compares to the previous four quarters leading up to the third quarter of 2014 of about $5.2 billion, including the significant litigation cost.
+Returns over the last four quarters in aggregate have generated an ROA of about 76 basis points and a 10% return on tangible common equity. This quarter we were able to keep the absolute level of our balance sheet flat to the second quarter. But by doing that we continue to replace discretionary assets with good core customer loans and we believe that is a very good trend. We continue to build record liquidity and we believe we are well positioned against the 2017 LCR requirements.
+Our capital is again at record levels and we returned over $3 billion back to shareholders so far this year through common share repurchases and dividends.
+Our tangible book value per share improved this quarter to $15.50. It is the highest level in many, many years.
+So I want to spend a couple more minutes focusing on a few drivers in our business. Our teams here at Bank of America are focused on the everyday engagement with our customers, deepening relationships by growing the core of things we do with them deposits, loans, managing their risks, helping them invest their assets all while keeping our costs down and you can see that in our results.
+When you think about our deposit franchise, we grew $50 billion in deposits over the last year on an all organic basis. That in and of itself is a large bank. As a reminder, our Consumer franchise is the largest retail bank in the United States. In our Consumer Banking business as you can see, we grew revenue and earnings year-over-year despite the low interest rate environment.
+We have been restructuring our branch structure selling some branches, closing some branches and changing account structures and with that this quarter our core consumer checking accounts continue to grow. We grew those accounts and improved the percentage of those customers who use us as a primary bank and importantly the average balance per account continues to grow.
+On cards, on credit cards, we issued another 1.3 million credit cards this quarter and active accounts continue to grow. The good news is we are doing it through the lowest cost possible through our core franchise, much lower than other means of growth.
+When you go to the change in our financial services business for mobile and digital banking, we now have 18.4 million active mobile customers and 31 million active online customers. Digital sales this quarter were up 30% over last year. More customers are using mobile device to deposit checks and access their accounts and now are starting to buy products as well as book appointments. To get a sense of that, we are now looking 15,000 appointments a week off of our mobile devices.
+Our Merrill Lynch teammates who work within our Consumer business helped push us through a new standard of 2 million accounts this quarter.
+When we go to our Wealth Management business, this business is showing the effects of lower market valuations pressuring revenue but activity here has reflected good long-term flows, good deposit flows and good loan growth. In addition, we continue to invest in long-term growth in this business, more advisors, better products and better advice in building and preserving wealth for our clients and these clients continue to use the full range of our products including banking products.
+As we have switched to our commercial banking business, the business we call Global Banking, loans to commercial and corporate clients around the globe grew nicely from last quarter and the year ago quarter. Although investment banking fees were down year-over-year, the industry fee pools appear to be down as much or more. We maintained our leadership across many of the products.
+In our Global Markets business despite the challenging market conditions in the late August and September timeframe, we reported $1 billion in after-tax earnings in that business. Excluding DDA impacts, this is the best third quarter in earnings for this business we have seen in recent memory.
+Our net interest income in the Company is benefiting from loan and deposit growth showing momentum this quarter after you exclude the impact of FAS 91.
+Focusing on expenses which we've talked to you much about, we continue to hold our costs in check. Expense less litigation LAS costs remain well below the $13 billion threshold of $12.7 billion and that was in line with our second quarter despite the additional cost of CCAR and additional investments in the business.
+We are taking the benefits of our simplify and improve program which keeps our costs flat while we continue to invest in customer facing client people to grow our businesses. This ability to invest in growth is key to driving our franchise forward.
+When you go to the risk side of the house, credit risk remains very strong, market risk remains subdued and we get a great return on that VAR as you look at it across the competitors. We continue to feel good about our legacy exposure risk and LAS business continues to work itself down.
+So in the context of the environment we faced, we are operating what we feel is a solid quarter and as evidenced the continuing progress on our strategy, our strategy of responsible growth with our customers.
+With that, let me hand it over to Paul.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Brian. Good morning, everybody. Starting on slide three, we present the summary of our income statement and returns for this quarter as well as Q2 and Q3 last year. As Brian said, we earned $4.5 billion in the quarter compared to a loss of a couple hundred million dollars last year and earnings of $5.3 billion in Q2. Earnings per share this quarter were $0.37.
+Let me mention a few larger items that in aggregate, benefited diluted EPS this quarter by a penny.
+First, a negative $597 million market related NII adjustment, primarily FAS 91, cost us about $0.03. More than offsetting this was a $0.02 benefit from DVA of $313 million and a $0.02 benefit from a collective impact of three other items, gains from selling some Consumer Real Estate loans, tax benefits from restructuring some non-US subsidiaries, and a provision for payment protection insurance in the UK.
+Revenues were $20.9 billion this quarter; expenses were $13.8 billion, significantly lower than a year ago because of litigation costs and compared to Q2, expenses were flat as we managed cost well while investing in our franchise. Return on assets was 82 basis points this quarter and return on tangible common equity was 10%.
+Turning to slide four, the balance sheet ended basically flat relative to Q2 with assets of $2.15 trillion. However, we grew deposits $12 billion from Q2 while long-term debt declined by approximately $6 billion. Liquidity rose to nearly $500 billion, a record level and the time required for funding is now 3.5 years. Tangible common equity of $162 billion improved because of earnings supplemented by $1.5 billion in OTI. This was partially offset by $1.3 billion in capital return to common shareholders through share repurchases and dividends.
+Tangible book value increased 10% from Q3 last year and our tangible common equity ratio grew to 7.8% as equity improvements outpaced asset growth.
+With regard to regulatory capital, I want to start by pointing out that our transition ratios under Basel III increased with CET1 ending the quarter at 11.6%. However, I will focus my comments on Basel III fully phased in regulatory capital ratios. CET1 capital improved $4.8 billion to $153 million driven by net income, positive OTI and DTA utilization. This was partially offset by capital return to shareholders.
+Under the standardized approach, our CET1 ratio improved to 10.8% as risk-weighted assets decreased modestly even as loans grew. Under the standardized approaches, the CET1 ratio increased from 10.4% to 11% as RWA improved by roughly $30 billion largely due to reductions in risk. During the quarter we announced that we exited the parallel run and we will begin reporting under the advanced approaches beginning in 4Q.
+So we have also presented our CET1 ratio for 9-30 on a pro forma basis which includes the addition of approximately $170 billion in RWA primarily for wholesale credit under the advanced approaches. The pro forma CET1 ratio at 9-30 was 9.7%, an increase of approximately 40 basis points from Q2 on the same pro forma basis.
+In terms of the supplementary leverage ratio, we estimate that as of 9-30, we continue to exceed US rules applicable at the beginning of 2018 at both bank and parent.
+Turning to slide five, we grew loans and deposits both of which are key drivers to our financial performance. Reported loans on an inter-period basis increased $1.2 billion from Q2. However underneath the consolidated number, there was significant activity I want to take a moment to point out.
+With that in mind, let's review why loans in All Other and LAS are declining. First, the portion of our mortgages that we report in All Other continue to run off due to paydowns. This runoff is being replaced by new loans which are now recorded in business segments like GWIM and Consumer where they are originated.
+Second, also in All Other, we converted $6.2 billion of mortgages with long-term standby agreements into securities thereby improving HQLA. These types of conversions are largely complete.
+Third, we sold roughly $3.6 billion of other mortgages and NPLs as we continue to clean up and optimize the balance sheet. Lastly, in LAS where we report our legacy home equity portfolio, second lien loans continue to run off.
+Now if one excludes the above activities in LAS and other, ending loans in our primary lending segments increased $19 billion or 3% from Q2.
+Turning to deposits on an ending basis, they reached $1.16 trillion this quarter growing $50 billion or 4% over Q3 last year. We produced solid growth across the franchise, Global Banking grew deposits 6% year-over-year. GWIM grew 3% and Consumer grew 7%. However as you can see at the bottom right, if one includes CD runoff, Consumer deposits grew 10%. We have also included two other tables to give you a sense of the composition of our deposits.
+Turning to asset quality on slide six, I won't spend a lot of time here as asset quality continues to be strong and mostly consistent with Q2. Net charge-offs were flat around $930 million versus adjusted Q2, Q3 provision expense of $806 million and we released a net $126 million in reserves. Releases in Consumer real estate and credit card were partially offset by reserve builds in commercial. In commercial we saw small increases in reserve over criticized exposure from Q2 driven by downgrades in oil and gas that were partially offset by some improvements in the rest of the commercial portfolio.
+Also noteworthy, the increase in oil and gas reserve over criticized in Q3 was less than half the size of the increase from Q1 to Q2.
+Turning to slide seven, net interest income on a reported FTE basis was $9.7 billion, declining $1 billion from Q2. The decline in long end rates in the quarter caused adjustments in our bond premium amortization which resulted in a linked quarter decline in NII of $1.3 billion partially offset by good growth in NII otherwise. The Q2 adjustment increased NII by $669 million while the Q3 adjustment decreased NII by $597 million.
+NII excluding these adjustments improved $292 million from Q2 to $10.3 billion. Three factors drove this increase. First, we grew core commercial loans. Second, we improved the composition of the balance sheet and our Global Markets business which improved trading related NII. Third, we benefited from one extra day in the quarter.
+With regard to asset sensitivity, at the end of the third quarter our overall asset sensitivity increased as a result of the decline in long end rates which drove the FAS 91 adjustment. As of 9-30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by approximately $4.5 billion over the subsequent year with a little more than half of that improvement caused by increases in short end rates.
+Turning to slide eight, noninterest expense was $13.8 billion in Q3 matching the level of expense reported in Q2. The $20.1 billion expense in Q3 last year included $6 billion in litigation costs. Litigation this quarter and in Q2 was less than $250 million. Excluding litigation, expenses were $13.6 billion in the quarter, a decline of $600 million or 4% from last year and consistent with Q2 despite additional costs related to our CCAR submission.
+Headcount continues to trend lower, down 6% compared to Q3 last year. LAS costs excluding litigation were relatively stable compared to Q2. However, we still expect to lower that number to roughly $800 million in Q4 and move lower in 2016. As a reminder, in fourth quarters we tend to experience some seasonal increase in expenses as we close out the year.
+Let's walk through the business segments starting on slide nine with Consumer Banking. Consumer $1.8 billion, 5% greater than Q3 last year. The business segment generated a strong 24% return on allocated capital. Revenue increased over last year as increases in noninterest income outpaced a decline in NII.
+With respect to NII compared to last year, the benefit of higher deposit levels was more than offset by the allocation of ALM activity and lower car deals. Noninterest income benefited from divestiture gains as well as higher card income driven by increased customer activity while service charges declined. Expenses declined from Q3 last year despite a 5% increase in sales specialist and higher fraud costs in advance of ruling changes regarding EMV chip implementation. Those increases were offset by savings from the continued optimization of our delivery network. The cost of operating our deposit franchise remains low at 180 basis points and the consumer bank reported an efficiency ratio of 57%.
+We continue to experience shifts in consumer activity away from branches towards self-service options. Self-service trends are driven by mobile banking, online banking and ATM usage. Mobile banking customers increased to 18.4 million and deposits via mobile devices now represent 14% of consumer deposit transactions. Mobile processing is better for us and it is better for our customers. It is one-tenth the cost relative to processing and financial centers and more convenient for customers.
+On slide 10, we present key drivers and trends. Average loans grew across mortgages, card and vehicle lending. Deposits, as Brian mentioned, continue to increase particularly if one excludes the impact of CD declining. On this basis, deposits are up 10% from the year ago.
+Regarding brokerage assets, Merrill Lynch accounts crossed the $2 million mark and are up 2% while asset levels are up 8% from last year even with declines in equity markets this year.
+Mortgage production although up from 3Q last year was down from 2Q as refinances declined. In the future, mortgage banking income in the Consumer segment will be lower by approximately $30 million per quarter given the Q3 sale of a small appraisal business. A similar amount of expense should reduce quarterly as well.
+Looking at card activity, card issuance was strong at 1.3 million. Combined credit and debit spending volumes were up 3% from last year despite the decline in fuel prices. Average outstandings were down slightly from Q3 last year as customers paid off more of their balances. However, average balances showed modest growth over Q2.
+US card credit quality was strong as net charge-offs declined this quarter to a decade low of 2.5% driving risk-adjusted margins higher to 9.3% excluding divestitures.
+Turning to service charges, they were down moderately versus Q2 last year -- excuse me -- versus Q3 last year as we continued to open higher quality accounts that carry higher balances. These higher quality accounts tend to have fewer account fees.
+Turning to slide 11, Global Wealth and Investment Management produced earnings of $656 million. Results were down from Q3 last year driven by lower market values and lower related client activity. Compared to Q3 last year, Asset Management fees were up 2% but more than offset by declines in transactional revenues.
+The trend of lower transactional revenues continued this quarter as clients migrated from brokerage to managed relationships which was compounded by lower markets and muted new issuance. On NII, the benefits of higher loan and deposit flows was more than offset by the Company's ALM activities driving NII down from Q3 last year.
+Noninterest expense was modestly higher than the year-ago period as litigation cost were higher and wealth advisors grew 6%. Pretax margin was 23%, down from a strong Q3 last year. Margins were pressured this quarter by a few factors.
+First, markets declined pressuring revenue across many products especially those in which we record transactional revenues. Second, operating leverage was challenged as areas of revenue where incentives are high like asset management grew while NII where incentives are much lower, declined.
+Moving to slide 12, despite the lower market levels, business drivers improved. Wealth advisors were up almost 1000 or 6% from Q3 last year. Long-term AUM flows were more than $4 billion. Deposits increased more than $7 billion. Average loans were up 10% from last year, our 22nd consecutive quarter of loan growth in this segment.
+The last thing I would note that is not shown here is referral rates across the Company remained strong. For example, our retirement solutions business continues to win in the marketplace. We have won more than 1200 retirement plans year to date, many of which were referred from global banking. On a year-to-date basis, this is up more than 40% from 2014.
+Turning to slide 13, Global Banking's earnings were $1.3 billion, generating a 14% return on allocated capital. Earnings declined from Q3 last year but were up modestly versus Q2. The comparison to Q3 last year reflects higher provision expense and lower NII driven by the Company's ALM activities as well as increased liquidity costs. Additionally, we saw year-over-year compression in loan spreads. However, loan growth was a positive contributor to NII. Growth from Q2 reflects improved NII from loan and deposit growth.
+Regarding provision expense while flat to Q2, it is up $243 million from last year. We added $125 million to reserves in Q3 compared to a release of $116 million in the year-ago quarter.
+Looking at trends on slide 14, let's first focus on fees relative to the same period last year given seasonality. Despite a lower level of IBCs this quarter, we maintained our number three global fee position and believe we increased our market share as industry fees pools declined. Investment banking fees for the Company this quarter were $1.3 billion, down 5% from Q3 last year. Advisory fees were up 24%, debt underwriting was down modestly, equity underwriting was down from Q3 last year, in line with industry volume declines.
+Outside of IB, our Treasury fees improved from Q2 on increased activity. Looking at the balance sheet, loans on average were $310 billion, up 9% year-over-year and a similar percent relative to Q2 on an annualized basis. The growth was broad across both corporate and commercial borrowers and asset quality was consistent with our overall portfolio.
+Importantly, the decline in spreads year-over-year flattened as the decline from Q2 was relatively small. On deposits, we saw good performance with average deposits increasing by $8 billion over Q2 and we continue to optimize the portfolio, improving the composition towards higher quality deposits from an overall LCR perspective.
+Switching to Global Markets on slide 15, earnings were $1 billion on revenue of $4.1 billion despite challenging markets. We generated an 11% return this quarter. Earnings were up from Q3 last year which included litigation costs of roughly $600 million most of which was nondeductible for tax purposes. As you can see, we have a net DVA gain this quarter which was higher than last year. Total revenues excluding that DVA declined from Q3 last year driven by lower fixed sales and trading and to a lesser extent IBCs, offset partially by improved equity sales and trading. Noninterest expense excluding litigation improved $102 million versus Q3 last year, a 4% improvement.
+Moving to trends on slide 16 and focusing on the components of our sales and trading performance, sales and trading revenue of $3.2 billion excluding net DVA is down 4% from Q3 last year. Comparing to the same period a year ago, fixed sales and trading revenue declined 11%. Similar to the first half of this year, the year-over-year comparisons reflect good activity in macro related products like rates and after tax. Conversely, market activity remained muted in credit products driving lower client activity this quarter than Q3 last year.
+As a reminder, our mix remains more heavily weighted toward credit products driven by the strength of our new issues capability and market share.
+Equity rose 12% driven by strong performance in equity derivatives reflecting favorable market conditions. Asset levels were down modestly from Q3 last year.
+Turning to Legacy Asset & Servicing on slide 17, this segment lost roughly $200 million. I want to focus on three things here, the reduction in delinquent loans, mortgage banking income and expenses and compare each to Q2.
+First, the number of delinquent first mortgage loans continued to decline, down 14% this quarter as the teams continue to work through solutions for customers.
+Second, mortgage banking income declined by more than $400 million. This decline was driven primarily by three factors: servicing fees declined about $50 million as the units we service declined; net MSR and hedge performance declined $100 million driven by gains on MSR sales in Q2; reps and warranty provisions swung nearly $300 million from a benefit of $204 million in Q2 to a revision of $77 million this quarter.
+Lastly, I want to focus on expenses which excluding litigation were flat compared to Q2 as increased professional fees offset improved operating costs from the decline in delinquent loans. We believe we are on track to achieve our goal of reducing expenses excluding litigation to approximately $800 million in Q4.
+On slide 18, we show All Other which primarily includes our ALM actions and the operations of our UK card business and other smaller activities. All Other reported a $503 million pretax loss more than offset by certain tax benefits. The pretax loss was a result of a negative NII market-related adjustment and an increase in provisioning for UK credit, UK credit card payment protection insurance. This was partially offset by gains from securities and loan sales.
+Regarding the change in PPI liability, we increased it because of a notice of future regulatory guidance regarding treatment of claims and a case ruling.
+A comment or two on taxes before we wrap up. The Company's effective tax rate for the quarter was 26%. It was lower than Q2 due to the tax benefits I mentioned earlier. I would expect the tax rate to be roughly 30% next quarter excluding unusual items and specifically the recent UK tax proposals.
+In terms of 2016, I would expect it to be in the low 30s. As a reminder from last quarter's announcement, we expect that the UK tax proposal announced in July will result in a one-time tax charge of approximately $300 million upon enactment from revaluing our UK DTAs.
+Let me conclude our prepared comments by offering these takeaways. Although the US economy is improving slowly, revenue growth remains challenging in this interest rate environment. We are focused on those things we can control and drive. These include delivering for our clients and customers within our risk framework and driving those things we know will result in sustainable profits and returns. Our results reflect this focus.
+We grew both loans and deposits across our business. We delivered to our corporate and institutional clients in a challenging market environment. We stayed focused on managing risk and we kept costs in check while investing in the business. We are getting better positioned each quarter for the current business environment and we remain well-positioned to benefit when rates rise.
+With that, let's open it up to Q&A.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Eric Wasserstrom, Guggenheim Securities.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities LLC - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thanks, good morning. Just wondering if we could maybe just speak a little bit at the NII outlook given the dynamics about the stable balance sheet, shifts within the balance sheet and how we should think about both the GAAP and adjusted NIM if the interest rate environment continues to look more or less like it does today? Can you just help us think through what all of those dynamics mean for NII?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Sure. So assuming some loan growth and adjusting for day count, we would expect normalized NII excluding market related adjustments to be flat to grind up as long as rates don't decline in the future. In the fourth quarter, we think they will grind up slightly based upon the realization of the expected forward curve and some loan growth.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities LLC - Analyst    [4]
+--------------------------------------------------------------------------------
+
+          Okay. And with respect to the loan growth, is that in the context of growth in the overall balance sheet or continued stability given mix shift?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [5]
+--------------------------------------------------------------------------------
+
+          If you just look at commercial loans year-over-year up 10%, last quarter up 3%, so you've got to annualize that out and what we are looking at is that we replaced discretionary assets with actually good core assets so whether the balance sheet grows a little bit or not is not as critical as the assets. So it is probably driven in the near-term more by mix than aggregate size growth on a GAAP basis.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities LLC - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Thanks very much.
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+          John McDonald, Bernstein.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [8]
+--------------------------------------------------------------------------------
+
+          Wondering on expenses, you kept the core expenses flat to last quarter. Did you digest additional CCAR expenses and also some costs related to the proxy vote? What are the puts and takes on keeping that flat and what is your outlook on the core expenses going from here in this kind of environment?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [9]
+--------------------------------------------------------------------------------
+
+          Sure, so the short answer to your question but then I would like to elaborate a little more is yes, we kept core expenses flat and we absorbed CCAR and other CCAR expenses and other investments in the business in the quarter.
+To take a step back, I think the way we would ask you to think about expenses is we are seeing good expense progress within our business importantly as we continue to invest in the future. So core expenses which for everybody excludes litigation and LAS are expected to remain relatively flat at call it a little less than $13 billion per quarter in a moderately improving business environment as we invest in growth and use SIM and other initiatives to offset inflationary pressures.
+If the business environment slows, we would have to adjust. If the business environment gets better, we are going to use SIM and other efforts to improve the operating leverage of this Company even as incentives and other expenses increase.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [10]
+--------------------------------------------------------------------------------
+
+          So, John, I would remind everybody that we did guide you that we would have increased CCAR expenses in the second half of the year so we do have a little bit of that in the fourth quarter as well.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [11]
+--------------------------------------------------------------------------------
+
+          So, John, just so you think about it from a headcount perspective because that is what is going to drive our 60% people cost down. For the quarter we were down about 1.5. In that, we actually had an increase in client facing headcount in the quarter up 1.6 so basically we were able to achieve a reduction while we continued to invest. On top of that, the risk in CCAR FTE count was up about 400 for the quarter and other business hiring especially the new kids from school were up about 1000. So through attrition and then through other reductions we got that down to net 1.5.
+So if you follow that course, last quarter we were down 3000 or so and that was 15 quarters in a row or something like that. We are down a little less this quarter which is expected to be a similar pickup next quarter. So the 12.7 we did in the second quarter remember was a surprise to all of you. We called it flat this quarter which I think exceeds what our expectations were. We are laser focused on keeping it at that kind of level while we continue to invest in 1000+ people to go generate the business growth you are starting to see.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [12]
+--------------------------------------------------------------------------------
+
+          Okay. Paul, in terms of the credit outlook, do you expect to kind of bounce around here, you've got charge-offs in the low 900s and you did about $100 million in reserve release. So charge-offs 900, provisions 800, is that the kind of ballpark you expect to stay in near-term?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [13]
+--------------------------------------------------------------------------------
+
+          I would expect to see provision in 2016 roughly where it is today.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          So that is around 800 a quarter, something like that, ballpark?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [15]
+--------------------------------------------------------------------------------
+
+          Yes, because we are going to get a little help. John, if you look at it, you've still got a little excess mortgage charge-offs going through card continues to work its way down because of this period of credit quality and the question on the commercial side is bouncing around, gets lumpy. But you look at the reserve release, we are down to 100 so think of that sort of 800 to 900 range a quarter and I think that is a way to think about it over the next several quarters.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Betsy Graseck, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Good morning. Paul, I just wanted to just you to elaborate a little bit on the comment you made during prepared remarks regarding the composition of the balance sheet improving that being a benefit for trading related NII. Could you just talk through what you did and is that sustainable? The benefit to NII?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [19]
+--------------------------------------------------------------------------------
+
+          Sure. I think the answer is we just sold for lack of a better word, sold some lower yielding assets that we used to grow our business end markets and we positioned them to higher yielding assets. So as an example, we would do a little bit less in prime brokerage and a little bit more in fixed income where some (inaudible) worths and yields are higher.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [20]
+--------------------------------------------------------------------------------
+
+          Okay. And then on the conversion of the loan to securities for HQLA given the fact that you mentioned that is done, what kind of core loan growth are we looking for as we move forward here?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [21]
+--------------------------------------------------------------------------------
+
+          By core do you mean loan growth in the business segments or for the consolidated Company?
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          I guess I will take consolidated more than anything.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [23]
+--------------------------------------------------------------------------------
+
+          So we grew loans as a consolidated company year-over-year by 1%. It was up slightly quarter over quarter. I would expect that we would be able to continue to grow the whole Company in the sort of, in that range. You are going to see faster growth in the core lending businesses, we grew that year-over-year 9%. I am not going to stand here and tell you that we are going to do that every quarter but we would expect to see more robust growth in our lending segments.
+You have to remember that in LAS home-equity loans are still coming down and in the discretionary portfolio even though we are not going to have $6 billion as much as $6 billion in LTSE conversions, we still are going to see first mortgages run off there.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          And then just lastly on this topic when you are thinking about reinvesting deposit growth etc. in securities, where are you relative to your new investments in securities versus what the portfolio yields are? Are you close to breakeven there?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [25]
+--------------------------------------------------------------------------------
+
+          In terms of running off yields, Betsy, versus the coming on yield?
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Correct.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [27]
+--------------------------------------------------------------------------------
+
+          It is relatively stable.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Okay.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [29]
+--------------------------------------------------------------------------------
+
+          Our portfolio has been priced down over the years and so it is relatively stable.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [30]
+--------------------------------------------------------------------------------
+
+          Okay, thanks.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          Matt O'Connor, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Good morning. Can you give us an update on the CCAR resubmission and then also comment on some of the management changes that occurred there as we think about the 2016 process just how you might approach it differently or similar to what you have done in the past?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [33]
+--------------------------------------------------------------------------------
+
+          Why don't I start with CCAR and then maybe Brian will speak to some management. So in terms of CCAR, we submitted our resubmission on September 30 as planned. That has the involvement of the leadership of the Company and the Board, significantly involved within the line of business we tried to keep the regulators involved and up to speed every step of the way and they have until 75 days after that submission to get back to us.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [34]
+--------------------------------------------------------------------------------
+
+          In terms of the change three months ago we told you that we were making the changes, nothing has changed in that Terry continues to work on the CCAR process, Terry Laughlin and Andrea has moved over as Chief Administrative Officer and been heavy in the process from the day that we announced it and that transition will continue to take place over the period of time between now and the next CCAR submission in 2016.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          Okay, and then just separately in terms of the credit quality comments that you provided for the next several quarters, how are you thinking about energy as part of that?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [36]
+--------------------------------------------------------------------------------
+
+          I think we mentioned in the prepared remarks that our criticized assets were up modestly if you sort of dive into the oil and gas segment. And remember last quarter we increased criticized assets about $1 billion because of oil and gas. This quarter we saw that increase decline significantly to about 40% of that level and then be offset by improvements in the rest of the portfolio. So we saw a modest increase in criticized assets. We feel pretty good right now where we are with oil and gas. As you know, clients are going through the redetermination process.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [37]
+--------------------------------------------------------------------------------
+
+          Just a big picture question following up on that, there is a lot of concern I think among credit folks that energy defaults have increased a lot and will continue to increase from here but we are not really seeing all that much pressure either at you guys or the banks. Are you guys higher in the structure, different customer base, why do think there is less pressure maybe with you guys than we are seeing from the industry as a whole outside of banks?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [38]
+--------------------------------------------------------------------------------
+
+          I think the answer is yes, higher in the structure and a lot of the risk is distributed out to investors and things like that. The Company has had reserve base methodologies have hedges involved and it is more complex I think than oil price changes. So I think as you look at it, our lending portfolio is done consistent with our credit quality standards and had held pretty well under the significant change in revenue from oil price changes.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [39]
+--------------------------------------------------------------------------------
+
+          And large corporates, we are just dealing with larger companies that have a lot of different options and in middle-market as Brian said, a lot of that lending is secure.
+If you look at our overall energy portfolio, we are at about 22-ish and really only about 40% of that really isn't tied. Of course everything in that sector is tied in some way to oil and gas but 40% of that is not really directly tied to the price of oil and gas. So when you start just working through the numbers and you whittle that down and then you whittle it down for the number of loans that we have where we have reserves, it gets to something I think that is manageable.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [40]
+--------------------------------------------------------------------------------
+
+          Okay, thank you very much.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          Jim Mitchell, Buckingham Research.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research Group - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Good morning, Paul. Just a quick question on the liability side of the balance sheet. You had highlighted that long-term debt was down $6 billion or so in the quarter. I noticed that long-term debt costs were down about 11 basis points quarter over quarter. Is that sustainable in the context of TLAC? Is there just some movement underneath the hood or is it timing? Just kind of help me think about where that footprint and cost go from here.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [43]
+--------------------------------------------------------------------------------
+
+          We generally don't comment on our issuance plans. I guess the only guidance I would give you is we are going to try to have preferred that is roughly 1.5% of Tier 1 capital and sub debt that is roughly 2%. And in terms of TLAC, we don't know what the rules are yet. We may have to issue a little bit more debt. But based upon what we are hearing at least from a sort of rumor perspective, it looks to be quite manageable.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [44]
+--------------------------------------------------------------------------------
+
+          Technically quarter to quarter there were some hedges that went from a deduct to a benefit or the other way around that changed that rate. So I wouldn't think that the underlying rates haven't changed much is the way to think about it. There is just a hedge cost and a hedge benefit that came through that increased the spread.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [45]
+--------------------------------------------------------------------------------
+
+          Or you were referring to the decline to the yield, sorry.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research Group - Analyst    [46]
+--------------------------------------------------------------------------------
+
+          No, that is all helpful. Maybe just on the loan growth side, what are you seeing on the demand side as Consumer has begun to pick up for you guys? Where are you seeing the most strength and do you think the environment still is pretty positive from the loan demand perspective in the US?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [47]
+--------------------------------------------------------------------------------
+
+          Remember we are focused on -- in the Consumer business on two things that we have been consistently focused on. We are making loans to our customers in connection with the whole franchise. And then secondly, we are staying in the very prime orientation. So as you think about this quarter, home equity production was $3 billion-ish which was kind of consistent with other quarters. It has grown from $1 billion up to $3 billion across the last couple of years and been very consistent.
+As Paul said earlier, mortgages tipped down a little bit but year-over-year they are up strong, a little bit of seasonality in there and a little bit of refi runoff. Our auto lending business is still was strong. The direct to consumer piece of that we didn't have two, three years ago. We are up to $0.5 billion a quarter production so we are seeing good demand but part of it is just capturing that inherent client share, wallet share that we have been after and you are seeing that materialize.
+The other key honestly in terms of nominal growth for us is the runoff non-core part that has gotten small enough over the last couple of years that we can overcome it. So the only place we still have that hole from a corporate perspective is really the home equity business. So we have resized the card business and you are seeing all the hard work, the 1.3 million cards producing some loans even though it is a huge payment rate on that.
+You are seeing the auto lending business, both direct to consumer and then what we do with dealers and stuff strong and stable, and you saw the car sales numbers strong. And you are seeing the Consumer Real Estate strong from the home-equity production and I think solid.
+When you go over to GWIN, you saw loan growth there between US Trust and what we call structured lending, but don't think of it that way. It is lending -- as well as assets and then also in the margin lending was fairly stable. I talked to John (inaudible). We haven't seen a big change in our margin lending. A lot of people think investors have lowered their risk and stakes have been relatively stable across the last few months.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research Group - Analyst    [48]
+--------------------------------------------------------------------------------
+
+          Okay, great. That is helpful. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+          Steven Chubak, Nomura.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Anayst    [50]
+--------------------------------------------------------------------------------
+
+          So one of your competitors revealed that their efforts to mitigate some of the GSIF indicators had actually helped push them into a lower GSIF bucket and looking at the metrics that have been published as of year-end, it looks like you are actually closer to the lower end of that 3% threshold. And we have seen some progress in terms of reduction in Level III assets at year end. And just wanted to see if you actually see opportunities to manage that bucket lower somewhere closer to 2.5%?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [51]
+--------------------------------------------------------------------------------
+
+          We always manage the balance sheet against all the different constraints whether you can see the improvement in pro forma advanced ratio by 40 basis points this quarter, closing down the gap. So we are always looking to manage the balance sheet. I wouldn't put a lot of stake in the us moving ourselves fundamentally in buckets at this point because we have been working at that for the last three years to make sure as this rule was going to come out, that we had ourselves positioned as well as we could. So we will continue to work on it but I wouldn't expect us to change.
+If you look about the risk assets and Level III assets and things like that and our Company continue to trend down and we just worked the balance sheet back. But I wouldn't say that we expect to move a bucket. We could but we don't expect to.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Anayst    [52]
+--------------------------------------------------------------------------------
+
+          Okay. That is really helpful. Thanks, Brian. Maybe just digging into some of the GWIN guidance that, Paul, you had given earlier, the negative operating leverage has been fairly pronounced which you acknowledged and I did appreciate the detail at least on some of the specific factors that weighed on the margin such as litigation and maybe some remixing in terms of revenue.
+But just wanted to get a sense as to how we should be thinking about that margin trajectory going forward assuming no elevated litigation and without any rate boost, just to get a sense as to how we should be thinking about that profitability trajectory?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [53]
+--------------------------------------------------------------------------------
+
+          If you remember the last quarter we talked a bit about this. There are some things that will help us which are that some of the deal stuff runs off this year relative to next year which will give us some positive help but round numbers nearly $100 million a quarter of expense help. That is just amortization that finally runs off so that is positive.
+And I think Paul cited and you cited back the examples of some nonrecurring things. I think you have to be careful in the year-over-year comparisons on the margin because this business, there is a big bank inside our GWIN business, that $250 billion deposit franchise, big-money franchise so all of the dynamics that we talk about from the corporate obviously hit them also. And so they will benefit more by stability in that as we compare quarters and hopefully grow out of that as they grow loans and deposits.
+But I think that is the thing. The question then comes down to more philosophically would you quit investing in new advisors to get a point on margin or so and in the context of that business earn $600 million to $700 million after-tax for us in the context of needing to drive it to another level. We still believe the right trade is to continue to invest in growth. And if the world changed and those people weren't becoming successful which they are, we would change that.
+And the thought is that we are adding advisors, you don't see that in other people's franchises and we are doing it in connection with Consumer Bank which is a critical increased success factor for our advisors. In other words, we hire people in what they call BFAs without -- that work within the Consumer franchise but on Merrill teams and we are seeing them get up to speed fast. We think that is a competitive advantage for people we during this business and we will continue to invest in that.
+So if we can't seen the success we will pull back on that but right now it is worth it for our shareholders and our customers.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Anayst    [54]
+--------------------------------------------------------------------------------
+
+          Okay, thanks for that detail, Brian. Maybe just one more for me on the investment banking side. One of your competitors was talking about a pause in activity that they have experienced so far in 4Q. I recognize it is early days but just wanted to get a sense as to what you are seeing within the global banking and markets businesses and also if you could provide just some additional color or detail on what you are seeing in the backlogs by channel, that would be really helpful too.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [55]
+--------------------------------------------------------------------------------
+
+          I will let Paul hit that but in terms of that. Just want to make sure you are talking about trading or investment banking fees or both?
+Steven Chubak
+Both.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [56]
+--------------------------------------------------------------------------------
+
+          Okay, Paul?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [57]
+--------------------------------------------------------------------------------
+
+          So I guess in terms of the pipeline, the pipeline right now looks quite -- this is investment banking fees -- the pipeline right now looks quite strong. There is a decent amount of M&A in it, the timing of which can move around a lot. Some of the pipeline increase I guess can be attributed to transactions that were in our pipeline in the third quarter didn't it come out in the third quarter and are rolling over into the fourth quarter. We saw that type of activity in ECM and as markets improve, we hope that pipeline activity will come out.
+In terms of sales and trading, we talked a little bit about that in the prepared remarks. We saw I think good activity in equity sales and trading as clients needed to rebalance risk or take advantage of opportunities particularly in Asia. We were getting some of that flow and feel good about it. On the other hand, we do have a strong FICC business that is tied to new issuance and the new issuance market in the third quarter wasn't as strong so some of those flows just weren't there.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [58]
+--------------------------------------------------------------------------------
+
+          Year-over-year, last year's fourth quarter was pretty tough so I think being better than that wouldn't be great performance in sales and trading. But Tom and the team have got the business pretty well positioned in terms of effectiveness and that is why even with the slowdown in the latter part of the quarter we still made $1 billion and you subtract out DVAs, $800 million or so and that is good performance in that business.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Anayst    [59]
+--------------------------------------------------------------------------------
+
+          All right, great. That is it for me. Thank you for taking my questions.
+
+--------------------------------------------------------------------------------
+Operator    [60]
+--------------------------------------------------------------------------------
+
+          Glenn Schorr, Evercore ISI.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [61]
+--------------------------------------------------------------------------------
+
+          Thanks. A couple of quick follow-ups. I hear all o your comments so no need to repeat them on the feeling decent about credit quality and energy specifically. Just looking for two pieces of info if you are willing to share either reserve as a percentage of loans for energy specifically or maybe what percentage of the criticized exposure is energy related? Just looking for more detail behind the comfort. Thanks.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [62]
+--------------------------------------------------------------------------------
+
+          I don't think we have any of that perspective with us handy and I am not sure we disclose that but we will follow up with you if we do.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [63]
+--------------------------------------------------------------------------------
+
+          Okay, worth trying. In terms of what is going on in terms of the mix shift on balance sheet out of some of the discretionary assets and into the core loan growth, I think everybody will take that all day long. And I am curious on if there are RWA implications that we need to think about, is that a heavier RWA mix even though we will take it -- I am just curious on how that plays on the capital side?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [64]
+--------------------------------------------------------------------------------
+
+          Yes, I think that as we grow loans, obviously our RWA is going to increase particularly on a standardized basis. It is less of an increase on an advanced basis but they are completely tied. And as you said, we are comfortable with that given the interaction with our clients and the opportunity that brings to increase our margins relative to other investment opportunities.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [65]
+--------------------------------------------------------------------------------
+
+          As you think about it, remember that if you look at page five and you look at the content of what is leading coming on especially in the Consumer business and then think about running that through all kinds of models including the CCAR process and think about getting rid of $5 billion of home equity loans which were basically nonperforming and putting on $3 billion of good home equity loans, that dynamic is pretty favorable to the overall calculations. And so it is not only within categories -- not only in categories it is also within categories that we are seeing improvement in credit quality on what is coming on especially when we run through models and things like that.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [66]
+--------------------------------------------------------------------------------
+
+          Okay, I appreciate that. One last one. You commented earlier about the strength in equities partially driven by the good performance in the derivatives business during the quarter. I guess the question is it ebbs and flows but maybe over the last 12 months, not just the last quarter, is derivatives 40%, 50% of overall equities, is that a number you are willing to share?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [67]
+--------------------------------------------------------------------------------
+
+          Are you talking about the percentage of equities as a function of what?
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [68]
+--------------------------------------------------------------------------------
+
+          I'm saying in any given period, your equity markets revenues, how much of that is driven via the derivatives business?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [69]
+--------------------------------------------------------------------------------
+
+          I think it is less than half but I don't have the number off the top of my head but I think you can look at it in various pieces. We are checking it now but remember it is an integrated business, it is between 30% and 40%. We just found a number but remember it is an integrated business so you can't say growth or derivatives but cash -- the clients do all things with us including fixed income and equities so we are growing it together. So think 30%, 40%.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [70]
+--------------------------------------------------------------------------------
+
+          Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [71]
+--------------------------------------------------------------------------------
+
+          Ken Usdin, Jefferies.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jefferies LLC - Analyst    [72]
+--------------------------------------------------------------------------------
+
+          Good morning. Brian, just one question follow-up on the loan side. You talked about the demand and where you are seeing it but I'm just wondering in terms of like the no excuses growth mentality from a supply side, where are the lending officers now in terms of like using the excess capacity to continue to grow the balance sheet? Is there still room from the Bank of America supply side to extend that growth on top of what the economy and the market place is giving you broadly?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [73]
+--------------------------------------------------------------------------------
+
+          Yes, if you look at the different segments, if you think about on the Consumer side using -- it is more sales force growth and effectiveness and so in building that team and then also the digital sales coming up whether it is autos, whether it is credit card are up dramatically. So think of that engine as being both people and machine for lack of a better term. But don't think of it as changing credit quality or taking any kind of more risks. So [Tom and Dean] that run that business for us has done a good job and so I would say these supply is there more from a delivery capacity than it is from an expanding the box or anything like that. We've really kept it to where we want it and we think that holds us in good stead as you think through all the different dynamics in our Company.
+When you go to the commercial side, it is simply a couple of things. In the very small business which is reporting, we have actually seen that business stabilize and start to make its way out of a run-off position and that is again a more automated scored approach. We sped up approval times and done a lot of work to make ourselves more competitive more on delivery than credit. But if you go into business making, commercial banking, global corporate investment banking segment are three versions. (inaudible) and the team, they have actually hired over 100 people, loan officers this year so think of that as 10% to 15% growth in loan officers. Got them hired, they are in working. It takes time for them to get up to speed. Al (inaudible) in our middle-market business, I think is up 60 this your, something like that, 70 people delivering lending and products and things behind that also as treasury services people.
+So again capacity expansion in the global corporate investment banking a little differently but as we look at middle market, I think that is an area where we are -- we used to think if we were going to take 10, let's only take eight, that is better, we are now telling our teams you need to -- we to understand why you are not taking 10 if that is our whole limit and our capacity in a given transaction as an example and they are doing that. So I think we are probably creating a little more not risk weighting type of supply but just we are taking a little bit more loans because we are twice the equity we used to be and therefore we can absorb it and the team does a great job in credit quality there.
+So I would say if you looked at it across the board, Consumer, it is more delivery capacity and in commercial it is more both delivery capacity and then as you cite, sort of take a little more risk in terms of dollar denomination but not in terms of unwanted credit quality.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jefferies LLC - Analyst    [74]
+--------------------------------------------------------------------------------
+
+          Okay, got it. Paul, one quick follow-up on GWIM, can you just remind us how that business kind of marks itself in terms of asset level pricing versus the transactions? It seems like those kind of went different directions this quarter and the result was kind of flattish on a revenue perspective. So what do we need to think about in terms of where the markets have come and where we are looking ahead in terms of asset level versus transaction type revenue activity?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [75]
+--------------------------------------------------------------------------------
+
+          AUM? So we continue to grow AUM and that is all good. I mean it was a little bit slow this quarter but in a bad market environment we continue to grow AUM, we continue to grow deposits, we continue to grow loans so I think everybody is doing their job. You are right that when market activity is lower, we tend to see less activity in the transactional side of that business. There is a lot of new issuance there, mutual funds, other products that just don't come to market and so that sort of exacerbates things when the markets are bad. Does that answer your question?
+
+--------------------------------------------------------------------------------
+Operator    [76]
+--------------------------------------------------------------------------------
+
+          Nancy Bush, NAB Research.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [77]
+--------------------------------------------------------------------------------
+
+          Good morning, guys. Two questions. One, there is an issue out there I think supposed to happen in 2018 on credit quality. It is this current expected credit loss. Can you just tell us where the argument is about that right now and whether you have been able to do any preliminary work about how that would impact you?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [78]
+--------------------------------------------------------------------------------
+
+          I don't think, Nancy, the idea of a loan type of reserving on the commercial -- all loans it is out there, the FASB is working on it. I think there has been voluminous comments and questions about it. But when it comes out, we well make it -- it will be basically a one-time adjustment type of thing and then it would be over with and so over the course of time, it should come out the same because you think about it this is just putting it all up front as you put the loans on and the commercial side especially would be a change.
+So we will get to that when we get to that but it hasn't been clarified what the rule is. Lots of people have commented on it and it would be a one-time thing and as you say somewhere around 2018 is what people currently think.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [79]
+--------------------------------------------------------------------------------
+
+          Okay. Secondly, another credit quality question. There was a lot of speculation before the quarter and I think this is probably based on the energy outlook that this would be the quote inflection point quarter and beginning to build reserves. But what you are saying and what J.P. Morgan said yesterday was that the credit quality outlook remains pretty stable. Can you just comment on this inflection point issue and when you think we will get there?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [80]
+--------------------------------------------------------------------------------
+
+          Well, we are still seeing reserve releases on the Consumer side of a bank. They are certainly starting to moderate and consistent with loan growth, we are seeing some reserve additions on the commercial side of the bank. And as I said earlier, if you are looking for when those lines are going to sort of cross, we think provision as Brian and I both said is going to be roughly sort of 800 to 900 in 2016. That is kind of where the conversion is going to happen someplace per quarter that is someplace in 2016.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [81]
+--------------------------------------------------------------------------------
+
+          Nancy, remember, we still have massive risk coming off in Consumer that we are not -- reserves are going over to the commercial side and some is coming out net of that 100 plus million this quarter. We expect that to probably mitigate and then if you get loan growth, you will build reserves at some point but I think that is still a bit out there.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [82]
+--------------------------------------------------------------------------------
+
+          So sometime in 2016 probably?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [83]
+--------------------------------------------------------------------------------
+
+          Well, it depends on what the loan growth is and it depend on the best economic scenario. But I think we still we are still repositioning reserves on the Consumer side that are [excessive]. You can see in the credit statistics we are carrying a healthy reserve for areas that are continuing to come down in terms of risk.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [84]
+--------------------------------------------------------------------------------
+
+          Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [85]
+--------------------------------------------------------------------------------
+
+          Paul Miller, FBR Capital Markets.
+
+--------------------------------------------------------------------------------
+Thomas LeTrent,  FBR Capital Markets - Analyst    [86]
+--------------------------------------------------------------------------------
+
+          Good morning, guys. It is actually Thomas LeTrent on behalf of Paul. Most have been asked and answered but one quick question on the servicing side. The servicing income has been coming down at a faster rate than the portfolio and I know you guys have sort of exited most of the sales on the portfolio side. So at what point can we sort of expect the fees to level off and is that just a function of the legacy stuff continuing to run off?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [87]
+--------------------------------------------------------------------------------
+
+          If you go to page 17, you can see that the rate of reduction will come down, will slow down but it will still come down on the theory of the units doing. But remember the other issue we have is we are holding more of the loans so that from a corporate perspective that also -- comes in yield and not in servicing fee. So expect it to work its way down to 345 this quarter I would think 300-ish is where it ought to sort of flatten out.
+
+--------------------------------------------------------------------------------
+Thomas LeTrent,  FBR Capital Markets - Analyst    [88]
+--------------------------------------------------------------------------------
+
+          And then also on slide 17 if I may on the 60 days delinquent, how much of that is the quarterly change, how much of that is from sales or is that mostly just runoff?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [89]
+--------------------------------------------------------------------------------
+
+          I would say most of it is just runoff.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [90]
+--------------------------------------------------------------------------------
+
+          We are just working it out contemptuously and so we've still got room to go to get it normalized but there is nothing big material going on in terms of sales and stuff this quarter.
+
+--------------------------------------------------------------------------------
+Thomas LeTrent,  FBR Capital Markets - Analyst    [91]
+--------------------------------------------------------------------------------
+
+          Okay, that is all. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [92]
+--------------------------------------------------------------------------------
+
+          Mike Mayo, CLSA.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [93]
+--------------------------------------------------------------------------------
+
+          I had three small questions. First, you sold $3.6 billion of assets, mortgages and NPLs. What was the gain or sale on those sales? I'm sorry, the gain or loss?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [94]
+--------------------------------------------------------------------------------
+
+          In total on our gains, on all our sort of loan sales in the quarter, it was $400 million.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [95]
+--------------------------------------------------------------------------------
+
+          I am sorry, $400 million?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [96]
+--------------------------------------------------------------------------------
+
+          $400 million.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [97]
+--------------------------------------------------------------------------------
+
+          That added a little bit. Can we assume that repeats or this is kind of a one-off?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [98]
+--------------------------------------------------------------------------------
+
+          If you look, Mike, it is in the puts and takes we put on the first slide there.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [99]
+--------------------------------------------------------------------------------
+
+          Okay, that is fine. Higher rates, you are more asset sensitive now I guess $4.5 billion to 100 basis points. You were $3.9 billion last quarter. Are you intentionally -- I mean how do you think about that, are you leaving money on the table by being so asset sensitive? Do you want to be this asset sensitive? Maybe give the answer in the context of the last jobs report which seems to imply rates will increase later than previously expected.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [100]
+--------------------------------------------------------------------------------
+
+          We have not changed how we manage the interest rates of the Company. All that happened was long end rates went down from Q2 to Q3 increasing the (technical difficulty) that number.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [101]
+--------------------------------------------------------------------------------
+
+          The FAS 91 is really the major difference.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [102]
+--------------------------------------------------------------------------------
+
+          And then lastly, Paul, you are new in the job as CFO. Actually Brian, this is the first call where we can ask the question, why did the old CFO leave? We have heard a lot of different reports so why did the last CFO leave?
+And, Paul, as you are new in the job as CFO, what changes might you want to make? And Paul or Brian, if rates don't go up for a lot longer than you expected, what is your Plan B to deal with the tougher environment?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman of the Board and Chief Executive Officer    [103]
+--------------------------------------------------------------------------------
+
+          So let me answer that and then I will let Paul talk. As we talked about three months ago, Bruce had served as Chief Risk Officer and CFO for a combined six years and wanted to get back and run a business or do something different so we announced that and Paul became CFO. There is nothing new to add.
+In terms of how we will deal with the environment as we said most times to earlier questions, we continue to be able to hold the core expenses flat while we make the investments, pay the increased CCAR expenses, pay for the cost to reposition the franchise, severance and everything and we will continue to work that. If the environment changed and we didn't think we were getting returns on that, we will just go to the long-term interest of our shareholders, we would reduce the investment rate.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [104]
+--------------------------------------------------------------------------------
+
+          And Paul's philosophy on being CFO, any changes with your predecessor?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [105]
+--------------------------------------------------------------------------------
+
+          I think it is a little early for me to have developed a plan in terms of radical change. Bruce did a tremendous job of cleaning up the balance sheet and positioning our Company for growth and we have a great team that he built and I'm getting to know all of that and we will see how it goes.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA Limited - Analyst    [106]
+--------------------------------------------------------------------------------
+
+          All right, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [107]
+--------------------------------------------------------------------------------
+
+          As it appears we have no further questions, I would like to return the program to Mr. Lee McEntire for closing remarks.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP of IR    [108]
+--------------------------------------------------------------------------------
+
+          Thanks for joining, everybody. We will talk to you next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [109]
+--------------------------------------------------------------------------------
+
+          This does conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2015-Oct-22-AMZN.OQ-137384537916-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2015 Amazon.com Inc Earnings Call
+10/22/2015 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com Inc. - CFO
+ * Phil Hardin
+   Amazon.com Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Neil Doshi
+   Mizuho Securities - Analyst
+ * Stephen Ju
+   Credit Suisse - Analyst
+ * Scott Devitt
+   Stifel Nicolaus - Analyst
+ * Ben Schachter
+   Macquarie Research Equities - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Ron Josey
+   JMP Securities - Analyst
+ * Brian Pitz
+   Jefferies LLC - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Kunal Madhukar
+   SunTrust - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Aaron Kessler
+   Raymond James & Associates, Inc. - Analyst
+ * Brian Nowak
+   Nomura Securities Intl - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * Carlos Kirjner
+   Bernstein - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to the Amazon.com Q3 2015 financial results teleconference.
+(Operator Instructions)
+Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Phil Hardin. Please go ahead.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q3 2015 financial results conference call. Joining us today is Brian Olsavsky, 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 22, 2015 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 2014. Now, I'll turn the call over to Brian.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Phil. I'll begin with comments on our third quarter financial results. Trailing 12-month operating cash flow increased 72% to $9.8 billion. Trailing 12-month free cash flow increased to $5.4 billion, up from $1.1 billion. Trailing 12-months free cash flow less lease principal repayments was $3.1 billion, up from an outflow of $99 million. Trailing 12-months free cash flow less finance lease principal repayments and capital acquired under capital leases was $637 million, up from an outflow of $2.3 billion. Trailing 12-month capital expenditures were $4.4 billion. Capital expenditures does not include the impact of property and equipment acquired under capital and finance lease obligations. These capital expenditures and capital leases reflect additional investments in support of continued business growth due to investments in technology infrastructure, the majority of which is to support AWS, and additional capacity to support our fulfillment operations.
+Combination of common stock and stock-based awards outstanding was 489 million shares compared with 481 million one year ago. Worldwide revenue grew 23% to $25.4 billion or 30% excluding the $1.3 billion unfavorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 26%. Worldwide active customer counts was approximately 294 million, excluding customers who only had free orders in the preceding 12-month period, worldwide active customers were approximately 272 million, up from approximately 244 million in the comparable prior-year period. Worldwide seller units represented 46% of paid units, up from 42% in the comparable prior-year period.
+Now, I will discuss operating expenses excluding stock-based compensation. Cost of sales was $16.8 billion or 66.1% of revenue compared with 71.1%. Fulfillment, marketing, technology and content and G&A combined was $7.6 billion or 30.1% of sales, up approximately 50 basis points year-over-year. Fulfillment was $3.1 billion or 12.3% of revenue, compared with 12.4%. Tech and content was $2.9 billion or 11.4% of revenue compared with 10.8%. Marketing was $1.2 billion or 4.8% of revenue compared with 4.7%.
+Now, I will talk about our segment results. As a reminder, in the first quarter we changed our reportable segments to report North America, International and Amazon Web Services. Consistent with prior periods, we do not allocate to segments our stock-based compensation or the other operating expense line item.
+In the North America segment, revenue grew 28% to $15 billion or 29% excluding foreign exchange. Media revenue grew 8% to $3 billion or 9% excluding foreign exchange. EGM revenue grew 35% to $11.8 billion. EGM now represents 79% of North America revenues. North America segment operating income was $528 million, a 3.5% operating margin compared to a loss of $60 million in the prior-year period. North America segment operating income includes $11 million of favorable impact from foreign exchange.
+In the International segment, revenue increased 7% to $8.3 billion. Excluding the $1.3 billion year-over-year unfavorable foreign exchange impact, revenue growth was 24%. Media revenue decreased 8% to $2.3 billion or increased 6% excluding foreign exchange. EGM revenue grew 14% to $5.9 billion or 32% excluding foreign exchange. EGM now represents 71% of International revenues. International segment operating loss was $56 million compared to a loss of $174 million in the prior-year period. International segment operating loss includes $64 million of unfavorable impact from foreign exchange.
+In the Amazon Web Services segment, revenue grew 78% to $2.1 billion. Amazon Web Services segment operating income was $521 million, a 25% operating margin compared to $98 million in the prior-year period. AWS segment operating income includes $78 million of favorable impact from foreign exchange.
+Consolidated segment operating income was $993 million or 3.9% of revenue, up approximately 460 basis points year-over-year. CSOI includes $25 million of favorable impact from foreign exchange. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income was $406 million compared to a loss of $544 million in the prior-year period. Our income tax expense was $161 million. GAAP net income was $79 million or $0.17 per diluted share, compared with a net loss of $437 million or a loss of $0.95 per diluted share.
+Turning to the balance sheet. Cash and marketable securities increased $7.5 billion year-over-year to $14.4 billion. Inventory increased 23% to $9 billion and inventory turns were 8.6, down from 8.9 turns a year ago as we expanded selection, improved in stock levels and introduced new product categories. Accounts payable increased 22% to $14.4 billion and accounts payable days increased to 79 from 74 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors including a high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and customer spending. It is not possible to accurately predict demand and therefore, our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such a settling intercompany balances in foreign currencies among our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rate can all have material effects on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements, record any further revisions to stock-based compensation estimates and that foreign exchange rates remain approximately where the have been recently.
+For Q4 2015, we expect net sales of between $33.5 billion and $36.75 billion, or growth of between 14% and 25%. This guidance anticipates approximately 340 basis points of unfavorable impact from foreign exchange rates. GAAP operating income to be between $80 million and $1.28 billion, compared to $591 million in the fourth quarter of 2014. This includes approximately $620 million for stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $700 million and $1.9 billion, compared to $1.04 billion in the fourth quarter of 2014.
+We remain heads down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks and with that, Phil, let's move on to questions.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Brian. Let's move onto the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions)
+Scott Devitt, Stifel Nicolaus.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Stifel Nicolaus - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Hi, thanks for taking my questions. The first question Brian, International retail growth continues to improve and I was wondering if you can just talk through some of the dynamics there understand the consumption tax in Japan comp? You have some real markets where you have physical infrastructure now in Europe and then also the dynamics in India and China as contributors. And then secondly, maybe if you could just given how profitable AWS has become, if you could framework for thinking about the long-term profitability of that business? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          On International yes, you are right, first of all, the FX neutral growth of 24% year-over-year is up 200 basis points versus Q2 and up 1,100 basis points year-over-year. Some of that is due to the comping of the JP consumption tax increase in April of last year which we said last year, impacted Q2 and Q3 and not really impact in Q4. We are seeing the last of that on the comp.
+But the impact of Prime Day globally we estimated about 200 basis points and we saw a pickup in both. I'll remind you that Prime Day was a global event, so we saw that as International as well. That was great event for -- a great day for customers, Amazon and sellers alike. The base International growth is really being driven by Prime adoption, greater selection, greater Prime selection including FBA. So it is essentially the same playbook as the US. The additional Prime features, we launched a Prime Now location in the UK this quarter. Not materially going to impact the entire continent but it is a good start. So we like the trends in International and they mirror many of the same things we see in North America.
+On AWS, the business model there, let me talk about margin which was up sequentially from Q2 from 21.4% to 25%. We're continuing to see great acceleration in the pace of innovation. We've launched 530 new significant features this year which is more than last year already. We continue to lower prices. We've lowered prices eight times since a rather large price cut in April of 2014 -- excuse me, April of 2014. And we like the customers are really responding. They like the speed and agility that AWS provides them. They like the new features that we launched, many of which are also enable them to lower their cost of infrastructure.
+Amazon Aurora, one-tenth the price of other high-end commercial databases, a new storage class of Amazon S3 QuickSight also very effective and cost-effective products for our customers. So like AWS, the model remains in early days and we enjoy leading this business and customers have responded well and we believe we are adding new services and features at a rate faster than many others. But the growth rates and margins will certainly remain lumpy and bumpy as we go forward. But we are very encouraged by the business and so are customers.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+          Mark May, Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [5]
+--------------------------------------------------------------------------------
+
+          Hello? Can you hear me?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [6]
+--------------------------------------------------------------------------------
+
+          Yes.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [7]
+--------------------------------------------------------------------------------
+
+          Okay. Thanks. Question hopefully it hasn't been asked already is around AWS margins were obviously quite strong in the quarter. Can you speak to the sustainability of the margin improvement that we've seen there and what is your long-term expectations for profit margins for this business? And if you give us a sense of what CapEx for this segment of the business look like in the quarter and the rate of growth that would be helpful. And then secondly, your employee adds were fairly strong in the quarter as well. Wonder if you could call out any particular areas within the business where you are strengthening your hiring efforts? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [8]
+--------------------------------------------------------------------------------
+
+          So this is Phil. I will take the AWS portion. I'll echo what Brian said earlier. This is a young and rapidly growing business and as you've seen looking backwards, certainly growth rates and margins and capital expenditure timing can be bumpy. We are taking a very long-term view on this business. We are excited about the potential there and really the team's focused on just keeping their heads down and continue to accelerate the pace of innovation to try to continue to grow the functionality gap we think we offer. A lot of hard work going on there. But again, we're take a long-term view on the business and interested in helping customers as much as possible in that space.
+On the CapEx, again, we are focused on the ability to drive efficiencies across all of Amazon but we are also certainly investing in growth. On the AWS side, we've got investment going on around the world. Certainly additional servers to support the strong growth we have and some of the expense for things like data centers or new regions can be a little lumpy and we've mentioned a couple of new regions we are working on throughout the world. So that's going on as well.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [9]
+--------------------------------------------------------------------------------
+
+          Mark, on your headcount question, you are right, the headcount was up 49% year-over-year which is higher than Q2 -- we saw in Q2. This is going to be primarily our Ops area. If you exclude Ops related employees, our headcount's growing actually slower than our FX neutral growth rate of 30%. So what's going on in Ops is we've added 14 net fulfillment centers this year bringing the total to 123 globally. We've added four sort centers in the US bringing the US footprint to 23. We're staffing earlier in those locations. We are in good shape for the holidays and ready to go. The other issue -- is there any other reason is that we are also doing a live conversion of temp workers to full-time workers purposefully. This a metric of employment of full-time hires so it is a little bit higher due to that program.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney, RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [11]
+--------------------------------------------------------------------------------
+
+          I'm tempted to ask about the long-term margins for AWS but I won't. Can you talk about two areas? One, the EGM growth in North America, it is accelerated really strongly. Any color behind what's in particular categories that are driving that? And secondly, there's been -- you've made some public comments in the last eight months about some on the retail side about investments internationally. Particularly in India. Could you refresh us on what kind of levels suspend you're interested in targeting in that market? And then, maybe as part of that, any comments on China and how well you think you're doing there now? Thanks a lot.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [12]
+--------------------------------------------------------------------------------
+
+          Sure. On a EGM growth, I won't call out any particular categories but it is a direct reflection of our efforts to grow selection both our retail selection and also our third-party, particularly FBA which is also Prime eligible. And then just the responsiveness of our customers, especially our Prime customers to the EGM product line. We are very encouraged with the EGM growth.
+And on India, I will not -- excuse me. I won't give specific dollar numbers on investment but I can give you an update on India. We are really encouraged with what we are seeing both on the customer side and the seller side. On the customer side, active customer accounts were up 230% year-over-year. We're in the middle of the Dewali season. That is going really well. Sales are 4X what they were last year. So customers are responding greatly this year. We continue to invest. We've been adding products at the rate of 40,000 products per day so far this year.
+And just as big is the number of sellers, the sellers -- the number of sellers has grown more than 250% year-over-year. 90% of those sellers are using our logistics and warehouse services. As a result, we have tripled our fulfillment capacity year-over-year. We are very encouraged, as I said last quarter, in India, and continue to invest there very heavily.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [13]
+--------------------------------------------------------------------------------
+
+          Mark, I think you asked about China as well. This is Phil. We're continuing to work on some of the items we've been talking about for a couple quarters now. So the team has some interesting ideas. Really focused on making Amazon a trusted conduit for Chinese customers to access authentic International branded products and things that customers cannot get.
+I think Amazon Global Store continues to expand the selection there. We added about another 400,000 items to that store this quarter and continue to focus on using our global network of vendors to be able to get those products to customers. We continue to test the store on TMall as well. And the team has some other ideas but that's what we are talking about so far.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+          Eric Sheridan, UBS Investment Research
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [15]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. Can you call out in terms of the 3P business what you are seeing in terms of third-party sellers maybe needing to make more and more of their goods Prime eligible? What the economics of that might be in terms of creating a tailwind for the business and how we should think about that evolving over the next couple of years? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [16]
+--------------------------------------------------------------------------------
+
+          Sure, Eric. What I can tell you is the 3P percent of revenue continues to grow for now up to 46% of paid units, which is up 400 basis points year-over-year and 100 basis points sequentially off Q2. We feel that Prime and FBA are reinforce each other, they are inextricably linked. FBA adds Prime selection and Prime growth attracts more FBA sellers. So we have seen growth in FBA. It increases our Prime fast-track eligible selection, which we like and customers like, so we like what we see in the third-party side.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Justin Post, Bank of America Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Thank you. We did see the acceleration in EGM. I was just wondering if some of the local delivery and Prime Now is driving that acceleration? Is that having a big impact on your business? And down the road, do you think the delivery infrastructure will be valuable in maybe delivering third-party and other units? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [19]
+--------------------------------------------------------------------------------
+
+          This is Phil. It still pretty early for a lot of the really expedited delivery options. We've been working on our network for about 20 years to be able to enable some of the really fast delivery with things like Prime Now. But at this point, we are in a relatively small list of cities but it is expanding pretty fast. I think we launched it a couple more Prime Now cities just today. So that brings us up to about 17 across the globe.
+On the same day, here in the US, we continue to expand that as well. But we think that those fast options add us to the consideration set of a customer's purchase on some purchases that we might not otherwise be included in. But at this point, we are still working on that and getting it up to speed. So nothing specific to call out on that. On the other part of your question, we continue to work on the network around the world but cannot respond to any of the rumors and speculation.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+          Robert Peck, SunTrust.
+
+--------------------------------------------------------------------------------
+Kunal Madhukar,  SunTrust - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          Thanks for letting me ask a question. This is Kunal for Bob. Quick question on India, is there any change or any indication that there might be a change in the regulatory framework that would allow you to go direct?
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [22]
+--------------------------------------------------------------------------------
+
+          This is Phil. I don't know that we have anything to comment on all of that.
+
+--------------------------------------------------------------------------------
+Kunal Madhukar,  SunTrust - Analyst    [23]
+--------------------------------------------------------------------------------
+
+          Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+          Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [25]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. I just wanted to ask the most frequent investor question and concern that we get is when will Amazon flip back to its heavier spending and investment ways from 2014 and earlier? So I wanted to ask, is that a legitimate question do you think or are you now at a point of scale and market share and maturity that you could sustainably manage the heavy invest and while still delivering material profit? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [26]
+--------------------------------------------------------------------------------
+
+          Yes, thanks, Doug. I will point out that this quarter showed a lot of innovation, a lot of new products and features and a lot of investment. We've already talked about India, but domestically, we're -- excuse me, globally we are investing very heavily in our Prime platform both in North America and International. And that includes video content and original content, Prime Music, as Phil just said, the Prime Now has been expanded to 14 Metro areas, we have had same day delivery in now in 16 metro areas, we've built 14 new fulfillment centers, we've launched multiple devices including e-readers, tablets that are priced under $50, Echo, Dash Button.
+So there's a lot of investment going on and there will be continue especially related to Prime. And on the AWS side, as I said, we have 530 new features so far this year. So innovation and investment will continue and can be lumpy. I hate to use that word again, but could be lumpy over time. The other dynamic in our Company though is definitely working on cost reductions and efficiency. I think you see a lot of that in this quarter's P&L and in our capital efficiency, both in the warehouse world and also in infrastructure.
+So we will continue to work on costs. The good thing about 30% revenue growth is it gives you a lot more cost to work on as well. So we will -- I would say it is not as much as a pendulum as maybe it's been portrayed, it is more of a constant. The investment will, it sometimes ebbs and flows but the cost reductions will be a constant presence and the increase in customer experience and shortening the time to delivery in making the customer experience better.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          Brian Nowak, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Nomura Securities Intl - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. You guys had the Kindle store in Brazil since December of 2012. Just curious about the learnings around that and what benchmarks are you analyzing as you try to determine whether or not to invest further in a larger Brazil store?
+The second one, just curious for comments on International Prime sub growth. It sounds like Prime subs are growing really well. I think a couple quarters ago, you mentioned how they are growing over 50%. Is that still the case and if so, what is driving that faster International Prime sub growth?
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [29]
+--------------------------------------------------------------------------------
+
+          On the Brazil side, this is Phil, we've had the Kindle store in Brazil for a while. I think we look at all of our investments within an eye towards trying to maximize long-term free cash flow at strong returns on invested capital. That's across the Board. That's the criteria we are using, making sure we're building things that customers love that can have attractive financial returns over time and can persist for a long time and if they work, can be big. That's the metrics we are using. There's nothing specific to call out to Brazil though.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [30]
+--------------------------------------------------------------------------------
+
+          This is Brian. We are not going to update our Prime subscription growth beyond what we said last year or the end of last year, which last year in the year when we raised prices early in 2014, the global growth rate was 53% and North America growth rate was 50%. So by default, the International growth rate was higher. We like the adoption of Prime internationally, it is helped by additional selection that's available for fast-track shipment including FBA. So that fly wheel is working.
+We've also launched video benefits, most recently in Japan, but we have them in UK and Germany. We continue to launch other Prime benefits, Amazon Pantry in Japan and Germany this quarter. We launched Prime Now in the UK. So it is very similar to the US story potentially time lagged a bit but we are seeing the same customer adoption and impact on growth rates.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          Carlos Kirjner, Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Bernstein - Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Thank you. I have two questions. You have told us that you have tens of millions of Prime users, that you are investing heavily in Prime. Now at this scale and the 50% plus growth rates that you just mentioned, if you roll the clock two or three years, one can see Prime penetration in markets like the US starting to saturate as judges so many homes in the country. How should we think about the level of investment in Prime once you reached full penetration? Are there components that are given primarily to customer acquisition and what's the right way to think about that?
+And secondly, what are the economic drivers that justify the business case for Prime Now? I don't expect you to give us any numbers, I've learned that lesson in the last few years, but what are the components of the customer lifecycle value calculation or what type of calculation that you make to justify someone dropping a box with that $15 order to a customer? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [33]
+--------------------------------------------------------------------------------
+
+          Sure, thank you, Carlos. First, what I will classify as Prime demographics. So yes, we still think there's a lot of people in the country who are not Prime members and we are anxious to have them try it and sign up and join. The other thing that we see is that with our vast offering of selection and faster and faster shipping programs, we have a more competitive offering for many things that they buy. So there's a share of wallet element to it as well over time that we are looking to be more useful to customers all the time.
+On your comment about the economic drivers of Prime Now. You know what I will say is, customers really value it. It is not our entire selection, it is tens of thousands of items that they may need on a daily basis. We think it is an interesting part of the selection offer for Prime and it's in many ways something that we can do that others cannot because it is a natural evolution of our 20-year effort to grow our fulfillment center network and our scale, quite frankly, makes it possible to even offer this to customers.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Neil Doshi, Mizuho Securities.
+
+--------------------------------------------------------------------------------
+Neil Doshi,  Mizuho Securities - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, guys. Can you talk a little bit more about India and what is the opportunity there that you see? There's a tremendous amount of -- tremendous middle-class there but the distribution can be very challenging. So is that an area where we could see Amazon really building out the last mile? And then there's been some reports of an Amazon potentially trying to close the GAAP in terms of delivery and deliver sooner. On the grocery side, what is the impetus there and can we see how is the recent market's been trending on the grocery side that you've launched recently? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+
+          I will take the India question. So again, India is a different market and does not have a lot of the same ready fulfillment options that some other countries did. We see that as an opportunity, an opportunity that we can build and we can bring to sellers. And as I believe I already mentioned, we like what we see, we are very encouraged, customer accounts, active customer counts are up 230% year-over-year and sellers, number of sellers is up 250% year-over-year. 90% of those sellers use our logistics and warehouse services, as you mentioned, which has caused us to triple our fulfilment capacity. We are happy to do so. We like what we see in India. We think we have, we're attractive both to customers and to sellers and we like our position.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [37]
+--------------------------------------------------------------------------------
+
+          This is Phil. On the grocery side, for Fresh we are in a handful of metropolitan areas here in the US. It is been a relatively measured rollout by Amazon standards. We continue to work on the customer experience and making sure we are really delivering a quality experience for shoppers. We are also working on the economics. And so, we've continued to work on that, but not much new to add right now.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+          Heath Terry, Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. I'm just wondering if you could give us a sense how some of the recent announcements from FedEx and UPS about pricing during the holidays and the structure of some of the third-party relationships might impact you? And given the investments that you've made in your own fulfillment infrastructure, how much of a competitive advantage you feel like you've got during the holiday season as other retailers have -- that are more directly exposed to these changes have to deal with it?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [40]
+--------------------------------------------------------------------------------
+
+          No comment on the pricing. I would say that we have 23 sort centers which allows us to control a lot more of our shipments for longer but we certainly value our relationships with USPS, FedEx, UPS and other global carriers. And we are looking forward to a great holiday season.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          Aaron Kessler, Raymond James.
+
+--------------------------------------------------------------------------------
+Aaron Kessler,  Raymond James & Associates, Inc. - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Yes, hi guys. Can you quickly, if you can talk about some of the more experimental projects you work on? I guess the travel business, you're in again for a few months and then got out of. Also, maybe with just restaurant, providing restaurant delivery. How do you view these services? They're not necessarily core to what you do, obviously you can provide those services. But how should we think about these types of investments longer-term? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [43]
+--------------------------------------------------------------------------------
+
+          On destinations, we're constantly trying new things and testing and measuring and iterating here at Amazon and we learned a lot but we've discontinued that. On the restaurant delivery, we've had it for a couple months here in Seattle and recently announced it in Portland, and it fits very well with Prime Now. At this point, it is pretty small but something we are excited to do for customers. We think it will be helpful for them and we are happy to take advantage of some of the competencies we've built with Prime Now with our fulfillment network so far.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+          Brian Pitz, Jefferies and Company.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [45]
+--------------------------------------------------------------------------------
+
+          Thanks, some questions on video. Any color such as engagement on the recent launch of video products in Japan including the Fire TV, the Fire TV stick and Prime Video? And also, any general updates on your video content strategy or view on standalone streaming separate from Prime? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [46]
+--------------------------------------------------------------------------------
+
+          Yes, I will take that one, this is Brian. No specific call outs in Japan. I would say that we are still very bullish on our Prime Instant Video, especially our new original content we've created. We think it is been critically acclaimed and also a big hit with customers. Man in the High Castle is coming out shortly as is the second season of Transparent which won Emmys this year. So we are really excited about the creative team we've assembled and the products that they have been able to bring to Prime customers. And we still like the customer reaction. Free trial conversion rates are higher when Prime members stream and they also renew at a higher rate their annual subscription. So again, that's very important to us as well and are very happy with the results.
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+
+          Ben Schachter, Macquarie Equities Research.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research Equities - Analyst    [48]
+--------------------------------------------------------------------------------
+
+          So Prime has done remarkably well with folks willing to pay $99 up front. But do you expect to have different offerings for different cohorts? In other words, right now, Prime is a one-size-fits-all model. Could we see different pricing models for different demographics in the future? And then separately, can you also talk about how shipping leverage changes during the holiday season when shoppers tend to want more items per transaction? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [49]
+--------------------------------------------------------------------------------
+
+          Sure. So this is Phil. On the Prime pricing, we do have a few different programs for different demographics today with programs like Prime Student or Prime Family, which we're very excited about. I can't speculate as to what we'd do in the future but Prime is a program that is really important for us and we are working hard everyday to continue to build selection there and to continue to make Prime better.
+Hopefully you see that in the list of things we've launched recently and the continued cadence of making the services we have better. We just added a lot of new music in our Prime Music program. And as Brian mentioned, some of the upcoming programming should be pretty good in the fall. The Man in the High Castle is actually our most watched pilot, so we are excited about that one as well. So, continue to work on Prime.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [50]
+--------------------------------------------------------------------------------
+
+          On the shipping side --
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [51]
+--------------------------------------------------------------------------------
+
+          I would say it is difficult equation. Yes, order size can go up but we ship a lot of toys and bigger items so it is hard to predict what that looks like. But having the density, having the sort centers has certainly helped our cost structure in that area and having inventory closer to our customers.
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+          Stephen Ju, Credit Suisse.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [53]
+--------------------------------------------------------------------------------
+
+          Thanks. Brian, it seems like you guys are rolling out Prime Now as well as product verticals internationally, fairly quickly especially if you measure it versus the pace of the rollout for Fresh or your other International older territories. Am I reading too much into this or have you guys put in place different processes to iterate more quickly?
+And second, I think you've disclosed that as of the end of 2014, a little less than 10% of your fulfillment centers are outfitted with Kiva. So I guess, are all of your other fulfillment centers on a go forward basis going to have Kiva? If not, why not? And given the pickup in presumably the volume through-put there, does this mean you can slow down the pacing of your buildout there? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [54]
+--------------------------------------------------------------------------------
+
+          Yes, sure. On Prime Now, it is our intent to rollout benefits and functionality globally as quickly as possible. I think we were able to do that with Prime Now and get to the UK faster. We are happy with that, it is not necessarily a comment on Amazon Fresh, it's just they are different businesses. So we're happy with the launch in the UK and the team did a great job to get that launch in a timely manner.
+On Kiva, we are up to 30,000 bots at the end of Q3, which is -- and then they're in 13 for fulfillment centers. At the end of 2014, we had 15,000 bots. So we've doubled that amount and they were in 10 warehouses. Our intent is to use that more widely. And stay tuned.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+          Ron Josey, JMP Securities.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          Great. Thanks for taking the question. Just real quickly on pay unit growth accelerated 26% this year. I realize that these are comps but anything significantly higher or anything that happened this quarter? I know Prime Day could be it, but wondering if that was the reason? And then on AWS usage, just wondering if you could update on usage? I believe last quarter you mentioned usage was growing faster than revenue. I wonder if that's the same case this quarter? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [57]
+--------------------------------------------------------------------------------
+
+          So this is Phil. On the unit side, you did see units move in a rate that's highly correlated with revenue there. Keep in mind AWS and some of the other rental type offerings don't generate units so we don't count those. But we did see, certainly saw some additional units as result of Prime Day. And on a longer-term, bigger basis, the continued growth of Prime, the continued selection expansion is helping with the units growth there. Was there a second part of your question?
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [58]
+--------------------------------------------------------------------------------
+
+          It was just on AWS unit growth. I think last quarter you said it was growing faster than revenue. I'm wondering if that's still the case here?
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [59]
+--------------------------------------------------------------------------------
+
+          We continue to see really strong usage growth across the board and it's coming from customers of all sizes. We also have recently announced that Aurora, which is our new database software, is our fastest growing service ever. For a long time we talked about red shift and Aurora has now outpaced that. So we're very excited about what we are seeing there.
+
+--------------------------------------------------------------------------------
+Operator    [60]
+--------------------------------------------------------------------------------
+
+          Youssef Squali, Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [61]
+--------------------------------------------------------------------------------
+
+          Thank you very much. Two questions. First, with the courts striking down the Safe Harbor Provision between the US and the EU, how do you see the changes to European data storage requirement affecting AWS potentially? And on the Kiva, a question asked earlier, can you maybe help us understand the capital intensity of ace and actually using Kiva versus one that is not? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [62]
+--------------------------------------------------------------------------------
+
+          This is Phil, I will take the Safe Harbor question with AWS. With our EU approved, AWS data protection agreement and model clauses we have in place, AWS customers can keep running their global operations using AWS and be in compliance with E-law. I think your second question was about the capital intensity? (Multiple speakers).
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [63]
+--------------------------------------------------------------------------------
+
+          Yes, right.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [64]
+--------------------------------------------------------------------------------
+
+          I'm going to be vague on the scale of it but their capital intensity is offset by their density and throughput. So it is a bit of an investment that has implications for a lot of elements to your cost structure but we are very happy with Kiva. We think it is a great pairing our associates with Kiva robots to do some of the hauling of products within the warehouse has been a great innovation for us. And we think it makes the warehouse jobs better and I think it makes our warehouses more productive.
+
+--------------------------------------------------------------------------------
+Operator    [65]
+--------------------------------------------------------------------------------
+
+          John Blackledge, Cowen and Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [66]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. Two questions. So first, our data suggests that the US Prime sub growth is growing very rapidly at scale. Just wondering where you think the US Prime sub base is right now on the adoption curve? The second question is North American EGM growth accelerating again this quarter, we're assuming growth is being driven in part by categories like apparel and consumables versus perhaps a more mature category like electronics. So the questions are, with the vertical mix changing, how should we think about the impact to margins or are some of the newer and faster growing categories structurally higher margin for Amazon than the more mature categories? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [67]
+--------------------------------------------------------------------------------
+
+          Yes, I cannot get into too much detail on the components of EGM profitability. I would say that we are seeing strong growth across all of our EGM categories. We have great teams that are chasing a lot of different product lines and working with vendors to get more selection on the site, both retail and also third-party. So still a lot of room there.
+On the Prime sub growth, we are not updating the statistics. We are very happy with the growth not only in participation but also purchases and retention and we had a very successful Prime Day in July that we are really happy. It was a great event for customers and sellers. That's about all I have on that.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc. - Director of IR    [68]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2016-Apr-27-FB.OQ-137612530009-Transcript.txt

@@ -0,0 +1,509 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2016 Facebook Inc Earnings Call
+04/27/2016 02:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook Inc. - Director of IR
+ * Dave Wehner
+   Facebook Inc. - CFO
+ * Sheryl Sandberg
+   Facebook Inc. - COO
+ * Mark Zuckerberg
+   Facebook Inc. - Chairman & CEO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Ken Sena
+   Evercore ISI - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Anthony DiClemente
+   Nomura Securities Intl - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Mark May
+   Citi - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Chris, and I'll be your conference operator today. At this time I'd like to welcome everyone to the Facebook first-quarter 2016 earnings call.
+(Operator Instructions).
+This call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon and welcome to Facebook's first quarter 2016 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO.
+Before we get started I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release, our annual report on Form 10-K filed with the SEC.
+Any forward-looking statements that we make on this call are based on assumption as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.
+The press release and an accompanying investor presentation are available on our website at investor.fb.com. And you now I'd like to turn the call over to Mark.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah, and thanks, everyone, for joining today. We started 2016 off well. 1.65 billion people now use Facebook every month, and 1.09 billion people use Facebook every day. In recent weeks we're also consistently seeing more than 1 billion people using Facebook on mobile everyday.
+We're also pleased with our business results. Total revenue this quarter grew by 52% year-on-year to $5.4 billion. And advertising revenue grew by 57% to $5.2 billion. I'll have more to say about these results in a minute, but first I want to talk about a proposal by our Board of Directors to reclassify Facebook stock.
+At F8, I talked about our mission and how the work we're doing to connect the world is more important today than it's ever been. I walked through our 10 year road map, focused on building the technology to give everyone in the world the power to share anything with anyone. Bringing people together and giving everyone a voice takes long-term commitment. Not just over the next few years, but over the next few decades.
+We're focused on the long-term, and that's the main reason for today's proposal. Facebook has always been a foundry-like Company, so we can focus on our mission and build long-term value. This structure has served our shareholders well. Early on we received some generous offers for companies trying to buy Facebook and our structure helped us resist that pressure.
+More recently, we navigated a challenging transition to mobile but because we were a controlled Company we were able to focus on improving the user and product experience of our apps first and then build a strong mobile business over time, rather than being forced to do something short-sighted. And over the years, our structure has helped us make big bets on acquisitions like Instagram that were very controversial initially but were good decisions for our community and our business.
+Facebook has been built by a series of bold moves. And when I look out at the future, I see more bold moves ahead of us than behind us. We're focused not on what Facebook is but on what it can be and on what it needs to be, and that means doing bold things. A lot of what we're building today in the areas like connectivity, artificial intelligence, and virtual and augmented reality, may not pay off for years, but they're important to our mission of connecting the world, and I'm committed to seeing this mission through and to leading Facebook there over the long term.
+Personally, there's another element to this. While helping to connect the world will always be the most important thing that I do, there are more global challenges that I also feel a responsibility to help solve to create a better world for my daughter and all future generations. Things like helping to cure all disease by the end of the century. Upgrading our education system so it's personalized for each student and protecting our environment from climate change.
+That's why Priscilla and I created the Chan Zuckerberg Initiative and committed to give 99% of our Facebook shares to advance human potential and promote equality. Today's Board proposal will allow us to maintain and improve the voting structure that has served us well and allow me to fund the Chan Zuckerberg Initiative.
+In December, I also announced that I won't sell more than $1 billion worth of stock -- Facebook shares -- per year over the next three years. That's still my commitment and I'll update our shareholders on future plans beyond that. Dave will talk more about the mechanics of this proposal in his comments in just a few minutes.
+But before we get there I want to also share a few more thoughts on the progress we've made this quarter. As I said before, our road map has three horizons. Over the next three years we're going to keep investing in our most developed ecosystem, the Facebook app and platform. Today, people around the world spend on average more than 50 minutes a day using Facebook, Instagram and Messenger, and that doesn't even include WhatsApp yet.
+This growth isn't happening because we came up with just one or two big changes. Our team has just worked day after day on lots of improvements over a long period of time, and that progress continued in the first quarter. We launched reactions to help people express themselves in more ways, and we improved how our products work on different mobile networks and devices all over the world.
+Sheryl will talk more about this in a minute, but now more than 3 million businesses are using our advertising products every month. We've expanded our measurement capabilities so more businesses can see the results they get from ads. We've made it easier for small and medium businesses to use the same targeting tools and ad formats that our larger advertisers use.
+Over the next five years we're going to build ecosystems around our products that are already being used by a lot of people. We're at the beginning of a golden age of online video. Video isn't just a single kind of content. We think it's a medium that allows people to interact in a lot of new ways. So that's why in addition to normal internet video, we're also focusing on more interactive video experiences, like live and 360 video.
+I'm a big Game of Thrones fan, and the other week HBO and our Oculus team came out with a 360 video of the opening sequence of the show, and it's now the most watched 360 video on Facebook in any 24 hour period with more than 12 million total views.
+Earlier this month we opened up live to everyone. Live is just one part of our overall video effort. But we think it has a lot of potential. Friends go live because it's unfiltered and personal. Actors and news anchors go live because they can reach bigger audiences, in some cases, than they can on even their own shows. If we do a good job, we think it's something that people will associate with Facebook. With interacting with people and not just watching content.
+But it's also a very new and small part of all of the videos that we see on Facebook today. I'm also really excited about what we're building around messaging. Right now we have two of the top messaging apps in the world. 900 million people use Messenger every month, and 1 billion people use WhatsApp every month. Between Messenger and WhatsApp, People send around 60 billion messages every day. That's almost three times as many message as SMS handled at its peak.
+Over the past couple of weeks we've talked about steps we're taking to build messaging into a platform that developers and business can build on. We announced bots for Messenger that let you do things like order flowers or get news without leaving your Messenger thread. But this is all very early and we're rolling these experiences out carefully and slowly over time.
+We're also very happy with the way that Instagram is growing with more than 400 million actives and more than 200,000 businesses advertising every month. Now we're focused on making the user experience even more engaging. With more content on Instagram all the time, people are currently missing about 70% of what's in their feed. So that's why in the first quarter we started rolling out feed ranking to help you see more of the posts that you care about.
+And this is a long-term effort, but news feed shows that ranking creates the best and most engaging experiences for our community. Over the next 10 years we're going to keep investing in new technology to help everyone connect. As part of Internet.org we're building an open source Telco infrastructure, a project called TIP, to make it cheaper to operate mobile networks. Free Basics, which helps people access tools for education, health information and communication for free, now features more than 600 services and it has brought more than 25 million people online. That makes it one of the most successful connectivity initiatives in the world.
+We're also working to help people connect and share in a more natural and intuitive way. Artificial intelligence is a long-term effort for us, but we're already using it in lots of ways. Right now our Moments app is using face recognition to help you share pictures with your friends. We're using AI to show the most relevant content in news feeds, filter Spam and messaging and even help blind people understand what's in their friends' photos by reading explanations of them allowed.
+Finally, we're building technology and virtual and augmented reality that can change the way that we all experience the world. Gear VR started shipping late last year and the response so far has been great. There are now hundreds of apps built specifically for Gear, and people have watched more than 2 million hours of video on it.
+In Q1 we also started shipping Oculus Rift. We've got a lot of great content with more than 50 games and apps built Rift. And again, this is very early and we don't expect VR to take off as a mainstream success right away. I Really want to emphasize that. Most Rift early adopters are gamers and developers, but eventually we believe that VR is going to be the next big computing platform and we're making the investments necessary to lead the way there.
+So that's our update for the quarter. As always, everything we do is focused on our mission to make the world more open and connected. And to get there, we're building technology that brings people together and that helps everyone in the world share anything they want with anyone.
+It takes a long-term commitment and it won't happen overnight, but we're in a strong position and I'm excited about what's next. So thank you to everyone in our community, to all of our teams, all of our partners, and all of our shareholders for everything you're doing to help connect the world. And now here's Sheryl.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hello everyone. We had a great first quarter and a strong start to the year. Q1 ad revenue grew 57% or 63% on a constant currency basis. Mobile ad revenue reached $4.2 billion, up 75% year-over-year and is now approximately 82% of total ad revenue. Our growth was strong across all verticals, marketer segments and regions, particularly North America and AIPAC.
+We remain focused on driving our clients' businesses, moving their products off shelves, both in stores and online. A big focus for us in 2016 is helping our clients understand the true business impact of their ads, especially on digital. We're pleased with the progress we made in Q1 across our three priorities. Capitalizing on the shift to mobile, growing the number of marketers using our ad products, and making our ads more relevant and effective.
+First, capitalizing on the shift to mobile. Consumers have shifted to mobile and businesses know they need to catch up. We hear from marketers that figuring out mobile today is like figuring out TV in its early days, but given where consumers spend their time the question now is not t if they should market on mobile but how. One of the drivers of the consumer shift to mobile is video. People are sharing and creating nearly three times more video on Facebook than they were a year ago, and as of February, the time people spend watching videos on Instagram increased by more than 40% over the preceding six months.
+This presents a big opportunity for marketers. The best marketers understand that people watch video differently in mobile feed than on TV. They create ads that grab attention in the first few seconds, sometimes even without sound. What we now thumb-stopping creative. For example, Nestle took their TV ad for Natural Bliss coffee creamer and in less than a day edited for mobile feed by creating a new opening and adding text overlays to relay their message without sound.
+They showed both the original TV ad and the mobile ad on Facebook. The original TV ad drove a 4 point increase in ad recall. The mobile optimized version, however, drove an even stronger 10 point increase in ad recall and a 7 point increase in product awareness. We want to help marketers optimize their video ads. For example, we know that on average captioned videos increase view time by 12% so we introduced auto captions to generate captions for video ads.
+In Q1 we introduced new ad formats like Canvas Ads. Canvas Ads showcase products by combining video images and call-to-action buttons. While it's still early, we're pleased with the results and are seeing adoption across many verticals. To motivate millennials to take on do it yourself projects, Lowe's and DVDO targeted 25 to 34-year-old homeowners with Canvas Ads that let them see bathroom designs, discover the products in each design, and tap to purchase. The ads were so engaging that people spent an average of 28 seconds interacting with them and Lowe's saw a 6.7 times return on ad spend.
+Our second priority is growing the number of marketers using our ad products. This quarter we announced that we have over 3 million active advertisers on Facebook and over 200,000 on Instagram. A significant number of these advertisers are small and medium businesses. These businesses use our platform because it's easy and affordable for them to connect with their consumers on mobile.
+We're also making it easier for SMBs to use the same targeting tools and ad formats that our most sophisticated advertisers use. We're seeing even small businesses use products like Lead Ads, Slide Show and Dynamic Product Ads. Our third priority is improving the relevance and effectiveness of our ads.
+Last year we introduced conversion lists to measure how Facebook and Instagram campaigns drive business objectives like sales. We've seen clients across verticals from retail to auto use conversion lift to measure and improve the return on their ad investment. Chase Bank used conversion lift to measure how effectively their Super Bowl ad drove credit card applications. They found that combining Facebook video adds with their TV ads drove 1.5 times more conversions than TV ads alone.
+In Q1 we expanded or list capabilities by testing list API, enabling more partners to measure the effectiveness of more of their campaign. We're pleased with the value we're driving for our partners and the progress we're making across our three priorities. Helping marketers make the shift to mobile will take time. We have a lot of hard work ahead and we'll continue to invest.
+I want to thank our clients around the world for their partnership and congratulate our global teams on the results of their hard work. Thanks, everyone. And now here's Dave.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. We're off to a great start in 2016 led by the ongoing growth and engagement in our community and continued momentum in our ads business. In Q1 we generated $5.4 billion in total revenue and delivered over $1.8 billion in free cash flow.
+Let's begin with our community metrics. In March 1.09 billion people used Facebook on an average day, up 16% compared to last year. This daily number represents 66% of the 1.65 billion people who visited Facebook in the month of March. Mobile continues to drive our growth. Over 1.5 billion people accessed Facebook from mobile devices in March, up 21% from last year.
+Before diving into our quarterly financial results, I wanted to highlight that beginning this quarter I will focus my prepared remarks on our GAAP results and our all financial metrics are GAAP unless otherwise noted. The primary difference between our GAAP and non-GAAP metrics is stock-based compensation. Stock-based compensation plays an important role in how we compensate our employees, and therefore we view it as a real expense for the business. We will continue to provide a reconciliation of GAAP to non-GAAP financial metrics in our press release and earnings slide. All of our comparisons are on a year-over-year basis unless otherwise noted.
+Q1 total revenue was $5.4 billion, up 52% or 58% on a constant currency basis. Ad revenue in Q1 was $5.2 billion, up 57% or 63% on a constant currency basis. This marked a slight decline from the 66% constant currency ad growth rate we experienced in Q4. In Q1 this year we benefited from an additional day due to the leap year which contributed approximately 2% to our year-over-year ad revenue growth rate.
+North America and Asia-Pacific were our fastest growing regions with advertising revenue growth of 64% and 62% respectively. Europe and Rest of World grew advertising revenue more slowly at 49% and 35% respectively, with the latter particularly impacted by foreign exchange headwinds. Setting aside currency headwinds all regions exceeded 50% constant currency ad revenue growth.
+Mobile ad revenue was $4.2 billion, representing approximately 82% of total ad revenue. Mobile ad revenue grew 75%, driven by strength from Facebook's news feed. Our mobile ads business continues to be driven by the combination of both supply-side and demand-side factors. On the supply-side, we continue to see healthy growth in the number of people using Facebook, time spent across our products and app load.
+On the demand-side, we believe the investments we have made to improve our mobile advertising solutions are helping drive value for both people and marketers. We are seeing growth in both new customers as well as existing customers who are spending more with us on average compared to last year. In Q1 the average price per ad increased 5% while total ad impressions increased 50%.
+The recorded increase in price is being driven by the continued mix shift towards mobile, which contains higher price news feed ads rather than the mix we have on PCs of both news feed ads and lower price right hand column ads. The increase in impressions was driven by strong growth in mobile add impressions and was offset partially by a decline in ad impressions delivered on personal computers consistent with the ongoing declines in PC usage.
+The increase in -- total payments and other fees revenue was $181 million, down 20% compared to last year. This decline was mainly driven by a reduction in payments revenue related to games played on personal computers. Q1 total costs and expenses were $3.4 billion, up 29%. We ended the quarter with approximately 13,600 employees, up 35% compared to last year.
+Q1 operating income was $2 billion, representing a 37% operating margin. Our Q1 tax rate was 27%, down from our full year 2015 tax rate of 40%. Our Q1 net income was approximately $1.5 billion or $0.52 per share. In Q1 capital expenditures were $1.1 billion, more than double compared to Q1 of last year. Server purchases and data center construction were the largest contributors to year-over-year growth.
+New builds in Texas and Ireland along with the expansion of existing facilities will nearly double our current data center footprint when completed. In addition to servers and data centers, investments in office facilities also contributed to the year-over-year growth. We ended the quarter with $20.6 billion in cash and investments.
+Turning now to the outlook. First, some color on revenue. We remain focused on creating value for the people and marketers who use our services. We expect that the main drivers of advertising revenue growth will continue throughout 2016, but we will face tougher comparables as the year progresses given the accelerating ad revenue growth we experienced throughout 2015.
+Payments and other fees revenues will continue to face headwinds throughout the year, given that the substantial majority of that revenue relates to payments from games played on personal computers. Even with the expected contribution from Oculus, we anticipate that our payments and other fees revenue for the full year 2016 will come in lower than the level in 2015.
+Next, onto the expense outlook. Our expense guidance remains unchanged. We expect that full year 2016 total GAAP expense growth will be approximately 30% to 40%. We expect full year 2016 amortization expenses to be approximately $700 million to $800 million and full year 2016 stock based compensation expenses to be approximately $3.1 billion to $3.3 billion.
+If you take into account our GAAP expense guidance as well as our amortization and SBC guidance, you'll see that our full year 2016 total non-GAAP expense growth guidance range remains unchanged at 45% to 55%. We anticipate full year 2016 capital expenditures to be at the high end of the $4 billion to $4.5 billion range we gave last quarter as we invest to support the rapid growth of the business. We expect our Q2 and full year 2016 tax rates to be similar to our Q1 rates.
+In summary, 2016 is off to a great start for Facebook. Our results reflect healthy growth and engagement in our community, strength in our ads business, and investments we're making to capitalize on the long-term opportunities we see ahead. Before going to questions, I wanted to touch briefly on the share reclassification that Mark discussed at the beginning of the call. As we disclosed in the proxy statement we filed today, our Board of Directors has approved a proposal for the reclassification of our capital stock that would involve the creation of a new class of publicly listed non-voting Class C capital stock.
+Pending stockholder approval, we intend to issue two Class C shares as a one-time stock dividend for each outstanding Class A and Class B share, resulting in a tripling of the pre-reclassification total shares outstanding. All stockholders would be treated equally. The net effect of this transaction would be to establish two publicly traded classes of Facebook stock, one representing the current Class A shares, and the other representing the non-voting Class C shares.
+Since the Class C shares would have the same economic rights as the Class A and Class B shares, we would expect that after the payment of the stock dividend, the share price of the Class A common stock would generally reflect a three-for-one stock split. This will have no effect on the voting interests related to shares that investors currently hold. As Mark mentioned, this structure will allow for the preservation of the voting structure that has served the Company well to date, while allowing for Mark to fund the Chan Zuckerberg Initiative over the course of his lifetime.
+Importantly, as part of this proposal, the preservation of the multi-class capital structure would be generally predicated on Mark continuing to maintain an active leadership role at Facebook. Let me talk about next steps.
+The reclassification would be conditioned on approval by a majority of outstanding votes held by Company stockholders, and we anticipate a vote on the matter at our annual meeting to be held on June 20th this year. A record date for this dividend would be determined at a later date. With that, Chris, let's open up the call for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          We will now open the lines for a question-and-answer session.
+(Operator Instructions).
+Your first question comes from the line of Eric Sheridan with UBS. Your line is open.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thank you so much. Wanted to come back to your comments on the small and medium size business opportunity at Facebook. Maybe direct a few points to Sheryl to get some comment.
+Wanted to understand what some of the opportunities are to continue to demonstrate to those advertisers what the potential is for both Facebook, and maybe even Instagram and Facebook Messenger, long term as platforms to grow their businesses, and sort of also pointing out what some of the measurement tools and operating challenges are to bring people onto the platform. Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [3]
+--------------------------------------------------------------------------------
+
+          Thank you for the question. SMBs or SMUs, as they're called in different places around the world, we think are a very core competitive advantage for us. It's prohibitively expensive for most small businesses to reach people digitally. 35% of small businesses in the United States, which is often the most advanced market, don't have a web presence at all, and setting up a mobile app, getting people to find and download a mobile app, can be more expensive.
+And so what's happening is that SMBs are turning to Facebook page as their mobile solution. They're free. They're easy to set up, and they already know how to do them because almost all of them are already Facebook users in the first place. And so the on-boarding has been incredibly important and incredibly effective.
+We announced last year that we have over 50 million small business pages active on a monthly basis. 80% of those are active on mobile. We then work on helping them use our ad products and upsell them to our paid ad products as well, and we announced this quarter that we hit 3 million active advertisers on Facebook and 200,000 on Instagram.
+What's interesting is that what you see is SMBs able to use the tools of some of the biggest brands in the world. So over 2 million SMBs have posted a video both paid and organic in the last month, and that has to be many times the number of SMBs that have shot or played a TV commercial. In terms of measurement, your question's important because it's not just getting them to use our platforms to connect to consumers, it's getting them to be able to measure a result.
+And so we've worked hard to build measurement tools into the product, so that when you buy an ad, SMBs in a very easy interface, and decide what their goals are. Are their goals measuring sales, are their goals to visit a website, are their goals a mobile app download, and then measuring all the way through from showing that ad to the purchase.
+I continue and we continue to be very bullish on this channel, because we have such a broad base of usage because that usage is so active, and because we're very focused on investing and simplifying our products so that all SMBs can use them.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+          The next question is from Brian Nowak with Morgan Stanley. Your line is open.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [5]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. I have two. The first one, Sheryl, you talked about video and kind of increasing the overall video consumption. Could you just talk about where you are in traction with video advertising and kind of the adoption of video ad units and the impact of video in the quarter?
+And then secondly, just kind of breaking down the advertising by cohort, could you talk to the strengths of, points of strength or weakness across direct response versus branded advertisers in the quarter? Thanks.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [6]
+--------------------------------------------------------------------------------
+
+          Sure, I'll take the second one first. Our growth was really broad based, and we grew across all of our marketer presence this quarter. That's direct response, brands, SMBs and developers. Our direct response business continues to be very strong. It's very ROI focused, and we continue to invest and roll out products that help people.
+So for example, lead ads, where people can fill out forms on a mobile device, take their contacts and throw it on Facebook. We rolled that out fully this quarter. And that enabled people to use Facebook in a very direct-to-response way and we'll continue to invest there.
+Video ads are really exciting. It's worth noting that video ads take place of another avenue. These are not all of the revenue (Inaudible), but as consumer engagement with video has continued to grow that creates more and more of an opportunity for video ads. Marketers have always loved video because it's a really compelling way to reach people. And this now you can reach them on mobile all day with those kind of messages.
+Importantly, marketers have to adjust sometimes. While the 30 second ad does perform well in news feed, we also have people understanding that some of the formats are different creating shorter ads, creating ads that can work even without sound, more personal ads, has really mattered. One example is Toyota used Facebook for the launch of the Rav4 Hybrid. This was actually in Los Angeles. They used a very broad video to drive brand awareness. They reached over 36 million people in their target demo within three days.
+Then, and this is where it gets even more interesting, they retargeted people who watched the video with over 500 personalized video ads which were optimized for Facebook and Instagram. So they were creating a direct response campaign to get people to take specific actions, like requesting a quote and finding a specific dealer. We saw a 14-point lift in ad recall, a 7-point lift in message association. And right now we're using a lift roll to continue to measure their sales for the 30 and 60 days beyond the campaign to see what happens, and we're pretty excited about what that shows in terms of you how video can be used in a really broad based way but also a more personal way.
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+          The next question is from Douglas Anmuth with JPMorgan. Your line is open.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [8]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the questions. I had a couple for Mark around Messenger. Mark, I was hoping you could talk to us about how you expect to shift user behavior within Messenger to get you users to focus more on businesses versus more personal communications and how you'll make users aware of the capabilities within the platform? And then just secondly, as more bots come on board here and businesses are engaging with Messenger, how do you envision kind of bots and humans working together in terms of providing more customer service? Thanks.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [9]
+--------------------------------------------------------------------------------
+
+          Sure. So part of our playbook for building out these ecosystems to scale is we start with the person-to-person use case, right? So whether that's in Messaging, and people messaging their friends or groups, in news feed before that, it was people posting updates and seeing what was going on with their friends and the people that they care about.
+And then the next step is to create organic activity around public entities, right? So whether that's businesses, public figures, like athletes and celebrities and types of folks that people want to interact with, these different platforms, we did that on Facebook and news feeds or pages, and we're working on a number of different ways to do that in messenger. One of those is bots. And one of the good things about bots that we've seen is that it can increase or, sorry, decrease the amount of time that you have to wait before you get a reply back from interacting with a message.
+So what we've seen, we've done some research on this. A lot of people everyday in Facebook today are already messaging pages and businesses directly. And the businesses respond. But what we've actually also found is that through some of our AI research, we can look at the responses that businesses give to common questions and can confidently provide the right reply a lot of the time. And when we can do that, then that decreases the latency, and predictably people want to do more of that activity.
+So that's one way that I think you're going to see bots work, between people who are actually driving the businesses directly will need to in some way train or answer questions for people, but we can build artificial intelligence that can learn from people how to automate a lot of that and make that experience a lot faster for people who want to interact with businesses and public figures. And of course then after you start building out that segment of businesses and public figures on the platform, then on top of that you have just a good amount of intent in these platforms to build a good business on top of that, that kind of stage-through.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          The next question is from John Blackledge with Cowen and Company. Your line is open.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [11]
+--------------------------------------------------------------------------------
+
+          Great. Thank you. Two questions. So Facebook just opened up instant articles globally to all publishers. Just wondering what you see as a publisher's benefits of joining instant articles and how should we think about the monetization impact in 2016. And then second question, the ad revenue in AIPAC was much better than we thought, just any more color on the drivers there. Thank you.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [12]
+--------------------------------------------------------------------------------
+
+          So instant articles is all about the quality of the consumer experience. I mean right now for links that are not instant articles, it can be one of the slowest parts of the Facebook app. You're browsing through a news feed, you tap on a link, if you're not on a good connection the content doesn't cache, and it can take 10 or 20 seconds in some cases for that content to load.
+And, you know, people in our community, they don't know the difference about whether that content is coming from Facebook or a different place. And they hold us accountable for making their experience quick and we want to do everything we can to do that. So instant articles makes it so that any publisher around the world now can deliver a really great native experience instantly with no latency in loading it, and we're just seeing that people like to engage with that a lot more. So that's what we're most excited about there.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [13]
+--------------------------------------------------------------------------------
+
+          The AIPAC question. AIPAC's been growing really well for several quarters now and we're seeing a lot of great adoption as people learn to use the products. One part of the business that I think has been really strong and is worth noting is we're working with marketers in China to help with their export business. So Air China is a good example. They're a popular airline in China. But they don't really have -- they're not really as well-known overseas, and before working with us they really only invested in traditional media.
+They had a goal of promoting their new flight routes including one from Mumbai to Beijing and their new aircraft. So they launched a campaign with us in 15 countries globally. They used Regent Frequency and Carousel and video ad targeting and for example, they would target in the US age 18 and above, frequent international travelers, living in cities where they had routes. Or Indian ex-pats living in the US to promote new routes to Mumbai.
+They reached 30 million people globally, more than 95% on global. And here's the best part. They had a 73% sales lift in the United States. So our AIPAC business is robust, and I think the global nature of our business is part of driving that.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+          The next question is from Heather Bellini with Goldman Sachs. Your line is open.
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [15]
+--------------------------------------------------------------------------------
+
+          Great. Thank you. I was just wondering if you could share with us, how do you see Instagram's ramp impacting Facebook's ad growth in 2016 or if there's any color you could share with us about kind of how that's been ramping. And also, if you could share with us how advertisers are viewing the platform, are you finding that it's typically more additive to their Facebook spending, or are they funding it with existing Facebook budgets? Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [16]
+--------------------------------------------------------------------------------
+
+          Facebook and Instagram are the two most important mobile ad platforms out there. In the short run, some of the spend is incremental and some isn't. There are people who will have a social budget or a digital budget, and as they move to Instagram some of that will come from Facebook.
+In the medium to long run, we believe we can compare very favorably with any other spend we can do because we have this very broad reach on both platforms, plus the ability to target very specifically. So what you're seeing in our results right now, very strong growth for Facebook and very strong growth for Instagram. We hit 3 million advertisers for Facebook. We hit 200,000 for Instagram. And often the platforms really work together.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          The next question is from Justin Post with Merrill Lynch. Your line is open.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Question for Mark. There's been some concerns about traffic to publishers and sharing levels on Facebook. I was just wonder if you could talk about core Facebook engagement, what's really working, are you concerned at all about that, and then when you think about the ad loads, are you comfortable with where they're at? Is there still a lot of room to go? And then maybe last one, if you were to ever leave Facebook, what would happen to your voting shares? Thank you.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [19]
+--------------------------------------------------------------------------------
+
+          All right. Let's talk about engagement first. So overall sharing is up across Facebook and people are spending more time on Facebook and the whole family of apps, and that is not just the case for the aggregate of the growing community but it's actually also the case on a per person basis as well, in terms of people sharing more and spending more time individually. Now, one of the things that we see is that the way that we are sharing is always changing. And some of this is because of underlying technical transition.
+So on desktop, for example, it was easier to type so we saw more text posts. On mobile it's easier to take videos so we see more videos. On desktop people would have more commonly uploaded an album of photos that they took from their digital camera and downloaded onto their computer, whereas on mobile the more common behavior is to take a single photo or a couple and just post those.
+There are all these transitions and that's our job, right, is to make it so that we build great tools that people, everyone around the world can share anything that they want with everyone. Now, the other thing that's also true is that people want to share with lots of different kinds of audiences. So Facebook gives you the ability to share with all of your friends and publicly if you want and with groups, but we're also investing in things like Messenger and WhatsApp, because a lot of people want to share increasingly messages, privately, one on one, their with very small groups.
+So in addition to Messenger, which is at 900 million people a month and WhatsApp just at more than 1 billion people a month. Facebook groups is also at more than 1 billion people a month, which I think represents the increasing diversity of the different types of audiences that people want to share with.
+But you know, ultimately, I think that humans have such a deep desire to express themselves and want to connect with the people around them that I think that all of these audiences and all of these different types of media should grow over time, and it's our job to basically make sure that we build good products and get rid of all of the bugs and make it so the performance is fast, and all the basic stuff works. That way we get there. But in general, right now all the high level trends look pretty positive on that. I think I'll kick it off to Dave to go through your questions about some of the technical pieces about the reclassification.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [20]
+--------------------------------------------------------------------------------
+
+          Sure. I guess also, Justin, you had a question on ad load, so I'll do both the ad load and the question on the reclassification. So on ad load it's definitely up from where we were a couple of years ago. I think it's really worth emphasizing that what's enabled us to do that is just improving the quality and the relevance of the ads that we have, and then that's enabled us to show more of them without harming the user experience at all. So that's been really key.
+Over time we would expect that ad load growth would be a less significant factor driving overall revenue growth, but we remain confident that we've got opportunities to continue to grow supply through the continued growth in people and engagement on Facebook as well as on our other apps such as Instagram. On the question regarding what would happen to Mark's shares if he were to leave Facebook, I would just kind of refer that the new multi-class capital structure is generally dependent on Mark continuing to maintain an active leadership role at Facebook.
+And if you go into the proxy materials, it goes into more detail on how different things would play out under various other scenarios, so I would just refer you to those.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          The next question is from Ben Schachter with Macquarie.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          Mark, when you're thinking about acquisitions broadly, in what area do you think Facebook needs to buy versus build? So basically where do you need external help? And then on VR, just a few quick questions. Any update on the shipping delay, how many units shipped in the quarter and expectations for the year, and then also on VR, understanding I know it's very, very early but beyond games and entertainment, what verticals do you expect to be first to utilize VR and AR? Thanks.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [23]
+--------------------------------------------------------------------------------
+
+          So on the acquisition philosophy, I mean, I talked about how I think the social ecosystem will play out an a number of these calls. The basic theory that we have is that there are a small number of services that are going to be ubiquitous utilities that1 billion or 2 billion or more people are going to want to use. That's core, basic messaging, the core functionality around having your real identity and connecting with all of your real friends and family online. Those are things that we just think are going to be ubiquitous.
+So we want to build those. At the same time, we also think that there are going to be many, many good businesses and different other social use cases where there are people doing good work and building different companies. We feel no need to own those things. So I think people come up from time to time and suggest, should we buy this company or that and what we look at are what are things that we think are going to be ubiquitous tools and who are the most talented people in the world to build this.
+And so when you think about something like virtual and augmented reality, that's how we thought about that. This is -- those are going to be important platforms over time. It's very early, obviously, it's going to take a long time to get there. And a lot of what we felt like we were buying there was a critical mass of the best people and the best technology to go do all the things that we needed to go do over the next 10 years to drive that home and turn that into a big platform.
+And then you asked a question about virtual and augmented reality, what are going to be the big use cases. I mean, you know for the first few years of virtual reality I think gaming and video are going to be the big ones. The initial market that we look at are all the people who have X-Boxes, PlayStations and Wii U's use, right? The people who are excited to have an immerse media experience sitting in their living room for a long period of time, and that's a pretty big market.
+And even though that's not all of what we hope to eventually serve, and that's not the full potential of these new platforms, I think that is one case where you can obviously deliver better and richer experiences than what you can with the current generation of technology. Video is going really well. I shared a stat before in some of my comments that on Gear VR alone we're now at more than 2 million hours of video, have been watched in the platform. So that's really exciting.
+And that of course will be bolstered by the fact that these new kind of 360 videos cannot only be watched in VR, so in the headsets, but we're building tools so you can share them on news feed and through our products elsewhere as well. So I think that's exciting. Over time there will be even more. But that I think should be enough to have some initial use.
+But again, I do want to really emphasize this is early and it's going to take a long time. And I know there's a lot of hype around this, and we're just focused on building this to be very good over the long term.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [24]
+--------------------------------------------------------------------------------
+
+          And then you asked about shipping units. We did begin shipping units in the quarter. This is a very, you know, very small still. VR is still very early. It's not going to have a material impact on revenue in 2016. And I gave more color on that in my prepared remarks.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+          The next question is from Mark May with Citi. Your line is open.
+
+--------------------------------------------------------------------------------
+Mark May,  Citi - Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Thanks a lot. First one for Sheryl, I think. Wondering if you could update us on the progress you're seeing with Fan. You gave some metrics in Q4. It seemed like that advertisers were really adopting that platform and seeing a lot of additional reach, maybe you if you could tell us how that's going, and then I think a couple more on the tax rate. We saw it step down quite a bit in Q1, but you're guiding for flat sequentially.
+Should we think about that as a run rate or are you still attempting to manage your tax rate down even further than where you saw in Q1 and we were expecting for Q2? And then on the OpEx guide, 41% non-GAAP growth in Q1, obviously below your range but you maintain the range. Why is that? Is that just purely a function of the comps as you head into the year, or are there some specific kind of investment plans that you have? Thanks.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [27]
+--------------------------------------------------------------------------------
+
+          Sure, Mark. I can start with the detailed one, the tax rate and the OpEx guide. So on the tax rate, yes, the rate came in better than guidance in terms of the tax rate, but it's consistent with the long-term trend that I've indicated. We do expect that that rate will be the approximately the rate that will continue for the rest of the year. So for purposes of 2016 modeling, I would use the Q1 rate.
+On the OpEx guide, Q1 came in slightly below our annual expense growth guidance, but we do expect that investments in areas like video and Oculus will impact the remainder of the year more substantially. So that's why we're maintaining the annual OpEx growth guidance that we have. And then Sheryl, did you want to speak about Audience Network?
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [28]
+--------------------------------------------------------------------------------
+
+          Yes, Audience Network is important to us because we're making a strategic investment in ad pack, helping advertisers and publishers grow both on and off Facebook. We think we're uniquely placed to bring people based marketing to scale and solve the measurement problem, and the Audience Network is a place we're really focused, because we feel like we're delivering value for advertisers and publishers so we're investing behind the growth we've seen.
+We've seen a growth of native ads, 83% of the overall inventory on the platform is native, and over 50% of our publishers are only using native ads. We have some great examples of Audience Network really improving people's results. Our recent one is Ebay Vivanuceous, which is an online real estate destination working in Latin America and Mexico. When they were using a combination of Facebook, Instagram and the Audience Network, they saw 57% lower cost per install with placement optimization and 69% more volume versus running on Facebook alone, which led to 6% incremental revenue.
+So compared to November a year before, the number of their app installs increased by 115%. So what we're seeing is the results we're able to deliver on Facebook and Instagram, a lot of our marketing partners want more, and our ability to do that is why we're investing in the Audience Network.
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+          The next question is from Colin Sebastian with Robert W. Baird. Your line is open.
+
+--------------------------------------------------------------------------------
+Unidentified Audience Member    [30]
+--------------------------------------------------------------------------------
+
+          Hello, this is actually Ben on for Collin. This one's for Mark. You had already talked about the AI and machine learning applications with respect to Messenger and bots, but was wondering what are some of the more nascent initiatives where you're applying machine learning or maybe where we might see those investments manifest themselves in the user experience over the next few years?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [31]
+--------------------------------------------------------------------------------
+
+          So the biggest thing that we're focused on with artificial intelligence is building computer services that have better perception than people. So the basic human senses like seeing, hearing, language, kind of core things that we do, I think it's possible to get to the point in the next five to 10 years where we have computer systems that are better than people at each of those things. That doesn't mean that the computers will be thinking or be generally better. But that is useful for a number of things.
+So for example, I talked about earlier we are building this moments app. So that way you can take photos on your phone and if you use this app, our face recognition can look at the photos that you take and suggest that you might want to share photos that you took with a friend in them, with that person. So that way all the photos that might be of you in your friend's camera rolls, they can share with you.
+Another example is just Spam filtering and just making sure we can actually read the content and understand what's interesting to you or not and not show that. One obvious thing I think over time is if you just look at the way that we rank news feeds, today we use some basic signals like who you're friends with and what pages you like as some of the most important things for figuring out what out of all of the millions and millions of pieces of content that are on Facebook, what we're going to show, and then what are going to be the most interesting things to you.
+That's because today our systems can't actually understand what the content means. We don't actually look at the photo and deeply understand what's in or look at the videos and understand what's in it, or read the links that people share and understand what's in them.
+But in the future we'll be able to, I think on a five or 10 year period. So all of these millions and millions of pieces of content that are out there, whether or not you've added someone as a friend or have liked a page, we'll be able to know a lot better what types of things are going to be interesting to you to produce some much better feed of content. So that's just a basic example of where having human level perception broadly is going to yield better experiences and a lot of the things that people care about today.
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+          The next question is from Ken Sena with Evercore. Your line is open.
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore ISI - Analyst    [33]
+--------------------------------------------------------------------------------
+
+          Hello. I have kind of a high level longer term question. But for brands, we're seeing where promotion, transaction and support capabilities for businesses are all deepening within Facebook.
+Therefore, should we be thinking about a longer term transition from the platform that's basically all ad to something where more marketplace capability is offered, given that buyers and both sellers are so known and so connected. And if so can we think about Facebook starting to monetize maybe on a transaction basis or even through various customer support capabilities, via the Messaging tools, AI, et cetera, that you're beginning to offer businesses? So maybe you could just kind of provide a little bit of color on how you how you see that evolution, that would be great. Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [34]
+--------------------------------------------------------------------------------
+
+          You're right that people are increasingly using Facebook to discover products and services. And we're testing some ways like marketplace to make this easier. We're also testing some incremental featured pages, which enable businesses to drive purchases on a page or direct people directly to their website. These are really early but we've had some positive feedback.
+Our focus, however, continues to be on our ad products, because we think we can take people all the way from the top of the funnel where they can really get a brand awareness or a product awareness and go all the way down to purchase, not necessarily because the purchase is happening on Facebook, but because we can work on the measurement systems to understand how the advertising both at the top and lower down in the funnel is influencing those purchases. We've been really excited by what we've seen in the commerce vertical of our ad products.
+So products like Dynamic Product Ads, Carousel Ads, are working really well for us. This quarter we launched Canvas Ads, which are very fast loading immerse I've mobile ads. They're easy to build. You can use the self-service tool. You don't have to write any code. They are native format so they had decrease that initial dropoff you see when people click off to another site.
+Very early days but the average viewing time is over 30 seconds, which shows you how immersive that is. I'll share one example of how ads are driving a small business on Facebook through ads, which is a company called Sparkle and Paint. They're a Utah-based SMP. They're selling girls' clothing. They did a Slide show ad that included a shop now, button which enabled you to take action on their site.
+They were able to increase sales by 9% per month, and more exciting for us, this was 6 times more efficient in terms of acquisitions than any other digital media channel. And that shows how you can use our ad products to go all the way from awareness, measuring through to a sale and show how important our ads can be to commerce on our platform.
+
+--------------------------------------------------------------------------------
+Operator    [35]
+--------------------------------------------------------------------------------
+
+          The next question is from Ross Sandler with Deutsche Bank. Your line is open.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [36]
+--------------------------------------------------------------------------------
+
+          Great. So I guess a question for Mark or Sheryl. So at F8, you showcased a bunch of new features for Messenger, including ads to promote your business inside of Messenger. So how should we think about the timing of those ad units coming on in Messenger, and can you use the same ad stack and the Facebook power editor that's used on core Facebook and Instagram to get ads up on messenger, can you just walk us through that?
+And then the second question on messaging, so with WhatsApp crossing 1 billion users recently, how do you view the product road map today on WhatsApp versus what you showcased recently with messenger? Is it a year behind or is it further back than that? Any color there would be helpful. Thanks.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [37]
+--------------------------------------------------------------------------------
+
+          For messenger and WhatsApp our focus right now continues to be on growth and engagement. We are not rolling out any monetization products on WhatsApp right now. But we did start that process at F8 on Messenger.
+And what we're doing is following the organic activity that's happening on the Messenger platform. Businesses and consumers are using Messenger to connect to each other in a more personal, more immediate way. And we rolled out a platform beta which gives new opportunities to build compelling experiences.
+Bots, very early but giving the opportunity for more personal interactions between businesses and mobile which then received API, so that businesses could send immediate responses to common questions, including engaging images and call to action as well as text. In terms of the timing this is really early. We have a lot of opportunity to invest in advertising across our different platforms, and so we want to make sure we get this right as we focus on continued engagement.
+You're right that over time when we make these investments we are going to be able to rely on some of the core aspects of the ad's infrastructure, certainly our long ad, our base of advertisers, some of the things we understand about how ads perform and the functionality will be an important part of the product offerings in the future, but those are not immediate by any stretch of the imagination.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [38]
+--------------------------------------------------------------------------------
+
+          Operator, we have time for one last question.
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+          The last question is from Anthony DiClemente with Nomura. Your line is open.
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities Intl - Analyst    [40]
+--------------------------------------------------------------------------------
+
+          Thanks a lot. I have one for Sheryl and one for Mark. Sheryl, there are many out there who might have assumed that this leg of excellent growth that Facebook is realizing might have come at the expense of TV advertising, but the TV ad world seems to be quite resilient here and you actually talked a lot in your prepared remarks about how marketers benefit from running digital and TV campaigns in parallel.
+So I wonder if you could just comment on where your share gains are coming from in your view. And then Mark on live video, I realize this is a small part of overall video, but I wonder do you think multiple platforms can succeed in live streaming over time, given the size of the market longer term, or do you think it's more of a network effect business where a vast majority of the traffic and economics will ultimately accrue to the leader in the live streaming space? Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [41]
+--------------------------------------------------------------------------------
+
+          We think our growth has been very broad based, but dollars are shifting from all types of media formats to where consumers are spending their time. We tell our clients that we want to be the best dollar and the best minute they spend and we want them to measure value. I don't think this means that all of our expense comes in -- all of our growth comes at the expense of any one channel, but it's broad based and often TV and Facebook and Instagram can work really well together.
+I'll give a fun example from the Super Bowl. T-Mobile wanted to use their Super Bowl campaign to increase their brand awareness and increase their reach. So before the game they targeted their 30 second Super Bowl ad that featured Drake to NFL and people with NFL and celebrity interests. It performed so well that they decided to run the 60 second version on Facebook and Instagram.
+That ad was so successful on Facebook and Instagram that they then ran the 60 second ad on TV instead of their 30 second ad. So as people invest they can use these different platforms together and we're pretty excited to see that progress.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - Chairman & CEO    [42]
+--------------------------------------------------------------------------------
+
+          And on live video, the theme that I think is most important is just that there's so much that people want to express and share with the people around them that they don't have the tools to do today. And I think that's a huge opportunity not just in live video but in a lot of the things that we're talking about.
+One interesting example recently that I touched on earlier is between Messenger and WhatsApp, we're around 60 billion messages a day, and SMS at its peak we think was around 20 billion messages a day. Just unlocking some of the friction that existed in SMS and improving the product a little bit and removing the small fee that was there has just unlocked a huge amount of expression. And we think that this is going to be the case in all different types of media and with all different audiences that a person would share it with.
+So in video, there are billions and billions of videos that are viewed every day on Facebook. Live is a very small part of it. The reason why we give disproportionate attention to it is because we're trying to help push forward new formats that are not just about consuming content but are really about interacting, so live 360 video, and there will be others in the future. And so, yes, to answer your question, I do think that multiple products and companies can succeed in building these things.
+I also think that there are go going to be a lot more interactive forms of video than just live and 360, like we're talking about now. And I think that this extends not just to video but for all of the different types of media and audiences that we're serving. So we're very excited about continuing to do our work to help unlock all the expression and connection that people want to do.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [43]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+          Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2016-Apr-28-AMZN.OQ-137577237096-Transcript.txt

@@ -0,0 +1,541 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2016 Amazon.com Inc Earnings Call
+04/28/2016 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com, Inc. - CFO
+ * Phil Hardin
+   Amazon.com, Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Carlos Kirjner
+   Bernstein - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Ron Josey
+   JMP Securities - Analyst
+ * Brian Pitz
+   Jefferies LLC - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Stephen Ju
+   Credit Suisse - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Bob Peck
+   SunTrust Robinson Humphrey - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Aaron Kessler
+   Raymond James & Associates, Inc. - Analyst
+ * Benjamin Schachter
+   Macquarie Research - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to the Amazon.com Q1 2016 financial results teleconference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Phil Hardin. Please go ahead.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello and welcome to our Q1 2016 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks. The following discussion and responses to your questions reflect management's view as of today, April 28, 2016 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 and subsequent filings.
+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 2015. Now, I'll turn the call over to Brian.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Phil. I'll begin with comments on our first-quarter financial results. Trailing 12-month operating cash flow increased 44% to $11.3 billion. Trailing 12-month free cash flow increased to $6.4 billion, up from $3.2 billion. Trailing 12-month free cash flow less lease principal repayments increased to $3.5 billion up from $1.5 billion. Trailing 12-month free cash flow less financed lease principal repayments and assets required under capital leases increased to $1.6 billion, up from an outflow of $1.2 billion.
+Trailing 12-month capital expenditures were $4.9 billion. Capital expenditures do not include the impact of property and equipment acquired under capital and finance and lease obligations. These capital expenditures and capital leases reflect additional investments in support of continued business growth due to investments in technology infrastructure, the majority of which is to support AWS and additional capacity to support our fulfillment operations.
+The combination of common stock and stock-based awards outstanding was 490 million shares compared with 483 million one year ago. Worldwide revenue increased 28% to $29.1 billion, or 29% excluding the $210 million unfavorable impact from year-over-year changes in foreign exchange. Worldwide active customer accounts, excluding customers who only had pre-orders in the preceding 12-month period, exceeded 285 million. Worldwide paid unit growth was 27%. Worldwide seller units represented 48% of paid units.
+Now, I'll talk about our segment results. In the first quarter of 2016, we began to allocate stock-based compensation and other operating expense net to our segment results. These amounts are combined and titled stock-based compensation and other in our segment results and reflect the way we now evaluate our business performance and manage our operations. For reference this quarter, I'll also mention segment operating income excluding stock-based compensation and other.
+In the North America segment, revenue grew 27% to $17 billion. Media revenue grew 8% to $3.2 billion. EGM revenue grew 32% to $13.5 billion. North America segment operating income including stock-based compensation and other was $588 million, a 3.5% operating margin compared with $254 million in the prior year. This includes $5 million of favorable impact from foreign exchange. North America's segment operating income before stock-based compensation and other was $924 million, a 5.4% operating margin compared with $517 million in the prior year.
+In the international segment, revenue grew 24% to $9.6 billion. Excluding the $177 million year-over-year unfavorable foreign exchange impact, revenue growth was 26%. Media revenue increased 7% to $2.5 billion, or 9% excluding foreign exchange. EGM revenue grew 31% to $7 billion, or 33% excluding foreign exchange. International segment operating loss including stock-based compensation and other was $121 million compared with a loss of $194 million in the prior year. This includes $21 million of favorable impact from foreign exchange. International segment operating income before stock-based compensation and other was $20 million compared with a loss of $76 million in the prior year.
+In the Amazon Web Services segment, revenue grew 64% to $2.6 billion. Amazon Web Services segment operating income including stock-based compensation and other was $604 million, a 23.5% operating margin compared with $195 million in the prior year. This includes $24 million of favorable impact from foreign exchange. Amazon Web Services segment operating income before stock-based compensation and other was $716 million, a 27.9% operating margin compared with $265 million in the prior year.
+Our operating income includes stock-based compensation expense and other operating expense. Operating income was $1.1 billion, or 3.7% of revenue, up approximately 260 basis points year-over-year. This includes $50 million of favorable impact from foreign exchange. Consolidated segment operating income before stock-based compensation and other was $1.7 billion, or 5.7% of revenue compared to $706 million in the prior year. Our income tax expense was $475 million. Net income was $513 million, or $1.07 per diluted share compared with a net loss of $57 million, or loss of $0.12 per diluted share.
+Turning to the balance sheet, cash and marketable securities increased $2.1 billion year-over-year to $15.9 billion. Inventory increased 30% to $9.6 billion, and inventory turns were 8.6 down from 8.8 turns a year ago as we expand selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 26% to $15 billion, and accounts payable days increased to 72 from 70 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable, and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as changes in global economic conditions and customer spending, world events, the rate of growth of the internet, online commerce and cloud services, and the various factors detailed in our filings with the SEC. It is not possible to accurately predict demand, and therefore, our actual results could differ materially from our guidance.
+As we describe in more detail on our public filings, issues such as settling inter-Company balances in foreign currencies among our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rate can all have a material effect on our results. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they've been recently.
+For Q2 2016, we expect net sales of between $28 billion and $30.5 billion, or growth of between 21% and 32%. This guidance anticipates approximately 70 basis points of favorable impact from foreign exchange rates. Operating income to be between $375 million and $975 million compared with $464 million in second-quarter 2015. This includes approximately $825 million for stock-based compensation and other operating expense net.
+We are grateful to our customers and remain heads-down focused on driving a better customer experience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks. And, with that, Phil, let's move on to questions.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [4]
+--------------------------------------------------------------------------------
+
+          Great. Thanks, Brian. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions)
+Our first question is from Mark May of Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thanks a lot. Lots here, but international retail revenue -- the international retail segment really stood out. Revenue accelerated. Seemed like a bit of a milestone also that the CSOI turned positive in a non-Q4 quarter. Can you shed any more light in what the key driver there was? And, how sustainable it is? And, AWS just mathematically, the comps get tougher starting in Q2, just given what happened in 2014. Is that something that we should be taking into account in terms of thinking about how the rest of the year may progress? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Sure. Your first question on international. Yes, all three segments had very strong growth in the quarter. International's 26% for FX-neutral growth rate was actually the strongest we've seen in 3.5 years. I would attribute it to the Prime Fly Wheel. As we may have mentioned in the past -- feel that Europe and the large countries in Europe and Japan are a few years behind the US on a lot of the key Prime metrics, but we also said last year that Prime subscriptions were up 51% year-over-year in 2015. 47% of that was in the US and a higher rate than that internationally.
+So, certainly a lot going on in the international. A lot that's really good adding Prime subscribers at a high clip. Continuing to add selection at FBA sellers. So, you'll see devices, you see video content. It's the whole array of Prime offering. Prime Now, Same-day, everything is in Europe. Maybe getting there a little slower than starting point at the US. We see it really showing up in customer engagement and customer purchases.
+On the AWS side, I think the 2016 to 2015 comparison probably stands on its own and 2014 falls by the wayside so I would encourage you to look at recent trends. We don't forecast, obviously, by segment.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [5]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. Just wanted to ask you about unit growth overall and if we look back over the last three quarters, you've accelerated it now to a materially higher level than what we saw in 2014 and the first half of 2015, and I realize in 3Q last year you had Prime Day. I was hoping you could comment on the overall acceleration we've seen here and key drivers behind that? And, if there's something different perhaps than what you talked about on international?
+Also, on AWS, can you talk about the underlying drivers here of margins and thinking about that a little bit going forward primary sources of leverage? As you open up six new regions in coming months, should we expect this to be constant build-out? Or, something that's more lumpy over time and more in waves? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [6]
+--------------------------------------------------------------------------------
+
+          This is Phil Hardin. I'll take the units question. Really the units are driven by very similar trends to what Brian described. When we look at the bridges for revenue, and obviously, units is our key driver of revenue. Things like Prime are key in that bridge. I would also call out selection growth. That has been a big area of focus for us.
+One important way we drive selection is through FBA. We continue to be very pleased with the progress we're making in FBA. What that means for our Prime customers is there's more for them to choose from. Obviously, that gives them more they can purchase. It makes Prime more valuable. For sellers, it means they sell more. I would say that FBA is helping drive some of the selection growth we're seeing here. Selection growth and Prime though are two very key drivers of our growth. On the second part, I think Brian -- .
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+
+          One other comment I didn't say earlier, I do want to point out that because of the leap year there was an extra day in Q1. Every Company would have seen this obviously. But, we estimate it was worth about 150 basis points to our growth rate in revenue. That would be consistent North America and international.
+Your other comment -- question was on AWS and a bit about margins and margin outlook. We're very pleased with the quarter. We came in at 23.5% operating margin on the new basis including stock-based compensation and other. We're very pleased. But, stepping back with the 64% growth in AWS which is now a $10 billion business. On the margin side, I would caution you that we're pleased, but it is very early to start drawing too many conclusions on the long-term margins in this business. They'll be bumpy over time. At any point in time, they are going to reflect the balance of investing including global expansion that he's talked about. Price reductions we may offer and also driving cost efficiency which for us is a very important driver in not only this business but also the North American and international segments.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+          Our next question is from Heath Terry with Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [9]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. Looking at the active customer account number, it looks like growth slowed pretty significantly, about 10 percentage points. Just curious if you can give us a sense of anything that might be throwing that number off, assuming we're reading it the right way? And then, as you roll out on AWS -- as you roll out the fixed new availability zones over the course of the year, is there a way to quantify what kind of an impact that's going to have on the capacity at AWS?
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [10]
+--------------------------------------------------------------------------------
+
+          I'll take the first part of your question about active customers. As we look at our metrics and what information we provide each year, we often make some changes. So, this quarter we only gave the active customers with a paid purchase in the trailing 12 months. So, that number was more than 285 million. I think that's pretty similar to the trend that we've seen in that metric.
+In the past, sometimes we had also given a total active customers count. That number for this quarter was over 310 million so that may be where you're making the statement about the slowdown in growth. The trajectory was very similar from prior quarters for both of those numbers. But, we opted just to give the other one, but you now have the number for the total number of customers as well.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [11]
+--------------------------------------------------------------------------------
+
+          And, on your AWS footprint question so we ended the quarter with 33 availability zones and 12 geographic regions, and we have 11 more availability zones opening in the next year. The impact on capital, yes, there will be additional capital investment as we build out those zones. Some of it has already taken place. But, I'll also say that by and large, the largest increases in capital leases is to support the growth of incremental usage of customers we have now and agreements we have now. You should expect to see us continue to invest to support this business. We have a leadership position. We intend to maintain it, and we're very excited about where we are.
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+
+          Our next question is from Brian Nowak with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [13]
+--------------------------------------------------------------------------------
+
+          The first one is on Prime. You've had two straight years of around 50% Prime subscriber growth. Curious about how you think about keys to driving Prime sub-growth going forward? And, the thought process behind the reported monthly Prime subscription? And, the second one on the logistics investments, there's been a lot about truck investments and logistics investments. Any comments at all about learnings, and what you're seeing from some of the investments in your truck fleet and your own delivery network? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [14]
+--------------------------------------------------------------------------------
+
+          Let me start with the Prime. Yes, we have had very strong growth the last two years and earlier obviously on Prime growth of members. I would say it's a culmination of a lot of separate investments that we're making. If you look at the success of our devices, we are seeing tablets sell twice the volume in Q1 year-over-year. Fire TV stick, you may have read in our press release that it has greater than 100,000 customer reviews, the most reviewed product ever. Over 62,000 of those reviews are 5-star reviews. We've not only had the Echo, but we have the Echo Dot and Tap. We're branching off that product line and having trouble keeping those in stock. And, of course, we launched the new Kindle Oasis, our e-reader.
+That is an important part of the series as is the digital content. You may have seen the recent announcements that we're working on a great amount of new content for Prime members. Customers love the content, and we like the results we see particularly around Prime free trial conversion and renewal rates for subscribers who use and take advantage of Prime. So, beyond the awards that the content is winning and the success we're having with Amazon particularly Amazon Originals, we feel that program is working. We're going to significantly increase our spend in that area. Some of that is in Q2. You'll see that more in the next few quarters. But, we think that's working and look forward to bringing a lot of new content to our Prime subscriber base. Both to our normal Prime subscription and also the monthly plan that you alluded to.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [15]
+--------------------------------------------------------------------------------
+
+          This is Phil Hardin. I'll jump in on the second part of your question. For the trucks, really it's trailers. The typical use case is running a lag between a fulfillment center and a sort center. So, we're running enough volume there that we were using trucks already. We thought it made sense to go ahead and buy some trailers. We're actually still contracting out for the truck part, and it gives us flexibility. We think the economics will make sense over time. Similarly, we've announced an agreement to lease some airplanes with air transport services group, agreement to lease up to 20 Boeing 767s there. And, similar use case, it's products that are already boxed, and we think again this is activities we've been doing already which means we grow at a very rapid rate. This gives us extra capacity, and we think it's good to be able to deliver to customers. We think it makes sense over the long-term.
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+
+          Your next question comes from Mark Mahaney of RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [17]
+--------------------------------------------------------------------------------
+
+          Great. Two questions related to Prime overseas. Could you talk about the status of Prime in international markets? How far rolled out it is in most of your major markets? Then, you talk about Prime Fly Wheels, and you did last year. But, it seems likes those Fly Wheels spun faster than you expected in the fourth quarter of last year that caused some near-term expense issues for you? Can you talk about how you're thinking about planning against that as the Prime Fly Wheels are getting broader for you, how do you try to get ahead of that into the peak season later this year? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [18]
+--------------------------------------------------------------------------------
+
+          Sure. This is Brian. Let me start with the second question first. It wasn't necessarily the Prime Fly Wheel that was the issue. It was more the FBA demand that we had from FBA sellers for space in our warehouses. We were very full. It was a high-class problem to have.
+But, as I mentioned last quarter, it did result in higher fulfillment costs in the fourth quarter as a result. I think you'll see some of that dissipated now in Q1. You can tell it was a Q4 issue.
+We learn from every Q4. This one was no exception. We are already making plans for a smoother Q4 next year. We will continue to add fulfillment capacity. We'll work with FBA sellers on inventory stocking and timing, and we think that there's things that we can do better as we do every year, come out of the fourth quarter with immense learnings.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [19]
+--------------------------------------------------------------------------------
+
+          This is Phil. On the Prime question, we launched Prime in the US in 2005. Followed that in 2007 with UK, Germany, and Japan. And then, other countries after. We have Prime in all the countries where we have marketplaces with the exception of Mexico, China, and India.
+And, Prime is really in varying stages in those countries. We have some kind of an expedited shipping offer in all of them. Here in the US, we've been talking quite a bit about Prime Now. That's also in Italy and Japan and the UK at this point and not others. Also, varying levels of digital benefits as well.
+Generally, the international countries are not as far along with selection or the fullness of the digital offers. We've got Prime Video in the UK, in Germany, and Japan. Music is not fully rolled out yet all together. That's where we are with Prime.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Carlos Kirjner with Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Bernstein - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          Thank you. I have two. I think it's the first time 1Q 2011 that we see tech and content counted as a percentage of revenue declining or flat. Is it just a sign of your inability to increase investment in line with revenue growth? Or, is there something going on, if yes, what?
+Secondly, Brian, you said that the growth of Prime has been driven by investments you have made or are making. You gave the examples of devices that you are selling. I think it's a mathematical certainty that Prime subscribers would accelerate in North America at some point from 50% growth. As penetration increases and growth slows, will we see a deceleration in the investment levels? In other words, how do we think about the effect of deceleration in Prime on the North American margin structure in the future? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [22]
+--------------------------------------------------------------------------------
+
+          Sure. Let me start with that second one. We think there's a lot of room to grow not only in our international countries but also in the US. We plan on continuing to build the benefits of the Prime program from music to video to two-day shipping to same-day shipping to Prime Now. I don't see that dissipating, and it remains the best deal in retail so hopefully everyone signs up for that.
+On the tech and content question, I don't have a lot to call out in the quarter. I would say there's no letup in the pace of invention here particularly on the AWS side. We used quote the number of new features and services to you each quarter. We had 214 in Q1 up from the 170 this first quarter of last year. Over 26% growth in this quarter alone coming off a year where I believe the number was 722 significant new features and services delivered for AWS customers last year.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Brian Pitz of Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Thanks for the question. Any comments on your business in India? How is that market ramping up? On the competitive front there, any sense of where the local incumbents may actually have some advantage in the region? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [25]
+--------------------------------------------------------------------------------
+
+          Thanks. I actually just returned from India where I spent a week with our teams in Bangalore and Hyderabad. We're breaking ground on a new 10-acre campus there. So, we are solidifying and increasing our investment in India on all fronts.
+I had a chance to see firsthand the level of invention going on with both customers and sellers making deliveries to customers, seeing the I have space program we have with merchants. It's a very exciting time in India, and again, the invention is off the charts. We're inventing things in India that do not exist in other parts of the world. And, the team there is one of our best. You can see it in some of the external commentary as well. For the second year in a row, customers selected Amazon India as Amazon's most trusted online shopping brand.
+During the quarter we rolled out a feature called Tatkal which is a studio on wheels that we go to the sellers to help them sign up. We let them do registration, imaging, catalog, uploads, and basic seller training. We're taking it to the sellers -- taking the business to the sellers. We've already reached sellers in 25 cities, and we're really helping them expand their business. Not only within their home region, throughout the whole country.
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Justin Post of Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [27]
+--------------------------------------------------------------------------------
+
+          Thanks. My question is on the international margins. They're quite a bit below where they were many years ago and trailing the US. Maybe talk about the dynamics there and what is it going to take to catch up over time? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [28]
+--------------------------------------------------------------------------------
+
+          Sure. On the op margin side, although there was improvement year-over-year, you're right, it is still on an FX-neutral basis negative. We have, as I said earlier, fulfillment network and digital content. We continue to build the underpinnings of the Prime program in our international countries. You also have to keep in mind that we're making large investments in India. We're very excited about what we see. And, we will continue to invest heavily in India.
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Ross Sandler with Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [30]
+--------------------------------------------------------------------------------
+
+          Great. I just had two questions on AWS. First, last fall at re:Invent, you disclosed that data management revenue was at a $1 billion run rate. Can you provide an update on that figure? And, maybe talk about how much of AWS revenue today is outside of the storage and compute layers.
+And then, the second question is on the AWS margin. I think everybody is trying to learn more about the structural long-term margin, and it was down a tad quarter-on-quarter. Is that solely from FX impact? Or, was there some seasonality of expenses? Any color on what's driving the AWS margin, and how we should think about that over the longer term? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [31]
+--------------------------------------------------------------------------------
+
+          I'll take your second question first. So, again, we had margin expansion year-over-year that was quite significant from 12.4% to 23.5%. But, again, it's very early in this business. We're very pleased with the results we're seeing on the top and bottom line. But, margins are going to be bumpy and affected by levels of investing, price reductions, and also cost efficiency that we're driving. So, quarter to quarter, it will very. We are concerned at this point about capital efficiency, returning price to customers periodically with price reductions, and adding feature sets for them to make the business more valuable.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [32]
+--------------------------------------------------------------------------------
+
+          This is Phil. For your other part of the question, we're not providing an update on the $1 billion stat. What I would say is that the AWS team has strong revenue growth across their suite of products. The fastest growing product in their history is actually Aurora, the new database. We're very excited by what we're seeing in that space, but we're not breaking out the revenue for those various components today.
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Eric Sheridan of UBS Investment Research.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. Looking at the gross margin, impressive performance in Q1. There were a few headwinds it looked like in gross margin in Q4. Wanted to understand how we should think about the puts and takes in gross margin. It has evolved to be a much higher number in the last few years. What some of the puts and takes are going forward especially with respect to content costs? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [35]
+--------------------------------------------------------------------------------
+
+          Sure. I don't have a forecast for you on content cost in isolation or really forward looks on anything besides the guidance I've given you. Yes, it hits in the gross margin. Content costs do show up there. I think the bigger issues that you should look at in gross margin, and again, starting with the comment that we expanded by 300 basis points year-over-year. That is really driven by, first of all, the AWS growth. And again, $10 billion business growing 64%. We're very pleased with that, and that affects gross margin as well.
+The other bigger element though is the third-party contribution. Third-party units are now up to 48% of paid units, and that's up 400 basis points year-over-year. That continues to be a factor in gross margin. We book that on a net basis. The third-party revenue. It's a positive factor in gross margin. It can be a negative factor in fulfillment costs and some of the other metrics.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [36]
+--------------------------------------------------------------------------------
+
+          This is Phil. Also, just to jump in, gross margin is not the primary metric we use to measure the business. We're much more focused on free cash flow dollars and operating profit dollars. So, there are a whole lot of moving parts in gross margin, and Brian mentioned a lot of them. But, it's not a primary metric for us.
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Aaron Kessler of Raymond James.
+
+--------------------------------------------------------------------------------
+Aaron Kessler,  Raymond James & Associates, Inc. - Analyst    [38]
+--------------------------------------------------------------------------------
+
+          Thanks. Couple of questions. First, if you can update us on your new advertising initiatives in terms of how the sponsored links are performing? Additionally, if you can give us an update on Prime Now. Seems like you've rolled out a number of cities for that. How that's involving and the traction with Prime Now? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [39]
+--------------------------------------------------------------------------------
+
+          We're very excited about the advertising business, and we think it's still very early days for this opportunity. So, it's an offering we've been working on. We're trying to take a very customer-centric approach. You've probably noticed some changes in the treatment on the website, and we did move away from text ads and product ads in favor of some of the other, newer products. We're really excited about the opportunity there is for third-party sellers and for other vendors on the site. But, we're not breaking out numbers today.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [40]
+--------------------------------------------------------------------------------
+
+          On Prime Now, we're now in 30 metro areas. Really from a standing start 16 months ago when we opened our first Prime Now location, and it's now a worldwide business in the US, UK, Italy, and Japan. The five cities we added in the first quarter were Raleigh, North Carolina, Cincinnati, Tampa, Liverpool, England, and Osaka, Japan.
+How do we feel about that business? Again, it offers tens of thousands of daily essential products. We think it's a service that customers like. Certainly is hard for companies to do. We think the natural evolution of our operations network and our scale gives us a chance to do this, and we are happy to invest in it as a service for our customers. We're taking a long-term approach on this one though.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Stephen Ju of Credit Suisse.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Thanks. Your capital lease-driven property and equipment acquisitions is down again year-over-year. So, will you help tie this to perhaps the overall usage growth at AWS? Or, maybe the changing nature of how your enterprise customers may be using the platform to be more compute versus storage or database-heavy? I think historically on the e-commerce side, you have been price followers as opposed to price leaders. AWS, you have been price leaders for the most part for actively taking down price. Now, given your leadership position, do you think you'll continue to be price leaders? Or, do you think it's now time for you to follow instead? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [43]
+--------------------------------------------------------------------------------
+
+          Let me start with your CapEx question. We like to look at both capital expenditures and capital leases because they're both essentially our level of investment. Those totaled $9.5 billion in the trailing 12 months, and it was up 7% from the 12-month period ending this quarter last year. I will point out that the prior year was $6.1 billion. We have stepped up investment. Although it did not go up as much year-over-year this quarter, we are still spending almost $10 billion on what essentially is fulfillment capacity in support of really strong growth -- unit growth in FBA and global expansion and then also on AWS. Additional capacity for existing customers as they grow their business and also in new regions. We've been working and continue to work very hard on capital productivity. It's very important to us and I attribute a good piece of the ability to keep that at a modest growth rate year-over-year to our capital efficiency and better purchasing across all capital and capital leases quite frankly. But, again, we are spending almost $10 billion.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [44]
+--------------------------------------------------------------------------------
+
+          Stephen, this is Phil. Just to jump on the usage growth comment, we continue to see really strong usage growth. We're not in the business of raising prices. We lower prices for AWS. There can be mix for products, but by and large, if you see our revenue growth, we're also lowering prices which means that by math we're typically going to be growing usage at a very strong rate. Just wanted to jump on that.
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+          Our next question comes from John Blackledge of Cowen and Company.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [46]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. The North American EGM segment outperformed our expectations of growth accelerating on a year-over-year basis. Given you don't break out GMV by vertical within the EGM segment and given the strong growth at massive scale, can you cite any key verticals that were particularly strong?
+Second question is just an update on Fresh. Rollout has obviously been much slower than Prime Now. How should we think about the Fresh rollout and the impact over the long-term? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [47]
+--------------------------------------------------------------------------------
+
+          This is Phil. I'll take the EGM question first. So, just to put numbers on that, the year-over-year in the US, or North in America, was 32% growth which was up from 28% in Q4. There's not any single categories we're calling out there. To grow on a base that big, that kind of rate, you need pretty strong performance across the board. A lot of categories are selling a lot. It's a lot of the drivers we talked about. As Brian mentioned on the revenue growth side -- Prime, selection growth. We also benefited from the extra day in quarter due to the leap year. Strong performance from many of the categories.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [48]
+--------------------------------------------------------------------------------
+
+          On Amazon Fresh, we continue to have a strong Fresh business in a number of cities in the US. We know customers love it. We're making good progress on the economics. You'll also notice we have other ways for people to buy consumable products. We have Prime Pantry. We have Prime Now. We're playing with a lot of different models to see what resonates with consumers, and it will guide our investment decisions going forward.
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Ben Schachter of Macquarie Equities Research.
+
+--------------------------------------------------------------------------------
+Benjamin Schachter,  Macquarie Research - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          First, congratulations on the great quarter. Couple on Prime and one on China. First, a point of clarification. You answered a previous question by saying that you will significantly increase investment in Prime. Was that specifically in reference to video? Or, should we expect new types of offerings beyond video and music?
+And, secondly on Prime, membership is likely hitting some saturation levels for certain demographics in the US? Do you intend to focus on more lower income households for growth there? Then finally, on China, anything notable to call out there that's been different over the recent past driving results? The free trade zone, et cetera?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [51]
+--------------------------------------------------------------------------------
+
+          I'll take the first question on content. Yes, my comment on Prime benefits was essentially one about video content and our investment there. Not saying other investments may not go up as well, but that is the one we're focusing on that I called out.
+On the comment about Prime -- I guess what I'll call availability or saturation. I think that's one of the thoughts behind our monthly plan. We want to create flexibility for consumers to try Prime in a low cost way if that's how they choose. We've always had our free trial program, but it is a hurdle for many people, or there's a hesitancy to put up a full year's payment for a year of Prime. Annual is still going to be a better deal. But, we know customers may try it more frequently if it's a monthly plan. And, that's what we're looking for. We know that once customers try it, generally they'll really like it. So, we think that will purge some other demographic groups as well.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [52]
+--------------------------------------------------------------------------------
+
+          This is Phil. Another comment on the Prime. Your saturation question. Keep in mind, even in the US, which is our most mature by years of launch, we still grew last year at 47% year-over-year membership growth, and we continue to make the program better and better. I think the monthly offers are great for flexibility. Give people a chance to try new ways, and we continue to add content. We continue to add selection. Prime Now is a huge benefit that didn't even exist two years ago. We're still out trying to meet as many customers as possible. We're very committed to driving Prime and it's part of the Company.
+Your question on China, probably the biggest thing to point to is more progress and selection on the Amazon global store. This is our website -- this is the offer that allows Chinese customers to shop from the US website, Amazon.com with prices in RMB and with Chinese language pages. It's focused on items that may be hard to get. And, Amazon is really trying to become the trusted source for many of these goods. So, really that's a big part of the focus. If you've been tracking that number over time, we're now up over $10 million which is good progress on that front.
+
+--------------------------------------------------------------------------------
+Operator    [53]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Ron Josey of JMP Securities.
+
+--------------------------------------------------------------------------------
+Ron Josey,  JMP Securities - Analyst    [54]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. I want to go back to North America but focus on margins. 5.5%, 5.4% margins, I think that's the highest level since maybe Q2 2010 and resumes the margin expansion we saw for most of last year. Just hoping we can understand -- help us understand a little more what's driving that? I'm sure the more mature Prime Fly Wheel you mentioned that's happening in Europe. Is there anything else that's going on besides Prime Fly Wheel, maybe more efficient shipping or things along those lines? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [55]
+--------------------------------------------------------------------------------
+
+          I'll start. You see the growth rate of the segment at 27%. It's showing the success we're having with customers. When we grow at that clip, we can do a lot of good things with it. We can on the cost side run our facilities more efficiently. We can buy better. We can look to in-source some things that we may have paid externally for. There's a number of things that we can do that I think will show up on the bottom line. But, principally, what we're trying to do now is make the Prime experience as strong as possible for consumers.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [56]
+--------------------------------------------------------------------------------
+
+          This is Phil. The other thing I would add to that is that the margin you see in any quarter is the output of our rate of investment in some places and drive for efficiencies in others. We're not really trying to optimize for any particular number in a given quarter. We're just trying to make the best decisions we can to grow long-term free cash flow per share. We're juggling the investment in the places where we feel like we have long-term opportunities where we need to invest with making sure we're getting continuously better in all our other processes at the same time.
+
+--------------------------------------------------------------------------------
+Operator    [57]
+--------------------------------------------------------------------------------
+
+          Our final question will come from Bob Peck of SunTrust.
+
+--------------------------------------------------------------------------------
+Bob Peck,  SunTrust Robinson Humphrey - Analyst    [58]
+--------------------------------------------------------------------------------
+
+          Thank you. Two quick ones. Back to India for a second, I was wondering if you could talk about the regulatory environment there, particularly how it pertains to Amazon cloud tail? Two, on logistics, could you talk about excess capacity in logistics as you build out air, freight, sea, et cetera. Would you ever entertain delivering other Companies' items, i.e., like a FedEx or UPS?
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [59]
+--------------------------------------------------------------------------------
+
+          This is Phil. I'll take the India question. We're happy to see the recent clarifications. Then, we're happy to operate in any regime. Frankly, the more clarity the better.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [60]
+--------------------------------------------------------------------------------
+
+          Then, on the logistics question. Stepping back, the reason we add logistics capability and transportation capability is so we can serve our customers faster and faster delivery speeds, and we've needed to add more of our own capacity to supplement our carriers and partners. They're still, again, great partners, have been, and will continue to be for the future. But, we see opportunities where we need to add additional capacity, and we're filling those voids.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com, Inc. - Director of IR    [61]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [62]
+--------------------------------------------------------------------------------
+
+          This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
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exam/original-files/Problem_1_Sample/2016-Jan-27-FB.OQ-137249190020-Transcript.txt

@@ -0,0 +1,516 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2015 Facebook Inc Earnings Call
+01/27/2016 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook, Inc. - Director IR
+ * Dave Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Carlos Kirjner
+   Bernstein - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Paul Vogel
+   Barclays Capital - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Michael Nathanson
+   Moffett Nathanson - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Anthony DiClemente
+   Nomura Securities Intl - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Facebook fourth-quarter and full-year 2015 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. 
+(Operator Instructions) 
+This call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon, and welcome to Facebook's fourth-quarter and full-year 2015 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO, Sheryl Sandberg, COO, and Dave Wehner, CFO. 
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release, our annual report on Form 10-K, and our most recent quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 
+During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.SB.com. Now, I would like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah. And, thanks, everyone, for joining us today. Overall, Q4 was a strong quarter and a great end to the year. More than 1.59 billion people now use Facebook each month and 1.04 billion every day. Our growth of nearly 200 million people monthly and 148 million people daily this year. More than 1.44 billion people use Facebook on mobile devices. 
+And, when it comes to our business, we're also pleased with our continued growth. Total revenue grew by 52% year-over-year to more than $5.8 billion, and advertising revenues grew by 57% to reach more than $5.6 billion. But, it's important to consider not just our business results, but also how we're improving the lives of people and communities around the world. 
+Next week, Facebook celebrates its 12th birthday, and as I think about our progress and where we go from here, I have reflected on the diverse global moments that Facebook was involved in in 2015. More than 950 million people received a notification that a friend or a loved one was safe in a crisis. Millions of people supported the people of Nepal after the earthquake and the people of France after the Paris attacks. More than 8 million people used 35,000 groups and pages on Facebook to support refugees. And, people from all over the world connected around moments from Star Wars to the US presidential election, from the Indian super league to the Cricket World Cup. 
+Seeing our global community connecting in all of these ways shows the opportunities ahead as we connect the world, but also the challenges. Even as the world has tended towards greater openness over time, in many communities we also see greater fear over what a connected world and more technological progress means for them. 
+Addressing these concerns is essential for making progress on our mission, and we're going to keep working to give as much voice as we can and advance the benefits of connectivity and bringing the world together. In 2016 and beyond, we're going to continue doing that by serving our community, working to bring connectivity to billions of the people who are not yet connected, and building new technologies that give people more ways to express themselves. 
+Now, let's talk about how we've continued working to do that, and let's start with how we're improving our existing products and businesses. Our strategy here is to deliver better, more engaging experiences for our community and to give people better tools for sharing different types of content with the different groups of people that they care about. 
+Video is an important part of the Facebook experience and continuing to invest here is important for allowing people to share and consume some of the most engaging content. We've continued to make progress, and now 100 million hours of video are watched daily on Facebook. We've been testing new experiences, like suggested videos, which enables people to discover more videos they might be interested in. We're also exploring ways to give people a dedicated place on Facebook for when they just want to watch videos. 
+With other parts of our core, we've continued to focus on improving the performance and quality of our products to better serve different communities on Facebook. And, these efforts are paying off with growth and engagement for different products reaching an impressive scale. 
+Now, more than 500 million people use events each month, and more than 123 million events were created on Facebook in 2015. For the first time, more than 1 billion people used groups in a single month on Facebook. It's inspiring to see all the different communities using groups from the small family and classroom and church groups, to the large ones, like the running challenge group that I started a few weeks ago that now has about 100,000 members. 
+To serve our entire global community, we're optimizing our services for people in developing countries. We've improved Facebook Light to offer a better experience in low bandwidth environments, improving load times, and adding features like video. More than 80 million people now use Facebook Light as of December. 
+And, when it comes to serving businesses, we've continued to focus on creating better ads and tools for our more than 2.5 million active advertisers. More than 50 million small businesses now use pages on Facebook, and people post more than 2.5 billion comments on these pages each month. This is a good example of how the strength and engagement of our community is making Facebook more valuable for businesses every day. And, Sheryl is going to talk more about this in a minute. 
+Next, let's talk about how we're building our next generation of services. With Instagram, we've continued to drive the shift towards more visual content online. The community continues to grow, and back in September, we announced a new milestone of 400 million monthly actives. 
+Over the last year as the community has grown, we've focused on building engaging new experiences for the community, including by improving search and by introducing trending content. We've also worked to develop new experiences to give people more options for creating and sharing different types of content. In March, we launched the layout app, allowing people to easily combine images. In October, the team also launched Boomerang, an app for making looping videos which reached number one in the app store in more than 70 countries. 
+We also introduced a new video channel on Instagram for people to watch moments from big events, like New Year's or the college football championship as they happen. With messenger and WhatsApp, we've continued to make progress with building these into valuable communication services for everyone in the world. 
+More than 800 million people now use messenger monthly. In 2015, we grew that number by almost 0.25 billion, while also increasing engagement. We continued to give people new ways to communicate by introducing video calling and new options for customizing conversations with fun things like colors and emojis and by using apps through the messenger platform. 
+We also worked to expand messenger's utility by adding payments, a new way to connect with businesses, and by testing M, a digital assistant powered by AI. In this quarter, we also began testing a transportation platform allowing people to request an Uber ride through messenger. More services will be coming to the platform soon, including airlines. 
+WhatsApp ended the year with nearly one billion monthly actives. As WhatsApp has grown, we've worked to keep it fast, simple, and reliable. And, we've seen many communities come to depend on this as their main communication service. 
+To serve these communities well, this month we announced that WhatsApp will now be free to everyone, and we will no longer charge the subscription fees that many people were charged after their first year. We think this is an important step towards creating an even more ubiquitous product without affecting our plans for building WhatsApp into an important business in the coming years. Later this year, we'll be testing new ways for people to use WhatsApp to communicate with businesses and organizations that they want to hear from. 
+Finally, let's talk about our work on new breakthrough technologies that can help connect more people to the Internet and create transformative new experiences. In 2015, we made significant progress on our efforts to connect more people to the Internet. We've launched the first trials of express Wi-Fi, a product designed to help entrepreneurs bring their communities online. We launched free basics in 33 more countries. And, we've now connected 19 million people. 
+This year, we expect to hold our first test flight of Aquila, our First Solar-powered aircraft designed to beam internet into communities from the sky. We're also working on new advances in lasers that can transfer large amounts of data faster and more efficiently than anything today. 
+With our work in AI, we continue to make progress towards a new generation of computers that can see and understand. Over the last year, we've published dozens of research papers including some of the leading work on image recognition and language understanding. 
+To drive the entire AI community forward, we've also opened source software and a lot of new AI hardware platforms. Achieving the scientific breakthroughs to build AI that makes a dramatic, visible difference in people's lives -- it's going to take a long time. But, already, we're seeing opportunities to serve our community. 
+We recently built a prototype AI system that combines language and vision comprehension, so you can show it an image that it's never seen before and it can answer questions about that image. And, we've even used AI to help blind people experience their friends' photos and newsfeed by describing the scenes. 
+With virtual reality, we've reached some important milestones. The Samsung gear VR shipped over the holidays with our Oculus software, and we're pleased with the initial reaction. 
+This month, we also opened pre-orders for Oculus headsets. This will be the world's best VR experience, and we're excited to begin shipping to people in more than 20 countries before the end of March. More than 100 VR games and experiences are coming to Oculus this year. And, later this year, we'll also be shipping our Oculus touch controllers to get your hands into virtual reality. These controllers will enhance the VR experience and allow people to communicate more naturally in VR through intuitive hand movements and gestures. 
+This Oculus launch is shaping up to be a big moment for the gaming community. But over the long term, VR has the potential to change the way that we live, work, and communicate as well. The launch is an important step towards the future, and we're really looking forward to seeing how people use it. 
+So, that's how we've continued to make progress on our strategy. It's been a strong quarter, and we ended 2015 with a great foundation for our efforts going into 2016. Our strategy is working, and we have many more opportunities ahead. So, we're going to continue investing to deliver more great results over the long term. 
+On a more personal note, over the last few months with the new addition in my family, I've been reflecting a lot on the legacy that we want to pass on to the next generation. I'm excited about our progress and the chance to build something great for the future. If we continue to focus on solving the fundamental challenges facing the world and bringing the world closer together, we can leave a better world for the whole next generation. And, that's what I think about every day as we continue building Facebook. I want to thank everyone in our community, our employees, our shareholders, our partners who are helping us on this journey. Thanks. And, here's Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hi, everyone. We had a terrific fourth quarter capping off a great 2015. Q4 ad revenue grew 57%, or 66% on a constant currency basis. Mobile ad revenue reached $4.5 billion, up 81% year-over-year, and is now 80% of total ad revenue. 
+Facebook and Instagram drive business results for our partners, helping move products off shelves, online and off. As a result, we're growing spend from our current clients and attracting new marketers to our platform. 
+We saw strong growth across all verticals, marketer segments, and regions. We're also pleased with the growth we're seeing in emerging markets in countries like China, where businesses are advertising on Facebook and Instagram to reach people internationally. 
+We continue to make progress on our three priorities. Capitalizing on the shift to mobile, growing the number of marketers using our ad products, and making our ads more relevant and effective. 
+First, capitalizing on the shift to mobile. Heading into 2016, it's clear that consumers have shifted to mobile, and businesses know they need to catch up. Marketers now realize that if they want to reach their customers where they are, mobile is essential. Our conversations with clients have shifted from if they should market on mobile to how. 
+With over 1.44 billion people using Facebook on mobile monthly and over 400 million monthly actives on Instagram, Facebook and Instagram have become the two most important mobile advertising platforms. We provide a creative canvas powered by technology, a unique combination of art and science that marketers can use to deliver great creative with the highest quality targeting at unparalleled scale. 
+The 2015 holiday season was a defining moment for mobile marketing and demonstrated the power of our mobile platform. According to comScore, total US consumer spending on mobile in November and December was up 59% year-over-year. This holiday season, marketers turned to mobile more than ever before. 
+To reach a large global audience for the launch of Halo 5, Microsoft Xbox used video optimized for Facebook and Instagram. Working with their agencies and power media team from Dentsu Aegis network, Eisenberg group, and 215 McCann, they understood that people watch video differently in mobile newsfeed than on TV, so they created videos to capture audience attention in the first 3 seconds even without sound. They drove over 380 million impressions and 49 million video views in key markets and increased purchase intent by 10 points in the US. 
+Our second priority is growing the number of marketers using our ad products. Last quarter, we announced that we had over 2.5 million active advertisers, and since then, our growth has remained strong. This represents a small fraction of the over 50 million small businesses now actively using pages. So, we see a big opportunity to continue to grow the number of Facebook advertisers going forward. 
+We're also very pleased with the growth in advertiser adoption of Instagram, and the positive results advertisers are seeing from their investments. 98 of the top 100 advertisers on Facebook also advertised on Instagram in Q4.  
+Our third priority is improving the relevance and effectiveness of our ads.  We shipped a lot of new ad products this past year. These products help deliver personalized marketing at scale and drive business for our clients. 
+Leading up to Black Friday, Shop Direct, the UK's second largest online retailer, teased upcoming sales with a cinemagraph video to build awareness. They then retargeted people who saw the video with one-day-only deals. On Black Friday, they used our carousel and DPA ads to promote products people had shown interest in. They saw a 20 times return on ad spend from this campaign, helping them achieve their biggest Black Friday and their most successful sales day ever. 
+To share just a few other product examples -- in emerging markets, we launched slide show, a video-like ad experience that works with lower connection speeds and feature [phones]. We introduced local awareness ads globally to help brick-and-mortar businesses reach people near their stores and started testing canvas ads to help marketers showcase their products in a more immersive way. We continue to invest in ad tech and are especially pleased with the growth of audience network.  
+Measurement also remains a critical area of focus.  Our measurement tools like conversion lift and the Facebook pixel prove to marketers that we're driving business results and help make our ads more relevant. This year, we saw more advertisers shift from proxy metrics like clicks to business results, like digital and in-store sales. 
+Our results show that the investments we've made over the past few years are paying off, and we see a lot of exciting opportunities ahead. We know we still have a lot of hard work to do and heading into the new year, we will remain very focused on our top three priorities. 
+I want to take this opportunity to thank our clients around the world for their partnership. Your investment and feedback is critical to making our products better. I also really want to thank the global Facebook teams for your extraordinary dedication to our partners' success. Your hard work and execution is critical to helping us to sell our mission. Thanks, everyone. And, now, here's Dave. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. Q4 was a strong quarter and wrapped up a phenomenal year for Facebook. Full-year 2015 revenue was $17.9 billion, up 44% year-over-year, or 53% on a constant currency basis. In 2015, we generated over $6 billion in free cash flow, including $2.1 billion in Q4, while continuing to fund important investments for the future growth of the business. 
+The strong growth and engagement of our community was a consistent theme throughout 2015 and that continued in the fourth quarter. In December, 1.04 billion people used Facebook on an average day, an increase of 17% compared to last year. This daily number represented 65% of the 1.59 billion people who visited Facebook during the month of December. 
+Mobile continued to drive the growth of our community. In December, 1.44 billion people accessed Facebook on mobile devices, an increase of 21% compared to last year. And, 90% of the people who used Facebook on both a monthly and daily basis accessed us via mobile devices. 
+Now, turning to the financials.  All of our comparisons are on a year-over-year basis unless otherwise noted. Additionally, our non-GAAP measures exclude stock-based compensation and the amortization of intangibles. 
+In Q4, total revenue was $5.8 billion, up 52%, or 60% on a constant currency basis. Q4 ad revenue was $5.6 billion, up over $2 billion from last year. Year-over-year growth was 57%, or 66% on a constant currency basis. 
+The strengthening of the US dollar continued to have an unfavorable impact on our revenue in the fourth quarter. Had exchange rates remained constant with Q4 2014 levels, our total revenue would have been approximately $320 million higher. 
+US and Canada and Asia-Pacific continued to be our two strongest regions, with ad revenue growth of 64% and 57%, respectively. Our rest of world and Europe regions grew at 53% and 45%, respectively, as they were more heavily impacted by currency headwinds. 
+Mobile ad revenue was $4.5 billion, up 81% from last year, and represented 80% of our advertising revenue. For perspective, three years ago, the mobile percentage was just over 20%. 
+Q4 capped off a remarkably successful year for our mobile advertising business, where we were able to combine strong growth in ad inventory supply with strong growth in advertiser demand. On the supply side, we grew the number of people using Facebook on mobile, time spent, and ad load. Our ongoing focus on ad quality and relevance enabled us to deliver a better overall mobile ads experience for our users while increasing the number of ads that they see. In Q4, we also benefited to a lesser extent from increases in ad inventory from Instagram and the audience network. 
+On the demand side, we believe our efforts on targeting and measurement solution enabled marketers to achieve better business results at better values. This helped us drive strong growth from a broad array of advertisers, including direct response in brand advertisers, large companies and SMBs, and both existing and new advertisers. 
+Turning now to the overall price [volume metrics].  In Q4, the average price per ad increased 21%, while total ad impressions increased 29% on a year-over-year basis. It's worth noting that this was the first quarter since Q3 2013 that total ad impressions increased on a year-over-year basis. This was driven by an increase in mobile ad impressions and was partially offset by a decline in ad impressions delivered on personal computers, consistent with the ongoing declines in PC usage. 
+The reported increase in price is being driven by the continued mix shift towards mobile, which contains higher-priced newsfeed ads, rather than the mix we have on PCs, of both newsfeed ads and lower-priced right-hand column ads. Total payments and other fees revenue was $204 million, down 21% compared to last year. The decline was driven by a reduction in payments revenue related to games played on personal computers. 
+Turning now to expenses.  Q4 total GAAP expenses were $3.3 billion, up 21%, and non-GAAP expenses were $2.3 billion, up 42%. Our year-over-year GAAP expense growth rates slowed this quarter, as we lapped the introduction of stock-based compensation charges associated with the WhatsApp transaction. Non-GAAP expenses were driven by increases in head count-related costs, cost of revenue, and marketing expenses. We ended the year with nearly 12,700 employees, up 38% compared to last year. 
+Our GAAP operating margin was -- I'm sorry. GAAP operating income was approximately $2.6 billion, representing a 44% operating margin. Our non-GAAP operating income was $3.5 billion, representing a 60% operating margin. Our Q4 GAAP and non-GAAP tax rates were 39% and 36%, respectively. 
+Our Q4 GAAP net income was approximately $1.6 billion, or $0.54 per share, and our non-GAAP net income was $2.3 billion, or $0.79 per share. In the full-year 2015, capital expenditures were $2.5 billion, as we continued to invest in servers, data centers, network infrastructure, and office facilities to support the rapid growth of the business. We ended the year with over $18.4 billion in cash and investments. 
+Turning now to the outlook.  First, some color on revenue. We expect the factors that drove the strong growth of our advertising business in 2015 will continue into 2016. However, we expect to continue to face foreign exchange headwinds, especially early in the year, as we will be lapping periods where the dollar was relatively weaker than it is today. 
+More importantly -- sorry. More broadly, the overall macro environment introduces a level of uncertainty around global growth and exchange rates that could impact our business in 2016. And, we do expect to face tougher comparables as the year progresses, given the remarkably strong advertising performance in 2015. 
+Turning now to expense guidance.  2016 will be another significant investment year for Facebook. In 2015, we continued investing heavily in the core. At the same time, we doubled our investment levels in our next generation services, which includes WhatsApp, Instagram, and messenger, and we tripled our investment levels in our long-term areas of focus, which includes our connectivity efforts, Oculus, and our AI investments. We will continue investing significantly in all of these areas in 2016. 
+We expect the year-over-year growth rate for full-year 2016 total GAAP expenses to be approximately 30% to 40%, and for full-year 2016 total non-GAAP expenses to be approximately 45% to 55%. Note these ranges represent total operating expenses, including cost of revenue. These ranges also include the cost of revenue impact of the expected shipments of Oculus Rift that we expect that impact to be immaterial to our overall total expenses for the year. 
+We anticipate our 2016 capital expenditures will be in the range of $4 billion to $4.5 billion. We recently announced that we will begin building a new data center in Clonee, Ireland, and that project is on top of the new data center being built in Fort Worth, Texas. We expect our 2016 stock-based compensation to be in the range of $3.1 billion to $3.3 billion, approximately 50% of which is related to our prior acquisitions, most notably WhatsApp. We expect 2016 amortization expenses to be approximately $700 million to $800 million. 
+And, lastly, we anticipate that our Q1 and full-year 2016 GAAP and non-GAAP tax rates to be in the low 30% on a percentage basis, down from our 2015 rates. We expect our tax rates will decline further over time and resemble those of our global peers over the next several years. In addition, in 2016, we expect for the first time to pay a significant amount of US income tax on a cash basis. 
+To conclude, 2015 was an outstanding year for Facebook. Our performance reflects the strong growth and engagement of our community, the momentum we're seeing in our ads business, and the significant progress we're making on our mission to connect the world. With that, Chris, we would like to open up the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) 
+Your first question comes from the line of Douglas Anmuth with JPMorgan. Your line is open.   
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my question.  Two things I wanted to ask. First, Mark, on messenger and WhatsApp, can you talk more about the takeaway on the messenger platform now that it's been open for nearly a year to developers, and how that's informed your view on what you're going to do with WhatsApp going forward?  
+Then, secondly, perhaps Dave or Sheryl, on the ad load, a few years ago you had talked about ad load at mid-single-digit levels and then more recently as up significantly since then. Do you still feel like there is still significant room to increase ad load here?  And, how do you think about the theoretical ceiling there? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          I can start with the ad load question, Doug. So, ad load is definitely up significantly from where we were a couple of years ago. And, as I mentioned, it's one of the factors driving an increase in inventory. Really, one thing to think about here is that improving the quality and the relevance of the ads has enabled us to show more of them, without harming the experience. And, our focus really remains on the experience. So, we'll continue to monitor engagement and sentiment very carefully. I mentioned that we expect the factors that drove the performance in 2015 to continue to drive the performance in 2016.  So, yes, I think that's the color I can give on ad load. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [4]
+--------------------------------------------------------------------------------
+
+          On messenger, the platform efforts in 2015 focused on two things. One was expanding the different types of content that people can share in messenger. And, that diversity is going really well. We see continued increase in video sharing and photos and stickers and a lot of stuff that you would just call fun, but that people really enjoy as different ways to express themselves. 
+But, in terms of the business, the more important piece is how people can interact with businesses through messenger. And, we started some early small tests around F8 last year, where with some eCommerce services made it so that people who were buying things could follow up with the business and get customer support and buy more things, and we went through this process of integrating that and making sure that it integrated with all of these systems well. And, I think everyone is really happy with that so far. We started off pretty slowly, but that's going to be some of the basis for how we look to make messenger a business going forward. We're happy with the initial results. There's obviously a lot more there that we need to do, and we'll have more to talk about this year and beyond. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          The next question is from John Blackledge with Cowen and Company. Your line is open. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Great, thanks. So, it was a phenomenal quarter and year for Facebook. And, given we're about a month into 2016, there's a lot of discussion around the global macro headwinds. Just wondering how the business is trending thus far in the quarter?  Maybe by market, US, Europe, Asia-Pac and rest of world. And, generally, just how Facebook is positioned if the global macro environment softens a bit. Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+
+          John, it's Dave. Just on that question, we're not commenting specifically on Q1. We didn't see anything in Q4 that indicated broad-based macro weakness, beyond, of course, the impact that FX was having, which was pretty significant. We saw the impact in places like Brazil where you've got a currency headwind of over 30%. So, you're certainly seeing that impact it. And, obviously, those sort of global macroeconomic and currency factors will continue to impact us. 
+We're obviously benefiting from a strong secular shift to usage of mobile, and we feel we're very well positioned in that. We're seeing more and more advertisers move to mobile. They realize that it's no longer a question of whether they need to be on mobile, but it's really how they are going to be on mobile. And, we think we've got the best solution for that, and we're investing to make it even better. So, I think from a secular trend point of view, we're very well positioned.  But, obviously, we'll continue to monitor the macro conditions in currency. 
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+          The next question is from Eric Sheridan with UBS. Your line is open. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [9]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. Maybe just asking for more color on Instagram. It's obviously still very early days on Instagram, but what are you seeing in terms of user engagement as you continue to move ad load up on the product? What advertiser adoption of the product is? I know you gave us a little bit of color during the prepared comments. And also, pricing on the environment inside the platform as you continue to roll out deeper with the advertising products. Thank you so much. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [10]
+--------------------------------------------------------------------------------
+
+          When we introduce ads into feed and continue to increase the ad load, we monitor really carefully. We're looking at user engagement on the platform. We also look at the quality of ads. And, our basic belief is that if we have high-quality ads, those create a good consumer experience, and we can look at what consumers are doing because we can understand how actively engaged they are on the platform. 
+For Instagram, we don't break out revenue. Instagram -- and we're pleased with the growth on Instagram.  And, as I mentioned, 98 of our top 100 advertisers on Facebook are now advertising on Instagram.  It's also the case that Facebook had remarkably strong growth as well.  So, we're seeing strong growth across those platforms. I think what's exciting about both platforms is that they combine the art and the science of both a creative canvas that marketers are excited about and targeting. So, to share another example from the holiday, Shutterfly did a Facebook and Instagram -- both a brand and direct response holiday campaign on mobile. And, what they did was just beautiful pictures, but also targeting very specifically to women with specific interests, such as things like weddings and babies. They saw a 6.4 times return on ad spend. We think that's what's possible when you combine the creative canvas we have, using the technology and using the platform that we've created. 
+
+--------------------------------------------------------------------------------
+Operator    [11]
+--------------------------------------------------------------------------------
+
+          The next question is from Heather Bellini with Goldman Sachs. Your line is open. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [12]
+--------------------------------------------------------------------------------
+
+          I just had two quick questions. One, Sheryl, I just wanted to follow up on what you said about Facebook and Instagram and the overlap in the advertisers. And, I was wondering if you could share with us how you feel those advertisers view it?  Do they view it as an incremental platform?  Or, there's been some question about whether or not some advertisers might take their spending and just move it over to Instagram. I'm wondering if you see incremental spending as a result of opening up both platforms?  
+And then, the second question would just be to Mark.  Just was wondering, I know you've mentioned Oculus and the pre-orders. I was just wondering if you could give us your take on whether or not you're happy with the initial launch of Oculus pre-orders?  And also, we obviously all know the big gaming impact. I'm just wondering from your perspective, as you look out, what industries do you think where this could be the most disruptive, outside of gaming? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [13]
+--------------------------------------------------------------------------------
+
+          I'll take the Oculus one first. Yes, I am happy. I don't show much joy, but I'm happy. Sorry. It's going to be gaming for the beginning. That's the initial market. There are about -- I think it's around 250 million people who have Xboxes, PlayStations, or Wiis. That's the initial market of folks who we think are going to be most interested in the early VR experiences, especially at some of the higher price points. But, overall, the reason why we're interested in this as a social company is that we think that this is going to be a new way that people interact, right? And, if you've tried out the toy box demo with the hands, Oculus Touch, what you see is when you're in virtual reality with another person and you can interact with the environment and use your hands, you can -- it's not just about where you are and the fact that you can instantaneously teleport to another place. You can interact with people in all of these different ways that would be very difficult in the rest of the world. So, we're very excited about that. That's going to be a big area of investment for us, and is ultimately, I think, going to change the way that we communicate and live and work in addition to how we play games. But, I think we're off to a good start. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [14]
+--------------------------------------------------------------------------------
+
+          On the Instagram question.  Certainly in the short run, some of the spend is incremental, and some of it isn't. Some of our clients approach this where they have a social budget or a Facebook budget, and some of that moves to Instagram. And, some people, it's incremental spend. 
+In the medium to long run, however, we believe that we are really well positioned to take share from other platforms out there. We believe both Facebook and Instagram have this combination of an ability to do great creative with the best targeting and the most sophisticated measurement, which shows businesses how we help them move products off shelves. And, we want -- and we tell our clients we want to be the best dollar, the best euro, the best pound, and the best minute you spend. We really encourage them to measure their ROI and compare us to other platforms. We think that comparison bodes very well for our growth. 
+We also think the continued consumer shift to mobile devices bodes well for our growth as well. That said, we have to continue to execute. We know this won't be easy. We have to continue to build the right products. We have to continue to measure all the way through from seeing an ad impression to sale. So, it's up to us to stay focused in the coming year and years. 
+
+--------------------------------------------------------------------------------
+Operator    [15]
+--------------------------------------------------------------------------------
+
+          The next question is from Ben Schachter with Macquarie. Your line is open. 
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Congratulations on a great year. You've had a lot of success with standalone apps. Should we expect to see you launching more such apps? And, could a standalone video app be a part of that, particularly for people who want to just watch video. 
+On the virtual reality, another question. Can you just discuss the supply constraints in terms of how many units you can ship per month? And, should we expect those shipments to accelerate into the holiday? Then, also related to that, how are you going to work with retailers to show consumers the power of Oculus in-store and in person? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [17]
+--------------------------------------------------------------------------------
+
+          So, on the apps question, the ones that have done the best are things that augment the core Facebook functionality for large subsets of the community. For example, we have this pages manager app. There are 50 million businesses that have pages on Facebook, and while that is not a huge number compared to the size of the overall community of people, it's a very large number of people and businesses. And, giving a focused experience for the person who wants to run their business through Facebook and be communicating with their customers all day long, that's just proven to be an incredibly engaging experience that drives content into the system and is good overall. We have introduced a number of things like that for public figures, for groups. Messenger has probably been the most successful as something that's connected to the Facebook experience that now has more than 800 million people using it. So, I do think that there are additional opportunities for this. And, we'll continue looking at them. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [18]
+--------------------------------------------------------------------------------
+
+          So, Ben, just following up on VR and supply constraints.  We have two products -- the [you've got gear] VR, and Samsung is really handling all of that from a hardware perspective, and obviously, they are well prepared on that front. With rift, it's really -- it's early in the evolution of VR. It's early to be talking about large volume, so at this point, I don't think we're giving a lot of color around supply chain and that sort of thing. It's not going to be material to our financials this year. 
+
+--------------------------------------------------------------------------------
+Operator    [19]
+--------------------------------------------------------------------------------
+
+          The next question is from Brian Nowak with Morgan Stanley. Your line is open. 
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [20]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. I have two. The first one is to go back to some of the core Facebook advertising success. I wonder if you could talk about some of the Facebook video ad learnings and kind of positives that you've encountered and hurdles that you still encounter that could be holding back advertisers from moving further video budgets out of the platform. 
+And then, the second one, we always see this gap between Asia and rest of world monetization versus North America and Europe. I was wondering if you could talk through some strategies and qualitative drivers you see over the next couple of years that are going to increase the overall Asia and rest-of-world monetization even further. Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [21]
+--------------------------------------------------------------------------------
+
+          I think our approach in increasing monetization around the world is really the same. We need to build really compelling ad products with great formats that let marketers be creative and be convincing. I'll share an example of something we did for an emerging market. I mentioned briefly in my remarks slide show.  The slide show product is enabled a video-like experience with phones with lower connection speeds than feature phones by a series of photos. So, Coca-Cola used that in Kenya and Nigeria. They took screen shots of a video ad they had produced for other markets. They uploaded them with texts. They reached 2 million people with a 10-point lift in ad awareness.  The way we need to drive sales around the world is by understanding markets, launching things like click to missed call ads in India and making sure our products work for markets, but also being able to connect to both advertising metrics and business metrics around the world. 
+Video ads are important on our platform and the most important thing that's growing well there is consumer engagement with videos growing. We have 500 million people watching video a day. And, the fact that so much video is being consumed on our platform gives us room for an ads business to grow because we want the formats to match. Marketers also really love video, and it's a really compelling way to reach people. 
+And, videos contributing to our growth -- it's important to note that it's not just large brand advertisers that are doing video, but all of our market segments. Direct response, [SMBs] who have uploaded 1.5 million videos, and that's both organic and paid in the last month, and developers. The video ad spend is not all incremental, of course, because every time we put an ad in a newsfeed, if it's a video ad, it's taking the place of an ad with another format. 
+In terms of learnings, one of the most important learnings we have is that video formats are different on Facebook. There are certainly people that are watching the whole 30-second video ad with sound, but there are some people that are doing less.  They are watching shorter formats, and they are watching with sound. And, one of the challenges we have in the market is convincing marketers and agencies and people that make the video to experiment with different formats. 
+The good news is that we're getting great results, like the Halo 5 example I shared in my remarks.  That when people are willing to experiment, this is a pretty unique, creative canvas. You can do short form with sound off.  You can do longer form with sound on, and everything in between.  And, our ability to persuade marketers to experiment is going to be a major driver of how much we can do here. 
+
+--------------------------------------------------------------------------------
+Operator    [22]
+--------------------------------------------------------------------------------
+
+          The next question is from Justin Post with Bank of America Merrill Lynch. Your line is open. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [23]
+--------------------------------------------------------------------------------
+
+          Thanks. I'll ask a couple of longer-term questions. First, I know a year ago you gave us a usage update on time spent. Wondering if video or any other products are having a big impact on usage?  And, if you can give us any metrics there. 
+And then, maybe one for Sheryl, we have you at 8% of all media time spent. Just wondering if you think Facebook could monetize better than other forms of media based on time spent or maybe a little bit below?   
+And then, maybe one for Dave. 60% margins last quarter, obviously very strong. Just wondering, what you think about the long term, and any comments on long-term margins. Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [24]
+--------------------------------------------------------------------------------
+
+          In terms of monetizing time spent, it's certainly the case that consumers have shifted to mobile, and businesses need to catch up. The exact percentage we can monetize that, we'll see. But, we certainly think that we will continue to benefit from the consumer shift to mobile because businesses are behind. If you ask even our largest clients, our largest clients if they drew a pie chart of where their consumers spend their time and money and [whether] they spend their time and money, we are still underindexed. 
+That said, I'll say it again, we have a lot of hard work to do. We really need to prove to clients, particularly as they scale and we become a bigger part of their spend, that we're driving results. Other platforms, other forms of advertising, like TV and other, have very established metrics that people have believed for a very long time. We think our targeting can be better than any other platform. We also believe our ability to measure results can be deeper. But, it's up to us to prove that and to prove that client-to-client. 
+It's also worth noting that we work really well with TV. It's not always a choice of TV or Facebook, but often, we can be a complement. We've done a bunch of work with Nielsen to measure what happens when marketers do big TV campaigns and do campaigns that are broadly targeted on Facebook. And, we are able to increase the reach and increase brand favorability. So for the most part, when people are doing big campaigns, they are doing them across multiple platforms, and we think that will continue. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [25]
+--------------------------------------------------------------------------------
+
+          Justin, on time spent, there's no question that video is helping us on time spent and engagement. We're not -- you won't have any specific stats other than the hours per day -- sorry, time spent per day that Mark mentioned on video. So, no updates on stats there other than that. 
+In terms of our long-term margins, we're not managing the business to a specific margin target in any year. We still think we're early in investing in the business. And, we're really investing in new areas today where we see a long-term opportunity for revenue growth. That being said, there -- we do think there's a lot of margin potential in this business, given the focus on advertising. But, no target at this point. 
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+
+          The next question is from Anthony DiClemente with Nomura. Your line is open. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities Intl - Analyst    [27]
+--------------------------------------------------------------------------------
+
+          Thanks for the questions, and good afternoon. Just for Mark or Sheryl, wondering what is your strategy for professional video content going forward? You talked a lot about video.  Would bringing more professional content to Facebook accelerate video engagement and adoption?  
+And then, for Dave, just kind of back to the quarter.  You don't break out Instagram revenue or financials, but wondering if the acceleration in the quarter -- would you say was that driven more by the step-up in Instagram given the opening up of the API, the incremental Instagram ad load?  Or, was there a commensurate acceleration in the core Facebook revenue? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [28]
+--------------------------------------------------------------------------------
+
+          In terms of video content, newsfeed is as interesting as the quality of the content in it. What we're seeing is that users are generating a lot of really high-quality content, often pretty short form that people are really happy to consume. And, we believe that trend will continue because we're at the very beginning with people really understanding the power of the smartphones that a lot of people are walking around with, particularly in developed markets. 
+We are working with publishers to try to make the content experience better inside of newsfeed. The best example of that is probably news with instant articles where we figured out that it was the slowest upload experience you could have in newsfeed to link off to an outside articles.  So, we've worked with publishers to upload more news articles natively to Facebook, and we're seeing great engagement from that. 
+Similarly, we've had conversations with makers of premium content. I think they are excited by the work they already do with us to use Facebook to distribute their content. And, we're interested in doing more. It's probably worth noting that much of the engagement and consumption we have is short form, not long form. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [29]
+--------------------------------------------------------------------------------
+
+          Anthony, it's Dave. Instagram -- we're certainly very pleased with the performance of Instagram, and it's certainly made a contribution this quarter. Make no mistake, core Facebook is really driving the top line.  We're very pleased with the strong performance that we had with Facebook itself in the quarter. 
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          The next question is from Carlos Kirjner with Bernstein. Your line is open. 
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Bernstein - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          I have two quick questions. I am interested in the plans to allow users to do other things beyond liking content. I think you call it reactions. I call it adding more words to the Facebook graph. Can you talk about the rollout of this capability?  And, whether this is something that you only see at Facebook.com?  Or, whether it's going to be widespread across the web and other sites, much like the like button. 
+And, secondly, can you talk about your thinking of the role of different Facebook platforms in payments? Are there things that you will not do because you don't have or do not want to acquire these [key one] assets? What's the boundary for what you could do with payments? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [32]
+--------------------------------------------------------------------------------
+
+          Sure. So, reactions is going to roll out on every platform. We're testing it in a handful of countries to start, just to make sure that we have the UI and interaction simple enough that people could express more of what they wanted without getting in their way. It is adding a little bit of complexity to something that is very simple today, just a one-tap like button. 
+But, the philosophy behind it is that when you only have a like button, if you share a sad piece of content or something that makes you angry, people may not have the tool to react to it and therefore over time the community feels less comfortable sharing that kind of content on Facebook. And, we want people to be able to share all of the things that are meaningful to them, not just the things that are happy and that people are going to like when they see it. We think that that's just really important to the mission of the Company and will increase engagement and sharing and openness and all of the things that we care about. And, so far, I think there are a few tweaks that we needed to make to reactions since initially testing it, but it's going well.  I think we plan to roll it out everywhere pretty soon. So, that's the game plan there. 
+On payments, the basic strategy that we have is to make it, especially in products like messenger, that where the business interaction may be a bit more transactional, to take all the friction out of making the transactions that you need. So, we don't view ourselves as a payments business. That's not the type of Company that we are. We'll partner with everyone who does payments. We look at the stuff that Apple is doing with Apple Pay, for example, which is a really neat innovation in the space that takes a lot of friction out of transactions as well. And, our view is that the less friction, the better the user experience.  The more people can easily interact with the businesses that they care about. Ultimately for our business, that will drive up the amount that businesses are willing to pay to advertise to send people into those kind of interactions because they perform well. So, it's good for everyone, but that's kind of how we think about that. 
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+
+          The next question is from Michael Nathanson with Moffett Nathanson. Your line is open. 
+
+--------------------------------------------------------------------------------
+Michael Nathanson,  Moffett Nathanson - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          Thanks. I have two. Following on Mark's answer to the question about payments.  I wondered, Sheryl, if you look at the fourth quarter as you said as a defining moment for marketers and with the friction of transactions getting easier, was there any type of shift in the marketers or verticals that moved money to Facebook in the quarter? Do you see more retail, let's say, or anything different in terms of the composition of who was buying in the fourth quarter? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [35]
+--------------------------------------------------------------------------------
+
+          Fourth quarter is a holiday quarter, so our top verticals were eCommerce, CPG, and retail. Our growth is really broad-based. And, I think it really shows how important the targeting can be. What we've definitely done over the last year and plan to invest even more in over the next year is worked hard on vertical-specific targeting. So, for example, for the telecom industry, being able to target existing consumers with new consumers with people who are -- their voice plan or data plan is about to expire. With the auto industry, really important industry for growth for us, helping them figure out who their current customers are, who their potential customers are, and where are the audience segments out there who have similar likes, interests, backgrounds, demographics to their current customers so that they can serve the right ad to the right people. The kind of things we're able to do with targeting and measurement apply across industries and obviously have to be industry and vertical-specific, and we're working hard at that. 
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+          The next question is from Mark Mahaney with RBC Capital Markets. Your line is open. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [37]
+--------------------------------------------------------------------------------
+
+          Great, thanks. Two questions. Sheryl, could you talk about political advertising?  And, how you think about the attractiveness of -- and any anecdotes you have on Facebook as a platform for political campaigns? 
+And then, Mark, the story is in 2012 at the beginning of that year, you realized just how powerful the movement was towards mobile devices, and you turned to your engineers and said we need to generate $1 billion in revenue off of mobile devices. I wonder if you've had that same conversation with your engineers when you think about these two messaging platforms that you have. They have got a large number of users, and clearly globally, we've seen this massive shift over towards messaging.  The Internet has changed, and how people have engaged with it. Do you feel like you had -- or do you need to have that kind of $1 billion  conversation with your engineers about those two messaging platforms? Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [38]
+--------------------------------------------------------------------------------
+
+          In terms of the elections, it's important to note that we're large and diversified, so no one vertical drives our business. Yes, the 2016 election is a big deal in terms of ad spend. But, so is the World Cup. So, is Super Bowl every year. So are events like the Olympics. 
+We are excited about the kind of targeting we're able to offer for our ads platform. We believe we have precision that doesn't exist on any other platforms. So, for example, using Facebook and Instagram ads, you can target by congressional district, you can target by interest, you can target by demographics, or any combination of those. And, we're seeing politicians at all levels really take advantage of that targeting. 
+It's also probably worth saying that we're pretty excited about what's happening with the elections organically on Facebook. Facebook is really the new town hall and connecting the people who are running for office, both at the national and the local level with people directly has been really important. Every member of congress in the United States is now on Facebook. We're seeing some of them post every vote and explain why they are doing votes. We're seeing a bunch of the candidates for president get on Facebook themselves and interact, taking questions from their potential voters directly. And, we think that kind of direct engagement where people can hold their elected officials accountable, and elected officials can speak directly to constituents is a really important part of our mission, and we're excited about the 2016 election and what's happening there. 
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+          The next question -- . 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [40]
+--------------------------------------------------------------------------------
+
+          I'll answer the other one. In terms of the story that you said, I think you have it wrong. I don't know where you got that story from. I never had a conversation with the team where we were behind on mobile, and then I said we need to do this to make money. That's not really how we operate. What happened is we realized that mobile was growing faster than desktop and that people were shifting their usage. And, it was the more important thing for people's consumer experience. That's when we made the shift, not in our business first, but in how we developed products. And, I told all of our product teams when they come in for reviews, really just come in with mobile. If you come in and you try to show me a desktop product, then I'm going to kick you out. You have to come in and show me a mobile product. 
+And that, I think, was just as a crude leadership tactic, somewhat effective in helping to motivate the organization to shift its energy towards focusing on mobile. But, it was -- if you remember, we actually went through a pretty tough period because we went through this period where our mobile experience was not as good as we wanted it to be.  And, we had no ads on mobile, and we actually prioritized making the mobile experience good before putting ads in. So, there was a long time where people thought that our business might not be as good because we had no ads on mobile. And, that was because we always prioritized the experience for people above, even if it's going to be a painful thing for the Company. 
+That's how I think about messaging. We know that messaging is going to be increasingly important. That's why we went out and hired David Marcus, who is one of the best product leaders in the field to run messenger, and why we bought WhatsApp, which is the leading messaging product worldwide. And, we have a formula for how we build these businesses. 
+First, you build a great consumer experience, right, that helps people share in a new way that's really important. Then, after that, you can start to introduce organic ways that people can interact with businesses. So that -- and Facebook is pages. The businesses that people want to interact with, the public figures, the politicians. Not necessarily ads, but organic interactions around not necessarily just your friends and families, but more public figures and businesses. And then, only once you have that ramped up to a good scale can you really start dialing up advertising, having that feel good and be a good part of the experience with good content because all of those public figures and businesses are already participating in the platform at scale. 
+So, you can expect to see that playbook in Instagram where we're pretty far along in terms of having quite a mature public content ecosystem, and ads are ramping well with good, high-quality ads because a lot of public figures and businesses are already investing and creating that kind of good content that goes on Instagram. And, you're going to see the same playbook in messenger and WhatsApp, in terms of making it so there are organic businesses and public figures. There's a bit more of that on WhatsApp already in terms of businesses using it than on messenger. We are catching up on messenger, but we'll do that on both. Once we have those ecosystems built out, we'll build businesses around them. And, that's how we think about stuff. We'll do that in all of our products and the different things that we do going forward. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director IR    [41]
+--------------------------------------------------------------------------------
+
+          Operator, looks like we have time for one last question. 
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+
+          Certainly. The final question is from Paul Vogel with Barclays. Your line is open. 
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [43]
+--------------------------------------------------------------------------------
+
+          Great, thanks. Just two questions. One, on the Facebook sports stadium?  Just wondering how you think about that in terms of how is it going to be different from other offerings?  What's the big differentiating factor?  And, how do you get folks to participate in that? And the second side, just on the margin side again.  Do your revenue and costs line up geographically, so there's obviously a translation impact to the numbers.  But, is there any operating mismatch between revenue and costs that would either benefit or hurt margins? 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [44]
+--------------------------------------------------------------------------------
+
+          On the sport stadium, this is an early test, but we're pretty excited about it. We are the largest community of sports fans in the world. We have 650 million sports fans on our platform. And, people are already using Facebook to share during realtime events.  It's an increasingly important use case for us. This gives people a place to share that one event and participate in it. I think what you'll see from us is always a focus on driving users and driving engagement. This is one way to do it. We'll see how it works. We're pretty open to experimentation. So, we feel -- but we feel pretty confident that realtime sharing is an increasingly important part of the platform, and one we'll continue to invest in. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [45]
+--------------------------------------------------------------------------------
+
+          And, Paul, it's Dave. I think that question is really around FX and how it relates on the revenue side versus the costs side. And, on that front, we're -- substantial majority of our expenses are US dollar-based, so certainly we see an impact to margins with FX headwinds. So, that's just the reality of having most of our development resources, for instance, in the US. Beyond that, we don't do geographic cost breakouts and allocations. It's not how we run the business. But, certainly from an FX point of view, FX headwinds have a dampening effect on margins. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - Director IR    [46]
+--------------------------------------------------------------------------------
+
+          All right. Thank you for joining us today. We appreciate your time. And, we look forward to speaking with you again. 
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+
+          Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2016-Jan-28-AMZN.OQ-139696494446-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2015 Amazon.com Inc Earnings Call
+01/28/2016 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com Inc - CFO
+ * Phil Hardin
+   Amazon.com Inc - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Ken Sena
+   Evercore ISI - Analyst
+ * Ronald Josey
+   JMP Securities - Analyst
+ * Neil Doshi
+   Mizuho Securities Co., Ltd. - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Kerry Rice
+   Needham & Company - Analyst
+ * Carlos Kirjner
+   Bernstein - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Jason Helfstein
+   Oppenheimer & Co. - Analyst
+ * Brian Pitz
+   Jefferies LLC - Analyst
+ * Gene Munster
+   Piper Jaffray & Co. - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Stephen Ju
+   Credit Suisse - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Paul Vogel
+   Barclays Capital - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Aram Rubinson
+   Wolfe Research - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          
+          Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q4 2015 financial results teleconference.
+(Operator Instructions)
+Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Phil Hardin. Please, go ahead.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          
+          Hello, and welcome to our Q4 2015 financial results conference call. Joining us today is Brian Olsavsky, 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, January 28, 2016 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 2014. Now I will turn the call over to Brian.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [3]
+--------------------------------------------------------------------------------
+
+          
+          Thanks, Phil. I'll begin with comments on our fourth quarter financial results. Trailing 12-month operating cash flow increased 74% to $11.9 billion. Trailing 12-month free cash flow increased to $7.3 billion, up from $1.9 billion.
+Trailing 12-month free cash flow less lease principle repayments increased to $4.7 billion, up from $529 million. Trailing 12-month free cash flow less finance lease principle repayments and assets acquired under capital leases increased to $2.5 billion, up from an outflow of $2.2 billion. Trailing 12-month capital expenditures were $4.6 billion.
+Capital expenditures does not include the impact of property and equipment acquired under capital and finance lease obligations. These capital expenditures and capital leases reflect additional investments in support of continued business growth, due to investments in technology infrastructure, the majority of which is to support AWS, and additional capacity to support our fulfillment operations. The combination of common stock and stock-based awards outstanding was 490 million shares, compared with 483 million one year ago.
+Worldwide revenue increased 22% to $35.7 billion, or 26% excluding the $1.2 billion unfavorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 26%. Worldwide active customer accounts were approximately 304 million. Excluding customers who only had free orders in the preceding 12-month period, worldwide active customers accounts were approximately 280 million, up from approximately 254 million in the comparable prior year period.
+Worldwide paid Prime members increased 51% year-over-year. Worldwide seller units represented 47% of paid units. Fulfillment by Amazon or FBA units represented nearly 50% of seller units. Worldwide active Amazon web services customers exceeded 1 million.
+Now I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $24.3 billion or 68.1% of revenue, compared with 70.5%. Fulfillment, marketing, technology and content and G&A combined was $9.7 billion or 27.1% of sales, up approximately 100 basis points year-over-year. Fulfillment was $4.4 billion or 12.3% of revenue, compared with 11.3%. Tech and content was $3.2 billion or 9% of revenue, compared with 8.2%. Marketing was $1.7 billion or 4.8% of revenue, compared with 5.1%.
+Now I'll talk about our segment results. As a reminder, in the first quarter we changed our reportable segments to report North America, international, and Amazon web services. Consistent with prior periods, we do not allocate segments, our stock-based compensation, or the other operating expense line item.
+In the North America segment, revenue grew 24% to $21.5 billion. Media revenue grew 11% to $3.9 billion, or 12% excluding foreign exchange. EGM revenue grew 28% to $17.3 billion. North America segment operating income was $1 billion, a 4.7% operating margin, compared with $733 million in the prior year period. North America segment operating income includes $6 million of favorable impact from foreign exchange.
+In the international segment, revenue grew 12% to $11.8 billion. Excluding the $1.1 billion year-over-year unfavorable foreign exchange impact, revenue growth was 22%. Media revenue decreased 3% to $3.3 billion, or increased 5% excluding foreign exchange.
+EGM revenue grew 19% to $8.5 billion, or 31% excluding foreign exchange. International segment operating income was $60 million, compared with $65 million in the prior year. International segment operating income includes $47 million of unfavorable impact from foreign exchange.
+In the Amazon web services segment, revenue grew 69% to $2.4 billion. Amazon web services segment operating income was $687 million, a 28.5% operating margin, compared with $240 million in the prior year period. AWS segment operating income includes $60 million of favorable impact from foreign exchange. Consolidated segment operating income was $1.8 billion or 4.9% of revenue, up approximately 140 basis points year-over-year. CSOI includes $20 million of favorable impact from foreign exchange.
+Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income grew 88% to $1.1 billion. Our income tax expense was $453 million. GAAP net income was $482 million or $1 per diluted share, compared with a net income of $214 million and $0.45 per diluted share.
+Now I'll discuss the full year results. Revenue increased 20% to $107 billion, or 26% excluding year-over-year changes in foreign exchange. North America revenue grew 25% to $63.7 billion, or 26% excluding year-over-year changes in foreign exchange. International revenue grew 6% to $35.4 billion, or 21% excluding year-over-year changes in foreign exchange.
+Excluding year-over-year changes in foreign exchange, Germany revenue grew 18%. Japan revenue grew 19%, and UK revenue grew 16%. AWS revenue grew 70% to $7.9 billion.
+Consolidated segment operating income was $4.5 billion or 4.2% of revenue, up approximately 220 basis points year-over-year. CSOI includes $16 million of favorable impact from foreign exchange. GAAP operating income was $2.2 billion, compared with $178 million in the prior year.
+Turning to the balance sheet, cash and marketable securities increased $2.4 billion year-over-year to $19.8 billion. Inventory increased 23% to $10.2 billion. And inventory turns were 8.5, down from 8.6 turns a year ago, as we expanded selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 24% to $20.4 billion, and accounts payable days increased to 77 from 73 in the prior year.
+I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date, and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable, and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy, and customer spending. It's not possible to accurately predict demand, and therefore our actual results could differ materially from our guidance.
+As we describe in more detail in our public filings, issues such as settling intercompany balances in foreign currencies among our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rate can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements, recording further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they have been recently.
+For Q1 2016, we expect net sales of between $26.5 billion and $29 billion, or growth of between 17% and 28%. This guidance anticipates approximately 130 basis points of unfavorable impact from foreign exchange rates. GAAP operating income to be between $100 million and $700 million, compared with $255 million in first quarter of 2015.
+This includes approximately $600 million for stock-based compensation and other operating expenses net. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense net, to be between $700 million and $1.3 billion, compared with $706 million in the first quarter of 2015.
+We are grateful to our customers, and remain heads-down focused on driving a better customer experience. We believe putting customers first, is the only reliable way to create lasting value for shareholders. Thanks. And with that, Phil, let's move on to questions.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [4]
+--------------------------------------------------------------------------------
+
+          
+          Great. Thanks, Brian. Let's move onto the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          
+          (Operator Instructions)
+Thank you. Our first question is coming from analyst, Stephen Ju with Credit Suisse. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          
+          Okay, thanks. So Brian, I think in the past, you've given some indication as to what usage growth may be at AWS. I was wondering if you have an update for that in the fourth quarter? And secondarily, is there any way to characterize what the pricing environment is right now for AWS as well? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [3]
+--------------------------------------------------------------------------------
+
+          
+          Yes, thanks, Stephen. No, I don't have a usage growth number for you. We'll say we're -- it's been very strong. AWS revenue is on a -- just short of a $10 billion run rate at the end of Q4.
+As far as pricing is concerned, we had a price reduction in January for our EC2 services. It was our 51st price reduction since we launched AWS years ago. And generally, what we find is that price is important, but so is speed and agility for customers, and the ability to deliver services and features that are beneficial to them. I will point out that we added 722 new features and services in 2015, and that was up 40% year-over-year. So we feel we have a lead in this space. And we don't take it for granted, and we want to serve customers better each year.
+
+--------------------------------------------------------------------------------
+Stephen Ju,  Credit Suisse - Analyst    [4]
+--------------------------------------------------------------------------------
+
+          
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question is from analyst, Jason Helfstein with Oppenheimer. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Can you talk a little bit about the dynamics in fourth quarter, eCommerce, particularly in the US? Did we see more aggressive promotional activity? And maybe talk about how you tried to work that to continue to drive the Prime number of members going forward? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [7]
+--------------------------------------------------------------------------------
+
+          
+          Sure. Well, what I can say is our approach to pricing has not changed. And through Q4, we did everything we could to have the best prices available for customers, and in-stock in time for the holiday. Another dynamic of Q4 was that, it was a huge FBA quarter. Nearly 50% of our third-party units were FBA, and our third-party units were also up to 47% of our paid units, so up 400 basis points year-over-year.
+So a really strong quarter for our FBA sellers, using our FBA services. It did put a lot of demands on our warehouses, and we were full. It was a very busy quarter, and it did increase some of our variable costs as a result, primarily in the US. But a very strong quarter for FBA. It exceeded our -- even our expectations.
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [8]
+--------------------------------------------------------------------------------
+
+          
+          Perhaps how are you able to integrate that into holiday promotions?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [9]
+--------------------------------------------------------------------------------
+
+          
+          I'm sorry. You cut off there. Could you repeat your question?
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [10]
+--------------------------------------------------------------------------------
+
+          
+          Sure. Just any additional color around Prime, and how you were able to integrate that into holiday promotions?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [11]
+--------------------------------------------------------------------------------
+
+          
+          Nothing specific. I will say, one interesting enhancement this year was our Prime Now service, which allowed people to order in selected markets up until 11:59 on New Year -- or excuse me, Christmas Eve. So that was a valuable service to many late shoppers, last-minute shoppers.
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question is from Aram Rubinson with Wolfe Research. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Aram Rubinson,  Wolfe Research - Analyst    [13]
+--------------------------------------------------------------------------------
+
+          
+          Hey, thanks very much. Two questions, both on the logistics side. It seems pretty clear that you guys are trafficking in some old world assets, like truck trailers, and ship lanes, and air fields. Can you help, give us a sense as to maybe what we're trying to accomplish with that? If it's defensive to protect your service to your existing customers, or if you're looking to maybe start new businesses with those assets?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [14]
+--------------------------------------------------------------------------------
+
+          
+          Sure, Aram. Thanks for your question. I would say that -- what we've found, is in order to properly serve our customers at peak, we've needed to add more of our own logistics to supplement our existing partners. That's not meant to replace them, and those carriers are just not -- no longer able to handle all of our capacity that we need at peak. They have been, and continue to be great partners, and we look forward to working with them in the future.
+It's just we've had to add some resources on our own. You mentioned trucks. The Amazon trucks, we did invest in those this past year. We use those primarily for movement between our warehouses and our sort centers.
+
+--------------------------------------------------------------------------------
+Operator    [15]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [16]
+--------------------------------------------------------------------------------
+
+          
+          Thanks for taking my questions. I've got two. The first one is just on gross margins. I think they were down about 200 basis points sequentially. It's the biggest fall in the fourth quarter in quite sometime. Anything you would call out there? Is it devices, or more sortation centers? Is there anything pressuring gross margins we should think about in the fourth quarter?
+And then on the fulfillment line, you mentioned FBA being a big driver of the growth in the fulfillment costs. Anything else you would call out, leading to incremental fulfillment costs? Maybe India or something else? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [17]
+--------------------------------------------------------------------------------
+
+          
+          No. And again, keep in mind, that the fulfillment as a percent of revenue is impacted by the calculation of FBA revenue being a net number, as opposed to a full revenue number. But our fulfillment costs per unit actually decreased year-over-year. It's just that we are now shipping more and more of our -- other than demand, out of our warehouses because of the strength in retail and FBA.
+On gross margin, I -- first, I'll caution you and say, we would encourage you to look at free cash flow which was -- it grew at a minimum $4 billion on each of the metrics that we point out. And Op profit, which was up 88% year-over-year. If you look sequentially, also keep in mind that in Q3, when it was up about 500 basis points year-over-year, that was lapping the write-down of our Amazon phone inventory the prior year. So there was a little bit of noise in the Q3 number. But generally, again, we're happy with the ability to service customers, the reaction of customers in Q4, and the bottom line results that we had.
+
+--------------------------------------------------------------------------------
+Operator    [18]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Colin Sebastian with Baird Equity Research. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [19]
+--------------------------------------------------------------------------------
+
+          
+          Great, thanks. One follow-up, and then another question. On the logistics and transportation side, I was curious if that's to date, just to supplement some of the other carriers? But more broadly or longer term, is there an ambition from the services side, to perhaps provide capacity to other companies?
+And then on AWS margins, was just wondering if we should expect more leverage there going forward? And whether Q1, whether that should demonstrate some seasonality, versus what we've seen in terms of sequential growth in prior years? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [20]
+--------------------------------------------------------------------------------
+
+          
+          Sure. Let me work backwards -- don't give guidance by segment, so cannot really comment on AWS specifically in Q1. The -- and the operational improvements -- excuse me, the gross margin -- the operating margin year-over-year that we've seen in the AWS business has been heavily driven by operating efficiencies, both purchase reductions and purchase prices, and also efficiency in driving greater utilization of the assets that we have. So we're very happy with that.
+Keep in mind that we did have -- although the year-over-year increase in capital expenditures and capital leases was not as great as we saw in 2013 to 2014, we did spend over $9 billion on those -- on capital, and expenditures and capital lease obligations, up from prior year was -- excuse me -- (multiple speakers)
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question come -- (multiple speakers)
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [22]
+--------------------------------------------------------------------------------
+
+          
+          Sorry, let me finish my answer to him, please? We grew up, we grew from in the $5 billion range in 2013, to $8.9 billion in 2014, and now over $9 billion in 2015.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Ken Sena with Evercore ISI. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore ISI - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          
+          Hi. So a lot of headlines around Amazon's activity at SunDance. I was hoping maybe you could expand once more on the video strategy, and specifically are you seeing an inflection in Prime Video usage? And maybe, just also on your streaming partners program, what the general reception is like? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [25]
+--------------------------------------------------------------------------------
+
+          
+          Sure. We're very thrilled with the customer response to Prime Video. Again, when Prime Video is used by our Prime members, it drives adoption and retention, higher free trial conversion rates, and higher renewal rates for subscribers. So what we were encouraged by in Q4 was that globally, we doubled the number of -- our Prime members doubled the number of viewing hours of the Prime Video year-over-year. And internationally, we had twice as member Prime members streaming year-over-year. So very encouraged by the pick up, and the response of customers.
+The other comment I would say about video is, we're very happy with the Amazon studios content, in particular. We've had some great success in 2014 and 2015. As you probably know, Transparent has won multiple Golden Globes and Emmys, both for actors and for the show itself. Mozart in the Jungle just won two Golden Globe Awards.
+So very pleased with the critical acclaim to the Amazon Studios content, and we've got a lot of new content coming out this year. Catastrophe Season 2, Bosch Season 2, we're all looking forward to. And in February, we will have Chi-Raq, our first original movie that we got to work with Spike Lee on, which won many critical -- made many critics' Best Films list in 2015. That will be coming to Prime Video in February.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [26]
+--------------------------------------------------------------------------------
+
+          
+          Just to add to that, this is Phil. On your question about the streaming partners program, so that's our new over-the-top streaming subscription program for Prime members. We think it's a really convenient way for them to access additional content, content from sources like ShowTime and Starz. And it's really early, so it's just out of the gate, but we've been very pleased with what we've seen so far.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          
+          Two things, please. Any call outs on the macro side? Occasionally, you called anything -- you've called things out, anything this time? And then, could you talk a little bit about Amazon business?
+I know that there is a little bit of a line in the press release on it. I know you've had this for a couple of years. But any indications to the materiality of that, the kind of momentum it's gaining, the kind of traction it's gaining? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [29]
+--------------------------------------------------------------------------------
+
+          
+          Sure, Mark. Thanks for your questions. No macroeconomic comments. Again, we feel we're very encouraged by the customer response to our offerings in Q4.
+Amazon business, yes, in April, you may remember we launched it as a marketplace, with specific features and benefits for businesses. That -- Amazon business now serves more than 200,000 businesses, from small organizations to Fortune 500 companies. So it's still early, but we're encouraged, and we think we're creating some value, a lot of value for our business customers.
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Mark May with Citi. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          
+          Thanks. Brian, question on the international retail business. I think you added well over $1 billion in revenue year-on-year in the quarter, but from a CSOI perspective, you really didn't see any improvement there. I'm sure there is -- there are a lot of different things going on.
+I just wonder if you could unpack that a little bit, and give us a sense of what profitability looks like maybe in some of your more mature, established countries and regions, relative to the investments you're making in other countries? So that we can kind of get a better picture of what's actually going on under the hood there? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [32]
+--------------------------------------------------------------------------------
+
+          
+          Yes. Sure, Mark. Thanks for your question. We are very pleased by the international growth, 22% FX neutral, was up 1,000 basis points year-over-year. We saw that the -- we told you that the Prime growth, Prime membership growth, 50% in -- excuse me, 51% globally. 47% in the US means that the international Prime programs grew at a faster clip than that. So very, very pleased with the uptick.
+We rolled out a lot of additional Prime features internationally as well this year, from free same-day, to Prime Now, to Prime Music, and Prime Video in Japan, to name a few. So very happy with that. But in general, if I step back, our investments in national are twofold.
+First, there's the Prime platform and all the features I just mentioned, including the fulfillment, adding more fulfillment resources to handle higher and higher retail volumes, and a very strong FBA program as well. And then, the remainder -- the biggest other investment area is obviously India. And we like -- we continue to see, like what we see in India. In Q4, Amazon India was the top e-commerce site in India, throughout the very busy -- Diwali shopping season, including the shopping season, according to comScore.
+And sales by sellers in Q4 were greater than all of 2014 combined, in Q4. So seeing great progress with downloads, innovations for sellers and customers alike. And we like the ramp there, and we're continuing to invest in India.
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Douglas Anmuth with JPMorgan. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          
+          Thanks for taking the question. Two things. Just first, on the North America EGM growth, if you could just talk about the 28% there? And the decel on an easier comp, and whether there's any particular factors within that we should be thinking about? And perhaps, if there was any weather and apparel impact there?
+And then second, last quarter, and I don't want to misquote you, but you said something along the lines of, being able to invest as you would like, and also deliver good profit, and that the pendulum wouldn't swing as far perhaps as it has in the past. Is that statement and thought still hold, as you head into 2016? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [35]
+--------------------------------------------------------------------------------
+
+          
+          Sure. Let me start with EGM. So EGM growth, North America EGM growth of 28% was actually also the highest in the last four years. So we're happy with that.
+The deceleration you're seeing of 700 basis points is more a function of the Prime Day that we had in Q3, if you remember. We didn't break it out by segment, but we said that Prime Day contributed 200 basis points to our Q3 run rate, revenue growth rate. So sequentially last year, in North America EGM, we dropped from 31% to 27%.
+This year, it's 35% to 28%. So there is always a -- generally, a sequential drop in Q4. But certainly very happy with that business and its role in Prime as well, in total customer satisfaction.
+Your other question, investments. Yes, we continue to have healthy investments as we've stated across the globe. To step back again on that, our general philosophy is, we want to find things, businesses that customers love, that can grow to be large, will provide strong financial returns, and are durable. They can last for decades. We think Prime is that, we think Marketplace is that, we think AWS is that, and we are constantly looking for a fourth or fifth business that fits that criteria.
+But as we continue to invest primarily in, as I said in Prime, the Prime platform, Prime features for customers, expansion for fulfillment capacity, as we build out to support 26% unit growth in Q4, for instance, and much greater FBA share, and not to mention all the investments in AWS, we are constantly looking for cost efficiencies, in fixing variable productivity. I think a thing to think about is, the investments will ebb and flow over time, but our focus on cost reductions and improvement on customer experience will be constant.
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Heath Terry with Goldman Sachs. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [37]
+--------------------------------------------------------------------------------
+
+          
+          Great, thanks. I was wondering if you could give us a sense, as we look at the slowing growth in AWS, obviously, still from an incredibly high level, and still very strong growth there. But try and take that into context, with the growth in margins that you keep seeing in that business, to levels that certainly seem a lot higher than you would anticipate for an Amazon business. Is there any capacity constraint or management that, that's driving pricing strategy in AWS?
+We've heard the comments about the number of availability zones that are being launched this year, which is obviously about a big part of driving incremental capacity in that business. I'm just trying to balance those, think about how we should balance those three things?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [38]
+--------------------------------------------------------------------------------
+
+          
+          Sure. Let me work backwards from your footprint question or comment. We have -- we just announced Korea as a region. And we'll be adding five more regions in the next, in the future, in the near future as we mentioned. CapEx, let me start with that first. CapEx, we've seen great efficiencies in capital expenditures, in particularly in AWS. And we continue to work on better purchase efficiencies and driving utilization rates in our data centers.
+CapEx, as I mentioned, grew quite a bit in 2014. It grew even more to over $9 billion, across all of our capital expenditures and capital leases in 2015. From the new regions, they are not the major driver in any way. Most of our capacity, and capital and capital leases in AWS is to service existing regions, and existing customers' demand growth. But there's certainly expenditures when we open up new regions. Some of that is not always in the year that we open the region, so we spent a good bit on those new regions already in 2015.
+But as far as pricing, there's no capacity constraint. And I would a little bit dispute the deceleration comment on the -- yes, on a percentage basis, 69% is lower than Q3. But as I've said before, we're approaching a $10 billion run rate in this business. On a dollar basis, we continue to grow. We saw the greatest growth year-over-year and quarter-over-quarter. And again, we continue to invent, it's not all about price-- we continue to innovate on behalf of customers, and see great customer response.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          
+          Sure, sure. Got it. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Kerry Rice with Needham & Company. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Kerry Rice,  Needham & Company - Analyst    [41]
+--------------------------------------------------------------------------------
+
+          
+          Thanks a lot. First question is, if you can provide maybe some context around linearity within Q4, more as a -- compared to your expectations? Obviously, you have a ramp-up into the holiday season, but was -- did December tail off faster than you expected, or did the ramp-up, did it spike higher than you expected? And then, just on the follow-up, maybe can you add some context about how the mobile played a role in the holiday season for Amazon? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [42]
+--------------------------------------------------------------------------------
+
+          
+          So in terms of -- this is Phil. In terms of expectations, I think we were pleased with what we saw this Q4. And if you look at what we gave for guidance, we were in the upper half of the range there for revenue. So no real call outs there. I think, what was your second part of your question?
+Oh, and mobile, we said for a long time continues to be a tail wind for the business. We're working very hard to make sure that it's very easy for customers to buy the things they want to buy, and access a lot of the features they have grown accustomed to on the website. And so, we're very focused on the convenience factor. And if you look at some of our new offerings like Prime Now that's available through a mobile app, and very, very convenient for customers. And as Brian has mentioned, allowed them to shop even up to Christmas Eve, and then have their items delivered in two hours.
+
+--------------------------------------------------------------------------------
+Operator    [43]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from Carlos Kirjner with Bernstein. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Bernstein - Analyst    [44]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. I have two. I want to go back to AWS margins. You talked briefly about purchasing an asset utilization. But do this explain the 800 bps or so, on your year-on-year margin expansion?
+And are you seeing anything else? Like is there any impact of scale driving leverage over fixed costs? Is there some benefit from revenue mix shift, like services, like Aurora and RedShift growing faster than EC2, or is all the margin expansion due to purchasing and asset utilization? So that's the first question.
+And the second, I have a question about your streaming content expenses or cost of revenues to be more precise. Last year, you told us they were $1.3 billion, but if you didn't give us a figure for 2015. In lieu of that, can you comment on whether 4Q saw higher than usual costs for streaming content, compared to other quarters in the year? Thank you.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [45]
+--------------------------------------------------------------------------------
+
+          
+          Carlos, this is Phil. So your question about the AWS margins, that business as they continued to learn, and as we continue to invent and get better at designing and operating the infrastructure and assets, we have been able to drive costs out of that business. And so, that's one of the primary drivers of the improvements that you've seen in margin year-over-year.
+There is also an FX tail wind in there as well, which I think was about $60 million this quarter, which would contribute on a year-over-year basis, which really arises, because we're largely priced in dollars, but have assets with local currency costs throughout the world. As for the streaming content, we haven't given another update this year, and haven't given any commentary on the profile quarter to quarter.
+
+--------------------------------------------------------------------------------
+Operator    [46]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. The next question comes from Brian Pitz with Jefferies. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [47]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. You mentioned Amazon Dash in the press release. Can you give us some color around how you're viewing the traction there, both with customers, and with brands and devices? And then, maybe any update on Twitch? How is traffic and user engagement been trending on that site? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [48]
+--------------------------------------------------------------------------------
+
+          
+          This is Phil. So on the Dash buttons, we're really excited about what we're delivering there. I think, as you saw in the release, there are some new devices that take advantage of the underlying service, that we think will be really convenient for sellers, and interesting for device makers. We're excited about what we're building there. I don't have any stats for you today.
+On the Twitch side, we continue to let Twitch do what Twitch does best. And so, don't have any updates on numbers there, but they continue to really engage customers, and offer a really unique experience, which was one of the reasons we were attracted to them to start with.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [49]
+--------------------------------------------------------------------------------
+
+          
+          And maybe just quickly, end of year fulfillment and sortation centers?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [50]
+--------------------------------------------------------------------------------
+
+          
+          Yes, I'll take that. So we ended the year at 123 fulfillment centers, up a net 14, and we have 20 -- excuse me, 23 sortation centers in the US, up 4 year-over-year.
+
+--------------------------------------------------------------------------------
+Operator    [51]
+--------------------------------------------------------------------------------
+
+          
+          Our next question comes from the line of Gene Munster with Piper Jaffray. Please proceed with your questions.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [52]
+--------------------------------------------------------------------------------
+
+          
+          Hey, good afternoon. I want to just quickly revisit the margin pendulum question in some of your comments, as you mentioned that to kind of expect it to ebb and flow. Could you tell us if you expect it to ebb and flow, but moving higher? Or is ebb and flow just mean that, that it's kind of undetermined in 2016? And then, a second follow-up, is the robotics. Any update in terms of number of robots, or how you see that expansion going forward? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [53]
+--------------------------------------------------------------------------------
+
+          
+          Yes, my comment on ebb and flow was more about the investment, and also including capital expenditures and capital leases. So not around gross margins. And merely, I was pointing out that again, we've laid out all the invested areas, where we're seeing heavy investment. We continue -- we see the continuation of that certainly, into 2016 and beyond.
+There are quarter-to-quarter and even year-to-year fluctuations in some accounts, and some investment areas. But generally, we're pretty transparent on where we're investing our dollars. And against that backdrop, we are always looking for efficiency. And the nice thing about growing the top line at such a high clip, is we have a lot more areas for opportunity to save money year-over-year. And we always look to do that.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [54]
+--------------------------------------------------------------------------------
+
+          
+          And this is Phil. On the Kiva question, the last update we've given is more than 30,000 robots. We continue to be really pleased with the program, and like what it does in the warehouse, both from a density of storage, as well as from making the jobs easier for the associates who are picking packages, by bringing the packages actually to the associates. But no new numbers on that.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+          
+          Our next question comes from the line of Justin Post with Bank of America Merrill Lynch. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Two questions. Was there any category mix impacts in the quarter on gross margins? That's just a quick one.
+And then secondly, as you look back at last year, you had some quarters where you really exceeded your guidance on the CSOI line. Maybe looking back, or just looking forward, what are the types of things that causes you to come in at the high end, versus maybe the low end, when you look back, or when you look forward? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [57]
+--------------------------------------------------------------------------------
+
+          
+          Sure. First, on guidance, we keep it pretty, a consistent process on how we look at guidance, and how we estimate the near-term view of the business. I will point out that Q4 is obviously, a very large quarter, the largest revenue quarter by far of the year. There's a lot of demand that comes in the last six weeks of the year as well.
+So very, very little visibility at the time of guidance when we do the call. So we are using are best projections on a lot of fronts. We think it's a similar -- we know it's a consistent process. And there are times, when we under-run and sometimes we over run it.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [58]
+--------------------------------------------------------------------------------
+
+          
+          On the -- this is Phil. On the category mix question, obviously, category mix does play a role in gross margin. I would say though, that we're much more focused on operating profit dollars, and free cash flow dollars, as we've probably talked about before.
+The gross margins are impacted by first-party versus third-party mix, as well as AWS mix, if you're looking at the total for the Company. So we're much more focused on the dollars. And no specific categories we're calling out, as a driver for gross margin, because, again, we're much more focused on the profit dollars.
+
+--------------------------------------------------------------------------------
+Operator    [59]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Paul Vogel with Barclays. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Paul Vogel,  Barclays Capital - Analyst    [60]
+--------------------------------------------------------------------------------
+
+          
+          Great. Thanks. Just wonder if you could give an update on the strategy around same-day shipping? How we should think about kind of further expansion of that? And kind of what parameters do you guys use to determine what markets to go in? Is it density of the market? Is it proximity of your distribution facilities? Just some color on that would be great.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [61]
+--------------------------------------------------------------------------------
+
+          
+          So we deliver, really quickly, a couple of ways. One is the free same-day, that you've seen us roll out in a number of markets in the US. The other is Prime Now. And we're now in more than 25 metropolitan areas for Prime Now. Delivering for free in two hours is difficult and expensive, but customers love it.
+So we feel like this is the natural evolution of our delivery, and we're happy to invest in that service. We like what it does for Prime members. We like the convenience factor. And so, we're taking a long-term approach, and doing what we normally do, which is really focus on continuing to drive greater and greater efficiency.
+
+--------------------------------------------------------------------------------
+Operator    [62]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Ron Josey with JMP Securities. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Ronald Josey,  JMP Securities - Analyst    [63]
+--------------------------------------------------------------------------------
+
+          
+          Great. Thanks for taking the questions. I wanted to ask more about North American operating margins, because I think they expanded just under 50 bps this quarter to 4.7%. And that compares to an average of 200 basis points thereabouts, expansion in the prior three quarters.
+So I'm just wondering, if in 4Q maybe higher FPA costs or something else in there that led to, maybe an expansion not as great as we saw in prior quarters. And then, following up on the Prime Now question just now, I'm wondering how an hour delivery or two-hour delivery has changed a consumer's perception of just delivery overall? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [64]
+--------------------------------------------------------------------------------
+
+          
+          Sure. Yes, again, I'll point out that the demand for FBA services was very high, nearly 50% of our third-party units, again were FBA. And the demand for space and services was very large by our seller base, which was great from a lot of standpoints, and it did exceed our expectations. But did make our warehouses rather full, and did cause us to incur some additional variable costs in the US. And there is also the dynamic that we were fulfilling more of these units ourselves, at our warehouses because of the FBA growth, and the retail growth.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [65]
+--------------------------------------------------------------------------------
+
+          
+          On the speed of delivery, this is Phil. All I can say is, the customers love the service. It's very convenient, and it gives them flexibility, and the ability to get products really quickly. I don't know that there's any big trends we are ready to call out at this point, but they seem to really, really like it. So we're encouraged by that. We're excited to invest in it, and excited what we can do for our Prime members.
+
+--------------------------------------------------------------------------------
+Operator    [66]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our next question comes from the line of Neil Doshi with Mizuho. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Neil Doshi,  Mizuho Securities Co., Ltd. - Analyst    [67]
+--------------------------------------------------------------------------------
+
+          
+          Great. Two questions, please. One, it seems like the Echo did perform well. Can you talk more broadly about your Internet of Things ambitions, and kind of how Echo plays into that strategy?
+And then, secondly, just wanted to know a little bit more about restaurant delivery? It seems a little bit outside of the wheelhouse. What's the impetus behind doing more in terms of food delivery, and what are your ambitions there? Thanks.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [68]
+--------------------------------------------------------------------------------
+
+          
+          So on the Echo, we like what -- how Echo has done. We're really excited about the ecosystem, and some of the skills that are being added to Echo, as well as some of the other devices that are taking advantage of Alexa, which is the brains behind Echo. So we like our device business in general.
+As you probably saw from the press release, we had a good Q4, where we did almost double the, or double what we did last year, so very excited about the devices. We like that they pump more energy into Prime, and really the whole ecosystem. Not sure on the Internet of Things, but it's very exciting for devices standpoint. And the brains of Echo are in the AWS cloud. And so, Echo gets new capabilities all the time, as Alexa gets better and better.
+On the restaurant delivery, it's just another great service we can offer for our Prime members. This is tied in with the Prime Now offering in a handful of cities at this point. And so, we have the delivery people going out and making the deliveries in the neighborhoods. And so, this is one more really valuable convenient service we can offer for our Prime customers.
+
+--------------------------------------------------------------------------------
+Operator    [69]
+--------------------------------------------------------------------------------
+
+          
+          Thank you. Our final question will come from John Blackledge with Cowen and Company. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [70]
+--------------------------------------------------------------------------------
+
+          
+          Great, thanks. Two questions. First one, shipping costs were higher than we expected. I think it was 12.5% of net revenue, versus 11% last year.
+Just any color on the higher shipping costs? And is that percentage of net revenue a new normal, as we are in 2016 now, and as we look out? And then the second question on Prime Now, in 25 markets globally, how should we think about the total number of markets that, additional markets you can enter with the Prime Now offering in 2016? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc - CFO    [71]
+--------------------------------------------------------------------------------
+
+          
+          Sure. Yes, as you say, the net shipping margin was up 70 basis points year-over-year. Again, this is all tied in with the increase in FBA growth, and the demand from Prime members. We're shipping more units -- more of our units, so this ripples through our ship cost per unit. And, again, the calculation of ship costs, as margin is a percent of revenue, and that is impacted by the denominator effect on the FBA sales, being booked at a net revenue.
+
+--------------------------------------------------------------------------------
+Phil Hardin,  Amazon.com Inc - Director of IR    [72]
+--------------------------------------------------------------------------------
+
+          
+          Related to your Prime Now question, this is Phil. We're in more than 25 metropolitan locations. It's -- if you've been watching, this roll out has really happened in the last year, so it's been a pretty rapid rollout. We're excited to bring it to more places.
+We don't have a target for you today, but we are working hard to bring it to more and more places. We're outside the US now in a handful of countries, in the UK and Japan and Italy, and working to expand. So it's a program we're really excited about, and we're happy to bring it to more customers.
+Thank you for joining us on the call today, and for your questions. A replay will be available on our Investor Relations website, at least through the end of the quarter. We appreciate your interest in Amazon.com, and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2016-Jul-18-BAC.N-138282004512-Transcript.txt

@@ -0,0 +1,833 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2016 Bank of America Corp Earnings Call
+07/18/2016 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Moynihan
+   Bank of America Corporation - Chairman & CEO
+ * Lee McEntire
+   Bank of America Corporation - SVP of IR
+ * Paul Donofrio
+   Bank of America Corporation - CFO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Steven Chubak
+   Nomura Securities - Analyst
+ * Brennan Hawken
+   UBS - Analyst
+ * Paul Miller
+   FBR Capital Markets - Analyst
+ * Eric Wasserstrom
+   Guggenheim Securities - Analyst
+ * Mike Mayo
+   CLSA - Analyst
+ * Glenn Schorr
+   Evercore ISI - Analyst
+ * Ken Usdin
+   Jefferies LLC - Analyst
+ * Matthew Burnell
+   Wells Fargo Securities - Analyst
+ * Matt O'Connor
+   Deutsche Bank - Analyst
+ * Vivek Juneja
+   JPMorgan - Analyst
+ * Jim Mitchell
+   Buckingham Research - Analyst
+ * Richard Bove
+   Rafferty Capital - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Good day, everyone, and welcome to today's program. (Operator Instructions). Please note this call is being recorded. It is now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP of IR    [2]
+--------------------------------------------------------------------------------
+Good morning. Thanks, everybody, on the phone as well as the webcast, for joining us this morning for the second-quarter 2016 results. Hopefully everybody's had a chance to review the earnings release documents that were available on our website.
+Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information on those, please refer to either our earnings release documents, our website or our SEC filings.
+So before Brian and Paul get into the results, just let me mention one housekeeping item. Please limit your questions to one per caller so that we can get to everyone and you can circle back.
+With that, I'll turn the call over to Brian Moynihan, our Chairman and CEO, for some opening comments, before Paul Donofrio, our CFO, goes through the details. Brian?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [3]
+--------------------------------------------------------------------------------
+Thank you, Lee, and good morning, everyone, and thank you for joining us to review our second-quarter results. I'm beginning on slide 2 of the materials we sent to you.
+We reported solid earnings of $4.2 billion after-tax, or $0.36 per diluted share, in what was certainly an eventful quarter for the markets from an overall macro perspective. This compares to $5.1 billion or $0.43 per share in the year ago quarter.
+This quarter included negative market-related NII adjustments that cost $0.05 per share, and negative DVA that cost us another $0.01 for a total of $0.06. That compares to a $0.03 benefit to EPS for both those items in the second quarter 2015.
+Earnings neutralizing for the FAS 91 DVA for both periods improved from $0.40 per share to $0.42 per share on a year-over-year basis. Our results represent another quarter of solid progress in the strategies we have been executing. Those strategies are delivering more of the Company's capabilities to each and every client we serve.
+At BAC, we focus on what we can control and, despite low rates and other macro events; we continue to focus on managing our risk, our costs and our delivery of quality products and customer service.
+In Q2, we grew loans $22 billion, or approximately 2.5% versus last year, even as we sold a few portfolios during the year. All this growth was organic and consistent with our risk appetite. We also grew deposits more than $66 billion or 6% over that same time period. And we did so while maintaining disciplined deposit pricing.
+We also continue to transform our Company in a digital way in all things and all businesses. For example, this quarter we crossed over 20 million active mobile users and continue to increase their use of digital channels for book transactions and buying more bank products.
+Active Mobile Banking customers logged into their accounts over 900 million times this quarter, depositing more than 25 million checks, or more than $20 billion via mobile check deposits. They made over 25 million mobile bill payments, up 30% year-over-year, and made nearly 80 million transfers.
+Person-to-person, or P2P payments, continue to ramp up as well. While still a small component of the overall consumer payments this quarter, we had $6.7 billion in P2P payments this quarter. That is more than $13 billion year-to-date and is up 28% from last year. This channel is a value channel for all our customers and made possible by the continuing investment we make.
+As we move to slide 3, we have talked to a lot of you over the last several months, including many of you on the phone today. I thought I'd try to address some of the more common questions we get from those conversations by looking at our results, by looking at the income statement and the items there in.
+First, one of the core questions is what if rates stay lower for longer? Well, for bank management and for you as investors, it would be easier if rates were to rise, but that hasn't happened. So the question is, can would grow earnings without rates improving? We believe we surely can.
+We can do that by continued success on things like expense management, by keeping NII stable to growing, stable and growing fees and continue to manage risk well and hold down our credit costs.
+As you can see, revenue this quarter was $20.6 billion on an FTE basis. Adjusted for the negative impacts of market-related NII adjustments and DVA, that number is $21.8 billion. Adjusted for the same items in the year ago quarter, the total was comparable.
+Now as we focus in on NII, Paul will take you through some of the changes this quarter later in the presentation. However, in summary, adjusted for market-related changes in both last year's second quarter and this year's second quarter, we grew NII by $400 million or 4% year-over-year. And that took place while the 10-year treasury yield fell 86 basis points from last year on a spot basis.
+Going forward in a stable interest rate environment, we believe we can maintain NII around the second-quarter 2016 level based on the current loan and deposit growth we see. And if rates rise, we would expect NII to grow.
+Another question relates to the Global Markets business. That question is often asked how we need to change this business, especially the FICC area, as many of our customers have. I want to hit this head on.
+First of all, fixed income is a good business for us here at Bank of America. It is a business which benefits not only by its core activities but by being coupled with our massive Global Banking franchise that has leadership positions across the globe.
+Combined together they generate a pretty steady $1 billion or so quarterly investment banking fees. It's also an important part of our overall Global Markets platform, the platform which sits on top of the number one global research team for the past five years.
+In the second quarter, this business did well. Global Markets generated $3.7 billion in sales and trading revenue excluding DVA. Compared to the same period last year, that is up 12%. This year-over-year improvement is driven by FICC sales and trading, which is up 22%.
+Now think about that, sales and trading revenue including DVA for this quarter was the highest second quarter we've experienced in five years and it led to one of the most profitable quarters for Global Markets we've seen in the past five years.
+Also, the team served clients well during a period of difficult volatility, so it clearly remains a profitable important business for us to serve clients. We're proud of how the team supported their clients through the Brexit vote and the periods of volatility related thereto.
+Another question is getting clarity on how we're transforming the business on the fee lines. Noninterest revenue was $11.2 billion this quarter; although modestly down from second quarter 2015, it was up nicely from the first quarter. There are a lot of items that run through the various lines of fees.
+First, with regard to consumer fees, we are largely done with the big card portfolio divestitures and branch divestitures. Both those impacted both card fees and banking service charges and you can see them coming off the bottom as you look at the linked quarters. Fees now will grow with the volume of cards and accounts that are now net growing in our Company.
+Our mortgage business is now sized appropriately for our franchise and the fee line there, Paul will talk about later, but will be -- is at near where it's going to be in the future.
+With regard to revenue more closely tied to markets businesses, the ups and downs in volumes of activity in sales and trading, investment banking and brokerage will move back and forth through the market. But the important thing is we have strong businesses -- strong client facing businesses in these areas and we're getting our share of these revenue streams even while the market ebbs and flows.
+So if we look about -- move from the fee line to the expense line, many of you give us credit for having managed expenses from $70 billion five years ago to the mid $50 billion today. But the question is can we do more? If you look at this quarter we continue to manage expenses well.
+Non-interest expense this quarter was $13.5 billion, improving more than 3.5% -- 3% from 2015's second quarter. This continues a trend of performance that has shown expense declining significantly on a quarterly basis quarter after quarter over the past several years. This is the lowest level that we have reported since the fourth quarter 2008, and that's prior to the Merrill Lynch merger.
+If you look at our efficiency ratio and normalize it to the NII adjustments stated above, it would be about 62% this quarter. That's an improvement of 200 basis points from last year's second quarter.
+Cost control and cost-effectiveness is a focus for our management team here at Bank of America. So the question is how much more can we do on expenses? So if you think about this, let's start by looking at the cost of the most recent four quarters.
+In the trailing four quarters, the total expense base was $56.3 billion. As we look out from the third quarter of 2016 through the next six quarters into 2018, we believe that with our SIM efforts and the continued work we're doing across the board in expenses, we are targeting an annual expense number of around $53 billion in total expenses for the year 2018.
+So over six quarters, we continued to absorbed investment, merit increases, rising healthcare costs and bringing expenses down a nominal amount.
+Our continued work in driving down costs to service delinquent loans will help with this, but the other reductions are generally coming from the core work in Simplify & Improve, work we continue to do to simplify those work processes, but also the core work we do to allow us to self fund our growth initiatives, and our continued investments in technology and salespeople.
+While I'm on the topic of expenses, I want to point out another important milestone for our Company this quarter. This quarter we changed our reporting to eliminate the Legacy Assets & Servicing segment. This completes the transformation -- this segment was the last place where product orientation was reported, [not] customer orientation. And more importantly, it also reflects the last of Legacy is really behind us from an operational basis.
+We added a couple slides in the appendix today to go along with our 8-K we filed a few days ago to explain the methodology of the realignment of LAS and the highlights that impact this segment where those loans and associated P&L are reported now.
+But what I want to get to -- across to you is LAS was [not] as an operational segment successfully did what it was tasked to do, to clean up one of the largest mortgage servicing businesses in the US.
+Consider that progress. From 1.4 million delinquent loans mortgage loans, we're down to 80,000 today. At one point we had 58,000 teammates and 20,000 contractors working on this task, and now we're down to 10,000 teammates. From one peak quarter of $3 billion plus in expenses, we're down to $600 million this quarter.
+That phase of the work is complete and we need to move that operating business in with the rest of the Company to do the further consolidation and further work to improve our servicing costs. We are pleased with the accomplishments of this group, but there is still more to be done.
+And that brings us to our provision. Simply put, the question we often get is, is credit deteriorating? As you can see, we remain very pleased with both consumer and commercial credit performance. Not only net charge-offs not gotten worse, but they've improved in the most recent quarter, moving back below $1 billion.
+Provision expense is and will remain roughly equivalent to net charge-offs. Even in our energy portfolio we've seen lower exposures [improved] losses.
+And that brings us to our returns. In this operating environment, can we get our returns above our cost of capital? Well, as you can see, we made solid progress on our returns this quarter. Our return on tangible common equity adjusted for the market-related and DVA impacts was 10.9%. On a similarly adjusted basis, ROA has moved to 90 basis points.
+We still have work to do, but you can see the improvement coming through.
+As we move to slide 4, you can see our business segment results. You see strong year-over-year results in every business driven by the generation of operating leverage. Consumer Banking continued its momentum around client activity and operating leverage. Consumer satisfaction continues to improve as does adoption and use of digital capabilities and functionality.
+In our wealth management business, they grew earnings as costs declined more than revenue while we continue to invest in this business. Revenue was impacted by AUM valuations from market variability.
+Our Global Banking team drove results with continued solid loan growth, operating leverage of 9%, and strong credit results. Global Markets executed well for its clients, as I stated earlier, in a very difficult period and used operating leverage to grow its earnings year over year as well.
+So on a combined basis, those four business segments improved 16% from last year's second quarter, earning about $5 billion this quarter. Partially offsetting this was a loss in All Other and that primarily reflects the market-related NII adjustments I spoke about earlier.
+You can also see the returns and efficiency ratios for each of these segments and note that each segment is earning well above our cost of capital. With that, I'm going to turn it over to Paul to take you through the numbers.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+Thanks, Brian. Good morning, everyone. Since Brian covered the income statement, I will start with the balance sheet on page 5.
+As you know, when general deposit flows drive the size of our balance sheet and they, on an ending basis, were relatively flat this quarter as inflows were partially offset by outflows to fund seasonal tax payments.
+So total assets were stable compared to Q1 with loans increasing modestly, security balances rising and cash down a corresponding amount. Liquidity also saw a small decline; however, we remain well compliant with LCR requirements.
+Tangible common equity of $170 billion improved by $3.6 billion from Q1 driven by earnings in OCI. This was partially offset by [$1.4 billion] (corrected by company after the call) in share repurchases and roughly $500 million in common dividends.
+As a reminder, following the CCAR results, we announced an increase in both our share repurchase authorization as well as a planned increase of 50% in our quarterly dividend. On a per share basis, tangible book value per share increased to $16.68, up 11% from Q2 2015.
+Turning to regulatory metrics, as a reminder we report capital under the advanced approaches. Our CET1 transition ratio under Basel III ended the quarter at 10.6%. On a fully phased in basis, CET1 capital improved $4.3 billion to $161.8 billion.
+Under the advanced approaches compared to Q1 2016, the CET1 ratio increased 37 basis points to 10.5% and is above our current 2019 requirement. Our [risk-weighted assets] (corrected by company after the call) declined roughly $13 billion driven by reductions related to retail exposures, primarily from credit improvement.
+We also provide our capital metrics under the standardized approach. Here our CET1 ratio improved to 11.4%. Supplementary leverage ratio for both parent and Bank continue to exceed US regulatory minimums that took effect in 2018.
+Turning to slide 6 and on an average basis, total loans were up $7 billion from Q1 and $23 billion or 3% from Q2 2015. On an ending period basis, loan growth this quarter was impacted by pay downs near the end of the quarter in the non-US corporate loan facilities and about $1.6 billion in FX translations across international loans including UK card.
+Note on the slide there is a breakdown of the loans in our business segments and All Other. Again on an average basis year-over-year, loans in All Other were down $42 billion driven by continued run off of first and second lien mortgages, while loans in our business segments were up $65 billion or 9%.
+In Consumer Banking, we continue to see strong growth in consumer real estate and vehicle lending offset somewhat by runoff in home equity outpacing originations. In Wealth Management, we saw growth in consumer real estate and structured lending.
+Global Banking loans were up $35 billion or 12% year-over-year and up 7% annualized from Q1. Deposits were stable with Q1 at $1.2 trillion but grew $67 billion or 6% from Q2 2015.
+Broad-based growth was led by Consumer increasing more than $44 billion or 8% year-over-year, while Wealth Management deposits rose 6% and deposits with corporate clients and Global Banking improved nearly 4%.
+Turning to asset quality on slide 7, we saw improvement from Q1. Total net charge-offs improved $83 million from Q1 to less than $1 billion in Q2. Consumer losses declined modestly across a number of products and while slight commercial losses also declined from Q1 as a result of lower energy losses. Provision of $976 million in Q2 was down $21 million from Q1.
+Finally, we had a small overall net reserve release in the quarter as consumer releases were modestly offset by builds in commercial.
+On slide 8, we provide credit quality data on our Consumer portfolio. Net charge-offs declined $68 million from Q1. While driven by the real estate losses, the improvement, as I mentioned, was broad-based.
+Over half of the losses in this book are US credit card with a loss rate improved 5 basis points from Q1 to 2.66%. Delinquency levels and NPLs improved and reserve coverage remains strong.
+Moving to the commercial credits on slide 9, net charge-offs improved $15 million from Q1 as energy losses declined. Energy charge-offs decreased $23 million from Q1 to $79 million this quarter.
+There isn't a lot of new news on the commercial asset quality front other than the modest improvement in our energy-related exposure. As you all know, the price of oil and gas was more stable in Q2.
+Within this backdrop, we experienced some improvement in both energy losses and exposure. A few clients refinanced with equity issuances and other financing solutions which also helped improve exposures.
+Overall, ever committed energy exposure declined $3 billion from Q1 with utilized exposure declining more modestly and exposure to exploration production as well as oilfield services, which we believe are the two higher risk subsectors, declined 1% from Q1.
+Outside of energy, commercial asset quality continues to perform well. Let me share with you a few metrics that exhibit the quality of this book and its performance.
+The reservable criticized exposure ratio is 3.8% and, excluding energy, metals and mining, exposure is 2.4%, which is near prerecession levels.
+The commercial net charge-off ratio, excluding small business, has been below 15 basis points for 14 consecutive quarters, even with the elevated levels of energy charge-offs we experienced over the past three quarters.
+The NPL ratio, which today is at 37 basis points, has been below 40 basis points for 11 consecutive quarters.
+Turning to slide 10, net interest income on a reported non-FTE basis was $9.2 billion. Included in NII this quarter was a negative $974 million market-related adjustment to true up (inaudible) premium amortization. This follows Q1's more negative adjustment of $1.2 billion and it's important to note that the adjustment in Q2 2015 was a benefit of $669 million.
+NII on an FTE basis, excluding market-related adjustments, was $10.4 billion. This was lower than Q1 primarily due to lower long-end rates and Q1's seasonal impacts. Compared to Q2 2015, results were up nearly $400 million or 4% as higher [shorten] rates, combined with loan growth funded by deposits, offset the negative impact of lower long-end rates.
+Looking forward to Q3, we will benefit from an extra day which will be offset by the impact of declines in long-end rates over the past two quarters and put pressure on our MBS bond yields and reinvestment yields more generally.
+As we get into Q4 and the next year, we get more optimistic about NII, assuming both the current forward curve and the current pace of loan and deposit growth.
+With respect to asset sensitivity, as of 6/30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $7.5 billion over the subsequent 12 months, driven by the increase in long-end rates.
+Now we think it's also important to understand what we expect to happen to NII if rates don't rise. Referring to the bottom left of the slide; the adjusted NII has been fairly stable averaging between $10.3 billion and $10.4 billion over the past five quarters.
+If we have stability in long-end rates, we would expect to maintain that level in the near-term, again assuming modest loan and deposit growth. Rates moving up or down from here would obviously impact that perspective slightly in the near-term, but building as we extend that scenario into future quarters and years.
+Turning to slide 11, noninterest expense was $13.5 billion in the quarter. That is $0.5 billion or 3% lower than Q2 2015, driven by good expense discipline across the Company.
+As you can see, we are presenting expenses a little bit differently now that we have eliminated the LAS segment. Having said that, we made steady progress on reducing legacy loan servicing costs this quarter and we still expect to achieve our original goal of lowering the former LAS segment costs, ex-litigation, to $500 million in Q4.
+Q2 litigation expense was $270 million, which was higher by $95 million in Q1 2015. So year-over-year, expense improvement, ex-litigation was actually $600 million.
+Nearly every category of cost was lower year-over-year. It was led by personnel, including the expiration of the fully amortized advisor awards, and the revenue-related incentive mostly in Wealth Management. While the rest of the improvement I would characterize as just good hard work, grinding expenses lower through SIM and other initiatives.
+While the rate of decline has been slowing, our employee base is down 3% from Q2 2015. As the employee base continues to grind lower, we think it's important to point out that the reductions on a percentage basis now include more highly paid managerial associates.
+So while the rate of FTE reduction has slowed, the relationship to expense reductions is not linear. Also, we continue to increase the number of client facing associates to drive growth, while at the same time, through SIM and other efforts, simplify and streamline activities and thereby reduce non-client facing positions.
+Lastly, as I said last quarter, we expect our quarterly FDIC expense to increase approximately $100 million for a number of quarters, starting in Q3 2016.
+Turning to the business segments and starting with Consumer Banking on slide 12, Consumer earned $1.7 billion, continuing its trend of solid improvement and reporting a robust 20% return on allocated capital.
+Revenue and earnings were driven by deposit and loan growth, coupled with continued expense improvement, driving operating leverage. As a result of this operating leverage, the efficiency ratio improved roughly 360 basis points year-over-year.
+Note that the lack of reserve releases this quarter versus a meaningful release last year mitigated some of the improvement in operating leverage. So while earnings were up 3% year-over-year, pre-tax pre-provision earnings rose 11%.
+On slide 13 we focus on additional key Consumer Banking trends. First in the upper left, the stats are a reminder of our strong competitive position. Revenue increased by $107 million as NII growth more than offset lower noninterest income.
+Net interest income continued to improve as we drove deposits and loans higher. Noninterest income was down due mostly to lower mortgage banking income. This decline is in part a result of selling fewer loans and instead holding more on our balance sheet thereby shifting mortgage banking income to NII.
+Expense declined 5% from Q2 2015. The positive expense trend is a result of a number of initiatives. As an example, I would note that our growth in Mobile Banking continues to play an important role in helping us optimize our delivery network while improving customer satisfaction. Our cost of deposits as a percent of average deposits also continued to improve and now stands at 162 basis points.
+Focusing on client balances on the bottom of the page, Merrill Edge brokerage assets at $132 billion are up 8% versus Q2 2015 on strong account flows partially offset by lower market valuations. We increased the number of Merrill Edge customers by 10% from Q2 2015. We now have more than 1.6 million households using our platform for self-directed trading.
+Moving across the bottom right of the page, note that loans are up 5% from Q2 2015 on strong mortgage and vehicle lending growth. Average vehicle loans are up 20% from Q2 2015 with average book FICO scores remaining well above the 770 level and net losses remaining below 30 basis points and improving on a linked quarter basis.
+Mortgage loan growth was aided by solid mortgage production of $16 billion, up modestly from Q2 2015, as customers took advantage of historically low interest rates.
+On consumer card -- or I should say on US consumer card, we issued more than 1.3 million cards in the quarter which is the highest level since 2008. Average balances were modestly down. However, adjusting for divestitures, average card balances grew $1.4 billion compared to Q2 2015. Spending on credit cards adjusted for divestitures was up 7.5% compared to Q2 2015.
+As we viewed in previous quarters, we continue to focus on originating high FICO loans which generally produce low loss rates and strong risk-adjusted margins.
+Last quarter we highlighted the quality of our underwriting in the Consumer business. This quarter, we are highlighting our leading position in digital banking. This technology continues to reshape how our customers bank.
+Importantly, as adoption rises, particularly around transaction processing and self-service, we see improved efficiency and customer satisfaction. We added more than 2.5 million new mobile customers in the past 12 months. With more than 20 million active users, deposits from mobile devices now represent 17% of deposit transactions.
+Mobile customers, on average, process 280,000 deposits per day, an increase of 28% year-over-year and the equivalent to volume of 800 financial centers. Mobile sales are up nearly 50% from last year. We are promoting mobile sales and electronic adoption by deploying digital ambassadors in our financial centers.
+We now have more than 3,500 digital ambassadors in our branches engaging with customers who come into the branch to transact. They educate these customers on alternatives to branch banking which are not only more convenient for them but also more efficient for us. Digital sales, appointments and satisfaction all continue to achieve new highs.
+Also, as you know, we are a leader in person-to-person and person-to-business money movement through digital transfers and bill payment capabilities. The adoption and popularity of these capabilities continues to drive growth with record volume of $246 billion this quarter, up nearly 5% year-over-year.
+Turning to slide 15, Global Wealth & Investment Management produced earnings of $722 million, up 8% from Q2 2015. Year-over-year, revenue was down modestly but expenses were down even more, improving pretax margin to 26%, up meaningfully from Q2 2015.
+This quarter included a modest gain from the previously announced sale of Bank of America Global Capital Management. This reduced AUM comprised of short-term liquid assets by approximately $80 billion. Overall, revenue declined 2% from Q2 2015 as strong NII growth and the gain were more than offset by lower market sensitive revenue.
+Asset management revenues decline from Q2 2015 on lower market values while improving modestly on a linked quarter basis. Transactional revenue was down and continues to be impacted by market uncertainty as well is the migration of activity from brokerage to managed relationships. NII benefited from solid deposit and loan growth.
+Noninterest expense declined nearly $200 million or 6% from Q2 2015 with half of that benefit derived from the expiration of the amortization of advisor retention awards that were put in place at the time of the Merrill Lynch merger. The rest of the improvement was a result of lower revenue-related incentives and other support costs.
+Moving to slide 16, despite volatile markets, we continue to see overall solid client engagement. Client balances at $2.4 trillion were down from Q1 but, excluding the sale I mentioned earlier, were up from Q1 as higher market valuation levels, $10 billion of long-term AUM flows and loan growth more than offset tax-related deposit outflows.
+Driven by the expected seasonality, average deposits were down from Q1 as clients paid income taxes. Importantly, average deposits are up 6% from Q2 2015 driven by growth in the second half of 2015.
+Average loans also grew this quarter. Growth was concentrated in consumer real estate and structured lending as well.
+Turning to slide 17, Global Banking earned $1.5 billion producing solid improvement over both Q1 and year-over-year. Returns on allocated capital was 16%, a 200 basis point improvement from Q2 2015, despite adding $2 billion in allocated capital.
+Double-digit percent revenue growth year-over-year offset a low-single-digit expense growth creating strong operating leverage that improved the efficiency ratio to 45%. Global Banking continues to drive solid loan growth within its risk and client frameworks producing solid year-over-year improvement in NII.
+Revenue benefited this quarter from mark-to-market gains on our [FEO] loan portfolio due to recovery in certain energy and mining exposures. Higher treasury fees and leasing gains also aided the improvement from Q2 2015. While total investment banking fees for the Firm were down from Q2 2015, Global Banking gained a little share supported by M&A fees which were up on an absolute basis.
+A modest increase in noninterest expense compared to Q2 2015 reflects the cost of adding sales professionals over the past 12 months, and a modest increase in incentive related due to the higher revenue.
+Looking at trends on page 18, and comparing Q2 last year, clients were confronted with increased volatility once again this quarter with concerns around both global growth as well as the outcome of the UK referendum.
+However, despite concerns, companies still need to finance as well as store their -- move their money and this is when the strength and diversity of our franchise is most appreciated by our clients.
+Average loans on a year-over-year basis grew $35 billion or 12%. Growth was broad-based across large corporates as well as middle-market borrowers and spread across most products.
+Having said that, we slowed our construction led commercial real estate lending a few quarters ago. Average deposits increased from Q2 2015 up $11 billion or 4% from both new and existing clients.
+Switching to Global Markets on slide 19. The past couple of quarters are great examples of the importance of this segment to not only its clients around the world, but also to our customers and clients in all our business segments.
+Customers and clients were able to live their financial lives better in Q2 because Global Markets delivered for them under challenging market conditions helping them raise capital, buy and sell securities as well as manage risk.
+We believe we increased our relevance with clients during Q2 and, more specifically, during the market volatility after the UK referendum. We did this by showing them that we will be there for them when they need us most.
+That we are there for them with consistent set of products and services at terms that makes sense for our clients and our shareholders. And there for them with thoughtful advice as well as the capabilities, strength and confidence to make markets and execute.
+All of this results in Global Markets reporting earnings of $1.1 billion and a return on capital of 12% -- 13% excluding net DVA impact.
+Revenue was up appreciably year-over-year as well as linked quarter. Total revenue, excluding DVA, was up 8% year-over-year on solid sales and trading results and up 18% over a Q1 that saw challenging market conditions. strong expense management drove expenses 6% lower year-over-year even while revenue was higher.
+Moving to trends on the next slide and focusing on the components of our sales and trading performance, sales and trading revenue of $3.7 billion excluding net DVA was up 12% from Q2 2015 driven by FICC.
+In terms of revenue, this was the best second quarter we have had in the past five years. Excluding DVA and versus Q2 2015, FICC sales and trading of $2.6 billion increased 22% as the improvement which begun in late Q1 continued through Q2 as global concerns abated and central banks took further monetary policy actions.
+Improvement was across both macro and Credit Products driven by stronger rates in currency, client activity as well as improved credit market conditions.
+Tighter spreads benefited mortgage trading and municipal bonds outperformed treasuries with strong retail demand. Equity sales and trading was $1.1 billion, declining 8% versus Q2 2015 which saw significant client activity in Asia driven by stock market rallies in the region.
+On slide 21, we show All Other which reported a loss of $815 million. This loss was driven by the current quarter's $974 million market-related NII adjustment. The loss is lower than Q1 due to both a lower market-related NII adjustment as well as the absence of retirement eligible incentive costs.
+Compared to Q2 2015, the difference is driven by a number of factors. First, the negative NII market-related adjustment in this quarter versus a large positive adjustment in Q2 2015. Second, we had reps and warranty recoveries in Q2 2015 related to a court ruling and gains on the sale of consumer real estate loans. Third, provision expense declined from Q2 2015 driven by continued portfolio improvement.
+The effective tax rate for the quarter was about 29%, which is in line with what we expect for the remainder of the year absent any unusual items.
+And, as a reminder, we still expect to record a tax charge of about $350 million, most likely in 3Q, that reduces the carrying value of our UK DTAs as a result of UK tax reform announced last year. The vast majority of this charge will not impact regulatory capital.
+Okay, so let me offer a few takeaways as I finish. Q2 was another quarter of solid progress in a challenging global environment. While growth concerns persist in many countries, the US economy continues to steadily improve, albeit at a less than optimum pace.
+The diversity and strength of our franchise makes us more relevant to clients and customers during times such as these and you can see that in our results.
+Clearly interest rates affected our financial performance this quarter. Still, while we cannot control interest rates, we are not waiting for them to rise. We grew in this environment by focusing on the things that we can control and drive. We grew deposits, we grew loans, we managed risk well reflected in reduced charge-offs.
+We delivered for customer clients in another challenging quarter, especially around the UK referendum. We invested in our future by adding sales professionals and continuing to deploy technology that improves customer satisfaction.
+We returned capital to shareholders and we announced plans to return increasing amounts. And we did all of this while we lowered expenses and drove operating leverage. Thank you. With that, let's open it up for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+(Operator Instructions). Matt O'Connor, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [2]
+--------------------------------------------------------------------------------
+Good morning. I had a few follow-ups on the expense commentary. I guess first, though, just maybe what drove the timing of -- given a three-year expense outlook, is it acknowledging lower for longer rates? Is it finding more opportunities? Or what was the motivation to give expense outlook for 2018 at this point?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [3]
+--------------------------------------------------------------------------------
+Well, Matt, as we looked at it, this is our current plan, so there's no new news for us in terms of how we operate the Company. But what we saw is that people were not getting the expenses right in the out years thinking that we could not continue the rate of investment and continue to bring down expenses.
+Secondly, to make sure people understood it in terms of blending in LAS and putting it into the base, it's now become less of the contribution; now it's more the general expense base we're working on.
+So, I think it was consistent with the way we were running the Company, but we wanted to make sure people had clarity over the next six quarters and going into 2018 of where we think the expense base goes versus what we saw in some of your guy's estimates and stuff.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [4]
+--------------------------------------------------------------------------------
+Okay, and then I guess specifically, the $53 billion that you pointed to, does that include the first-quarter stock expense of around $1 billion and some, I assume, nominal amount for legal?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [5]
+--------------------------------------------------------------------------------
+Yes, it includes an estimate based on current views of both. That's all in expenses for the year. Now they come in different quarters.
+You just pointed out we have a frontloaded of that, but -- so this quarter did not include that -- think about it as $0.25 billion, plus [a quarter] when you think about the $13.5 billion this quarter. But overall, it includes the estimate for that out there plus the litigation estimate.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [6]
+--------------------------------------------------------------------------------
+Okay, and just separately if I can ask, we've had a couple other banks talk about loosening standards a bit on the consumer side. I feel like you've held your standards quite high especially in credit card.
+But just any thoughts on appetite for loosening standards a little bit here given the challenging rate environment and the economy is still hanging in there?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [7]
+--------------------------------------------------------------------------------
+Look, we've worked, I think, extraordinarily hard to transform the Company, its balance sheet, its ability to produce earnings. We've got a customer and risk framework on the Consumer side that is focused on prime and super prime. That strategy, I think, works for our shareholders and our customers and we're sticking to it.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [8]
+--------------------------------------------------------------------------------
+And just to give you a simple view of that, Matt, this quarter we did the highest number of new credit card originations we've done for a long time and all of them are consistent with that risk appetite. So there's plenty of market share to gain there by just concentrating on current customers and deepening.
+And while people always ask the question you asked, the answer is there still about 7 out of 10 mortgage customers at Bank of America get their mortgage somewhere else that fit within our credit customers.
+There is plenty of cardholders that fit our credit parameters that are out there that don't have our card or aren't using our card as their primary card. And so, just giving those couple of examples, there's plenty of market share to get there so we don't need to change the standards to grow, and you've seen that come through.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [9]
+--------------------------------------------------------------------------------
+Okay. Thank you very much.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+Jim Mitchell, Buckingham Research.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [11]
+--------------------------------------------------------------------------------
+Hey, good morning. Maybe I could follow up a little bit on the NII discussion. Maybe if you could help us think through -- you talked about near-term kind of flattish, but as we think a little bit longer-term, if the forward curve is realized and/or maybe give some color -- you've had good deposit growth, core loan growth of 9%, but net loan growth has only been about 2.5%.
+Do we start to see that inflect more? And does that start to help the out years as well? So, just any color on NII beyond the next quarter or two would be helpful.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [12]
+--------------------------------------------------------------------------------
+Sure, look, as I said in my comments, if rates follow the current path of the forward curve, we would expect, with the extra day and the decline in long-term rates, to be at around the $10.4 billion range in the next quarter.
+So -- but as you get out to 4Q and next year, I think we get more optimistic about being able to grow. Given just our current pace of deposit and loan growth, we're obviously experiencing good deposit growth.
+We've got, as we talked about, a strong risk and client framework, so we'd like to put all of that deposit growth into loan growth, but we're going to only do so if it meets our criteria. Whatever deposit growth doesn't get absorbed by good loans with our clients obviously goes into the investment portfolio and we get a return there.
+So, I think -- look, it's just a question of the further you get out the more that wave of deposits and asset growth kind of overwhelms the change in interest rates and we see growth.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [13]
+--------------------------------------------------------------------------------
+Also, if you look at page 6, you'll see -- you can see that the point you made is that the inflection point was hit a few quarters ago where the noncore loans and leases were running down and not being made up by growth.
+We passed that and so as we think about it going forward in the upper right-hand part of page 6 you can see that other loan leases balance is coming down. They'll continue to come down, but there's just less of them.
+And then if you look at the lower left you see the core loans are growing at a good rate -- have been growing at a good rate, now can come through.
+So I think your point about what gives us encouragement because you saw last year's second quarter, this year's second quarter, about how even in a lower for longer rate environment we can grow NII is that you actually are growing the net loan book pretty consistently now each quarter.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [14]
+--------------------------------------------------------------------------------
+So if -- I guess you don't want to put too many numbers around it, but should we think that maybe starting in 4Q or 1Q we might start to see some incremental NII growth and maybe that accelerates, as you point out, the loan growth overwhelms the rate picture?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [15]
+--------------------------------------------------------------------------------
+I think we'd say that you've got to be careful about your rate scenario even on a spot basis because it can move around and move that around. But if you think about it as second quarter next year you'd start to see this breakthrough again based on absolutely no change in rates from the low point they were.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [16]
+--------------------------------------------------------------------------------
+Right. Okay, great. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+Ken Usdin, Jefferies.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jefferies LLC - Analyst    [18]
+--------------------------------------------------------------------------------
+Hey, good morning, guys. Just one, on the fee side you mentioned all the great metrics in terms of the growth of activity and account growth and whatnot, but we're continuing to see declines year-over-year in card income, service charges and the brokerage business.
+So, I was wondering if you can walk us through when you anticipate some of the building blocks turning into revenue. Or are there still some of the spending or competitive pressures building in underneath? So just the outlook for some of those core consumer and brokerage-related fee areas would be great. Thanks.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [19]
+--------------------------------------------------------------------------------
+Okay. Well, let's start with card. I think card actually is up on a linked quarter basis, down year-over-year, but you have to remember, again, we had portfolio divestitures. So I think we're at the point now where we're not going to be seeing those sorts of divestitures in the future and we start feeling better about more consistent growth around card.
+If you look at brokerage income, we've been in a multi-quarter trend of people shifting from brokerage to more managed accounts. That trend has obviously put pressure on the revenue line because at the same time that was going on we had a lot of volatility in the marketplace, lower overall capital markets, lower overall activity.
+But I think over time as -- if capital markets continue to rise, we will get -- we will offset the decline in transactional revenue.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+Glenn Schorr, Evercore ISI.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [21]
+--------------------------------------------------------------------------------
+A quick two parter on Wealth Management. One, I wanted to see if you saw any difference, post the retention lock-ups of a few months back in terms of [FA] attrition? And then the second part is in wealth management. What specifically -- product or behavioral changes are you putting in place ahead of the DoL rules kicking in in April?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [22]
+--------------------------------------------------------------------------------
+So on the first question; we haven't seen any change in attrition after retention. And most of the retention -- most of the attrition of experienced financial advisors have been more due to our change in the way we do the international business which has been going on for about a year. But in terms of aggregate numbers, it's been relatively stable.
+In terms of -- and the attrition we see is actually in the lower production levels, mainly due to people not being able to build a book of business and we're trying to fix that through the integrated business system with our consumer and preferred teams.
+In terms of department -- DoJ and the fiduciary standard, we're busily implementing this. It's consistent with where we're going with the business. It's consistent with the move from an old view of what Financial Advisory was versus a managed money fee-based loaded with a financial planning driven business.
+Admittedly, it's a little tricky because the actual rules only apply to the $200 billion-odd of 401(k) in retirement assets we have, but it's consistent with where we've taken the business and the teams [drawing] it. We don't see meaningful revenue or changes due to that. We will see meaningful changes to implement it, but not meaningful revenue changes.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [23]
+--------------------------------------------------------------------------------
+Okay, appreciate that. And just a follow-up on the 2018 expense target which everyone appreciates. It might be a silly question, but should we -- is it safe to assume that 2017 will be somewhere between 2016 actual and 2018's target?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [24]
+--------------------------------------------------------------------------------
+Well, we've got -- yes, it's a safe assumption. It's not a silly question, but you've got six quarters between now and then and you can see what we are running at it now to get it down to that level. We'll take work every quarter.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [25]
+--------------------------------------------------------------------------------
+Okay. Thanks, Brian.
+
+--------------------------------------------------------------------------------
+Operator    [26]
+--------------------------------------------------------------------------------
+Steven Chubak, Nomura.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Analyst    [27]
+--------------------------------------------------------------------------------
+Hi, good morning. So I hate to beat a dead horse on the expense question, but Brian or Paul, I was hoping you could provide some more detail as to what specific expense leverage you can pull to really drive that figure to $53 billion.
+It is a pretty meaningful delta versus the $56 billion run rate over the last four quarters. I'm just trying to gauge how those expense initiatives might impact revenues and whether we should expect any revenue attrition as those additional initiatives take hold?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [28]
+--------------------------------------------------------------------------------
+Sure. So let me just back up a little bit -- I will definitely answer your question, but I want to emphasize again we're talking about LTM $56 billion going to $53 billion and absorbing in that merit, healthcare, inflation and other investment.
+And the first thing I would point out as you think about the credibility of that -- look at what we accomplished over the last five years. From Q2 2011 to Q2 2016, we reduced quarterly expenses by $4.8 billion; that's a $19 billion annualized run rate.
+And we did this by not only reducing legacy mortgage-related expenses, which were only -- make up about $2 billion of that $4.8 billion, but just through good expense management in every major category across the Company.
+So, from here it's about -- a number of things -- a lot of those things are been identified through our Simplify & Improve initiative. We're investing in technology and capabilities to improve efficiency. The most obvious example of that you can see is in the increasing adoption of customers for digital channels.
+But I do want to emphasize that it is about making progress across the entire Company, from our leaders and our teams. So if you look in Consumer, there are examples -- the digital adoption, we've got mobile users up 15% to over (technical difficulty). When they make a deposit that's 1/10 the cost.
+We've got digital sales up 12% year-over-year. We've got more customers using digital statements, a lot more work to do there as we transition from paper to electronic. We are optimizing the coverage model in both consumer and GUM and they all have goals. We all have goals and initiatives around controllable expenses, including travel, supplies, support costs.
+If you look at Global Banking and Global Markets, we're simplifying our legal entities structure and business model. We're integrating wholesale credit origination and processing across the lines of businesses. We're centralizing data platforms. We're expanding electronic capabilities and we're optimizing the coverage model. So there's a lot going on and we're going to need all of it to get to our goals.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Analyst    [29]
+--------------------------------------------------------------------------------
+Got it. Okay. So, Paul, based on your comments it sounds like it's really going to be driven by technology and other efficiency initiatives. So there shouldn't be any expectation that we could see any meaningful revenue drop off or attrition in light of those actions that you are taking?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [30]
+--------------------------------------------------------------------------------
+I think -- yes, Paul gave you a lot of different places it comes from, but I think you've got to back up and say it comes from reducing the expense base and -- by people -- and you can see that even in markets year-over-year we're down 7% and people where revenue went up.
+So, it's electronification to the fixed income platform and the equities platform continuing down that road. So every single area is moving here.
+And then you also have to think about the stability of the platform. This Company has now been operating with a consistent strategy and a consistent ability to execute for many years. And what's gone with the legacy and stuff, that just allows us to keep operating on ourselves.
+And we always have performed best in history when we had that period of time, no acquisitions, no divestitures, no legacy asset servicing. So we're very confident that it will happen.
+On revenue, I'd say look at it year-over-year, look at it linked quarter. So last three or four quarters you've seen revenue stable and -- well, it bounces around with market activity in a given quarter. The core revenue continues to go forward and the expenses keep coming down on a core basis.
+So we're comfortable that there is nothing -- we won't allow our people under our responsible growth to give us cost saves and not grow the business. So it has to be sustainable. It has to be actually taking out real work and yet still investing in more client facing teammates, more salespeople and more technology capabilities for customers.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Analyst    [31]
+--------------------------------------------------------------------------------
+Thanks very much.
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+Eric Wasserstrom, Guggenheim Securities.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [33]
+--------------------------------------------------------------------------------
+Thanks. Just a couple of questions on auto and then one clarification on the OpEx guidance. I'm sorry to come back to that, but on the OpEx, is it -- is the 2018 figure where you expect to begin 2018 or end 2018?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [34]
+--------------------------------------------------------------------------------
+It's for the full year.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [35]
+--------------------------------------------------------------------------------
+For the full year? On auto, you underscored the origination quality and the high end of the FICO range, but one of the things that we are hearing from dealers is about the compression in pricing that's occurring in the high end ranges.
+Some other lenders move up out of the mid-FICO range and I wanted to see if that's something that you think you're experiencing or if you're in fact seeing some stabilization in the competitive area around high FICO auto lending?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [36]
+--------------------------------------------------------------------------------
+I would say we haven't experienced that. We can check and get back to you. I would just make a couple more comments about auto. We are maintaining our share but we are very focused on the prime and super prime.
+And as we pointed out last quarter, we are booking these loans at FICO scores of around 774 and we've got debt to income at all time lows. And importantly, we are not, from restructuring standpoint, extending tender the way we see in the marketplace.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim Securities - Analyst    [37]
+--------------------------------------------------------------------------------
+Thanks very much.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+Mike Mayo, CLSA.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [39]
+--------------------------------------------------------------------------------
+Hi, still more on expenses. This might be good news/bad news. I guess the good news is your expenses over the last year, branches are down 2%, FTE down 3%, almost every expense line is lower, so that's good, and for efficiency ratio is down to 62%.
+But the bad news the way I look at it is over the last five years your expenses are down a lot but your core revenues are down even more. So what might resolve at least the issue in my mind? Do you have a specific efficiency target for 2018?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [40]
+--------------------------------------------------------------------------------
+Well, Mike, the -- if you look at the risk-adjusted revenue, you would come to a different conclusion. So yes, we had a lot of revenue in 2011 or 2012, but the charge-offs were running tens of billions dollars more a year than we have now. So, a lot of that revenue is just going off the backend.
+So, if you look at it from a risk-adjusted base, I think we grew from the low 60[%]s to the low 80[%]s over the last five or six years. So that is actually the work that gets done.
+So we could -- going back to point, we focus on very high credit quality, so we keep that credit cost moving in the right direction or stable when the world has gone a different way.
+We don't have a target efficiency ratio. You can calculate one of that out in 2018, because, as we talked about earlier, the NII differences will be driven by where rates go to some degree.
+But the idea is we are going to take expenses from $56 billion in the last four quarters to $53 billion. We think that's where we'll get them to. And if rates stay stable or go up a little bit, you'll see a lower efficiency ratio. Right now we're running about 62% this quarter, fairly stated, and we think we can push it down from there.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [41]
+--------------------------------------------------------------------------------
+And I don't want to take away -- I think we collectively appreciate having a 2018 expense target. But if you just take the second quarter annualized, you are at $54 billion. And then if you reduce your LAS expenses you get down to a $53 billion number. So is this (multiple speakers)?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [42]
+--------------------------------------------------------------------------------
+Mike, you're missing the FAS 123 in Social Security which is $1.2 billion in the first quarter that doesn't occur this quarter, but will -- you've got to add that back, too.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [43]
+--------------------------------------------------------------------------------
+Okay, well that's helpful. And you said a lot is going on and I think some other analysts tried to restate what you're saying. But what are the three biggest drivers then of that reduction and what you might term a core expense base?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [44]
+--------------------------------------------------------------------------------
+It's been people -- we're down 2,600 people quarter over quarter; it's a constant reduction in personnel through hard work and automation, while we're continuing to increase the investment in salespeople. And so that helps on the revenue side and the revenue equation versus expense.
+It's things like our data center configuration. We've been in a program, take about $1 billion, $1.5 billion out of all the data work, all the data centers and configuration that we're partway through.
+And in part, just -- like Paul said, every line item is just grinding that -- as we continue to bring down people, we have less occupancy, less telecommunications and everything else, so it really comes across-the-board.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [45]
+--------------------------------------------------------------------------------
+And then lastly, should we expect a restructuring charge or do you pay as you go?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [46]
+--------------------------------------------------------------------------------
+We have consistently paid as we've gone, as you well know, and even in every quarter we have between $50 million and $100 million of severance expense that we don't even talk about.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [47]
+--------------------------------------------------------------------------------
+All right, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+Vivek Juneja, JPMorgan.
+
+--------------------------------------------------------------------------------
+Vivek Juneja,  JPMorgan - Analyst    [49]
+--------------------------------------------------------------------------------
+Hi. I won't beat the dead horse on expenses. Just a quick question on the card business. If I look at purchase volumes year on year, it slowed further from last quarter. Any color on what's going on there?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [50]
+--------------------------------------------------------------------------------
+Yes, I think purchase volumes are up 7% if you normalize for the divestitures.
+
+--------------------------------------------------------------------------------
+Vivek Juneja,  JPMorgan - Analyst    [51]
+--------------------------------------------------------------------------------
+Okay, but the divestiture happened in 4Q; it slowed from where it was. It was up 2% year on year in the first quarter and it slowed to 1% year-on-year in the second quarter. So it seems to me a little bit of a weakening trend.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [52]
+--------------------------------------------------------------------------------
+I think we've had divestitures in 2Q last year and in the fourth quarter.
+
+--------------------------------------------------------------------------------
+Vivek Juneja,  JPMorgan - Analyst    [53]
+--------------------------------------------------------------------------------
+I know, I am -- in fact, those were both reflected in 1Q 2016 year-on-year growth rates and I'm comparing (multiple speakers) --.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [54]
+--------------------------------------------------------------------------------
+Vivek, let me just -- let me make it simple for you. The year to date through July is up -- taking divestitures up about 4% on debit and credit both and up 7% in credit card purchases, normalized for divestitures year-to-year -- the first six months plus this part of July, so it's growing fine.
+
+--------------------------------------------------------------------------------
+Vivek Juneja,  JPMorgan - Analyst    [55]
+--------------------------------------------------------------------------------
+Okay. Got it. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [56]
+--------------------------------------------------------------------------------
+Paul Miller, FBR & Company.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [57]
+--------------------------------------------------------------------------------
+Yes, thank you very much. On the LAS, so you now consolidate the LAS segment into pretty much the Consumer segment. You still -- last on the appendix you said you had about 11,000 workers in that area -- I guess continuing to work through about 88,000 loans.
+Should that number continue to move down? Will we continue to see that move down or what's the thoughts behind that?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [58]
+--------------------------------------------------------------------------------
+Be careful because those 10,000 people work on the 88,000 loans plus the 3 million good loans. They service both good and not good loans, to make it simple. And so, that's one of the reasons why we're separating.
+And in All Other going forward is loans that we are actually only -- loans we'd never do again and that we're running off 600,000, 700,000 units. Moved into the segments whether it's Consumer, US Trust or Merrill Lynch are the loans that relate to their businesses in terms of servicing costs, too.
+So, that was one of the confusions, as this thing got down you got to the point where the good servicing costs are becoming a more meaningful part of the total. And they'll continue on because that portfolio, whether it's direct servicing costs for third parties or even the stuff on our balance sheet, will continue.
+But to give you a sense, from first quarter to second quarter, when we were down -- the total headcount of about 2,600, about 900 and change came from LAS, from the servicing side. So it still contributes but it's contribution is going down each quarter because the amount left to service the good stuff and just generally service our portfolio will be a higher percentage of what's left.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [59]
+--------------------------------------------------------------------------------
+Okay, and then you gave some guidance on where you think LAS expenses will be by the fourth quarter. And I'm not sure I wrote it down correctly and I might have misinterpreted it. But was it close to $500 million, you said, or am I off somewhere?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [60]
+--------------------------------------------------------------------------------
+Yes, so this quarter we ran about $600 million and we said we would get -- a long time ago we said it would get to $500 million by the fourth quarter this year, so we're almost there, and the idea is that that will be completed.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [61]
+--------------------------------------------------------------------------------
+So, is $500 million the run rate to service the good loans? I'm confused. Or is that still servicing the bad loans?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [62]
+--------------------------------------------------------------------------------
+Both.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [63]
+--------------------------------------------------------------------------------
+Both? Okay. Thank you very much, guys.
+
+--------------------------------------------------------------------------------
+Operator    [64]
+--------------------------------------------------------------------------------
+Brennan Hawken, UBS.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [65]
+--------------------------------------------------------------------------------
+Good morning. Sorry to come back here, but I just hate horses, so I'm going to take another whack at this thing. On expenses, what should we think about as far as your assumptions for legal and then some of your market-related businesses, market sensitive businesses? GWIM end markets? Just because the expense line items in those businesses do have a pretty big impact from market conditions.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [66]
+--------------------------------------------------------------------------------
+I'll start with legal. From a legal perspective, if you look over the last four, five, six, seven quarters we've been running around $300 million per quarter. We did $270 million this quarter. That I feel like is a reasonable range if you're building a model for the near-term.
+In terms of the capital markets businesses, not quite sure I get your question. Obviously, they are -- that line is tied to the performance of the business.
+The total performance of the business, returns, earnings and revenue and we have programs in place that we think are competitive with what's on Wall Street, so that we can attract the best of talent and retain the best of talent.
+We're constantly benchmarking against those programs and we feel like we're where we should be for the quality and the market presence we have in those areas.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [67]
+--------------------------------------------------------------------------------
+So overall (multiple speakers) --.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [68]
+--------------------------------------------------------------------------------
+So you should think of the environment we're talking about as an environment consistent where we are now from growth of 1.5%, 2% of US GDP and stuff. So it doesn't contemplate any change to the current environment from just a general operating principle.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [69]
+--------------------------------------------------------------------------------
+And again, remember what I think Brian said and what I emphasized again, that $53 billion is absorbing increases in merit, absorbing increases in healthcare, investment that are just -- inflation that are just natural in the business.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [70]
+--------------------------------------------------------------------------------
+Right. I guess I was just -- so you're saying that first of all on legal, the $53 billion includes a roughly $300 million per quarter rate, and that your operating assumption for the GWIM and other market business would assume a revenue inflation and corresponding payout inflation from those businesses from here?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [71]
+--------------------------------------------------------------------------------
+Yes, based upon our current plan.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [72]
+--------------------------------------------------------------------------------
+Got it.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [73]
+--------------------------------------------------------------------------------
+What's in our current plan. And in terms of legal, I hope it's going to be less than $300 million When we get out there. I'm not telling you to stick that in your model, but that's a good range to be thinking about.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [74]
+--------------------------------------------------------------------------------
+Okay, that's really helpful. Thank you. And then one quick follow-up on GWIM. You guys highlighted a gain on sale, but could you talk about how much that impacted the margins in that business and then whether or not there was any EPS tailwind there?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [75]
+--------------------------------------------------------------------------------
+Yes, it was $80 billion of AUM again. That was all short-term. It had a minimal impact on margins. Minimal.
+
+--------------------------------------------------------------------------------
+Brennan Hawken,  UBS - Analyst    [76]
+--------------------------------------------------------------------------------
+Okay, thanks.
+
+--------------------------------------------------------------------------------
+Operator    [77]
+--------------------------------------------------------------------------------
+Matthew Burnell, Wells Fargo Securities.
+
+--------------------------------------------------------------------------------
+Matthew Burnell,  Wells Fargo Securities - Analyst    [78]
+--------------------------------------------------------------------------------
+Good morning. Thanks for taking my question. Paul, I wanted to follow-up on the mortgage banking side of things. That was one of the areas you highlighted in terms of potential growth. Year-over-year, the mortgage banking revenue was down fairly substantially. It seems like a lot of that was hedging gains and losses and things like that.
+But you also mentioned that you're planning on keeping more mortgages that you originate on the balance sheet. Could you give us a little more color in terms of how you are thinking about that going forward both in terms of the mortgage originations being kept on the balance sheet and how you are thinking about mortgage banking fees?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [79]
+--------------------------------------------------------------------------------
+Sure. Let me -- you're right. The MBI line was down year-over-year; that was planned for. We knew that was coming. I just want to walk -- so for everybody else -- I just want to walk through why it's down and then we can talk a little bit about going forward.
+So four items. First, we sold an appraisal business last year, so there was revenue in last year's second quarter that isn't in this quarter. Second, we had some servicing sales in the second quarter of last year for a game that we didn't have this quarter. Third and probably most significant from a revenue perspective is that we had the Ace decision in the second quarter last year. So we released last year some reps and warranties and that was a significant amount of benefit last year.
+And then fourth, and probably strategically most important and the point you're getting too, is we are selling less mortgages, choosing instead to hold them on our balance sheet. And, obviously, this decreases MBI but increases NII over time.
+So -- plus you have to note that, as we just talked about, servicing -- bad servicing is going to continue to run off. So if servicing is running off and not being replaced as fast, if we're holding more mortgages on the balance sheet as we transition from MBI to NII, you could see that line continues to trend lower.
+In terms of the mortgages, I think in the short-term it's going to be fairly stable and that trend is going to -- it's a good base this quarter. It was a good base to start from.
+I think that trend lower is going to be in some quarters very slow because, as you point out, other line items are a little bit messy and bounce around there depending on what happens in interest rates, but that's the trend.
+In terms of what we're trying to accomplish, all of the loans we originate that are nonconforming, we would like to keep on our balance sheet. And even the conforming loans that have a certain characteristic we're going to be holding on our balance sheet. So right now let's around 75%-ish of the loans we're originating are going on our balance sheet. Is that helpful?
+
+--------------------------------------------------------------------------------
+Matthew Burnell,  Wells Fargo Securities - Analyst    [80]
+--------------------------------------------------------------------------------
+Yes, thanks very much.
+
+--------------------------------------------------------------------------------
+Operator    [81]
+--------------------------------------------------------------------------------
+Richard Bove, Rafferty Capital.
+
+--------------------------------------------------------------------------------
+Richard Bove,  Rafferty Capital - Analyst    [82]
+--------------------------------------------------------------------------------
+Hi. I apologize for going back to the net interest income issue, but obviously the reason why central banks keep interest rates down is because they expect it to increase lending. And I'm wondering if you've done any elasticity studies which show what happens to loans when interest rates go down or up.
+And as part of that, there are multiple examples of what happens to earnings if interest rates go up 100 basis points or down. And I'm wondering if you've done anything to show if interest rates remain flat and loans go up 2%, 5%, 6%, 8%, what the impact on earnings would be.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [83]
+--------------------------------------------------------------------------------
+Yes, absolutely. On that last part of your question is precisely what I think we've been talking about today in the Q&A and in the remarks. We've got interest rates -- we talked about interest rates following the forward curve. We talked about interest rates being flat.
+And despite both of those circumstances we think in the out years we can grow NII, or in the out quarters we can grow NII because we're growing deposits and we're putting them to work where we can within our risk and client frameworks to grow well priced loans.
+Any amount of deposits that doesn't go to our clients and customers we're sticking in the securities portfolio and getting as much yield as we can get there within the constraints of liquidity and capital risk and interest rate risk.
+So, we think we can grow in even a flat interest rate environment, grow the NII line, not necessarily in the next quarter, but as we again move out into the future.
+Brian has already pointed out all the work we're doing around expenses, so when you combine what we think we can do from a fee base, from an NII perspective and then lowering expenses, we think we can grow earnings in the Company even if interest rates are flat.
+
+--------------------------------------------------------------------------------
+Richard Bove,  Rafferty Capital - Analyst    [84]
+--------------------------------------------------------------------------------
+What I'm asking to get a lot more specific in the sense that you do this with interest rate changes, right? In other words, there's these bubble charts which show what will happen to net interest income if interest rates go up 100 basis points. There is nothing which says what happens to earnings if you see a 5% increase in loans.
+In other words, what is more important? In the old days people would show these charts, if you hold interest rate flat and volume goes up, what happens to earnings if you get a 5% increase in lending as a result of interest rates staying so low?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [85]
+--------------------------------------------------------------------------------
+Again, Dick, you're right, we tend to talk in our disclosures about interest rates moving 100 basis points, 50 basis points as the -- and holding all else equal what's in our plans. We could just as easily do the opposite. We could hold interest rates flat and then you could see the effect of deposit and loan growth.
+We certainly have that analysis. That's how we arrived at our perspective on the future. And I think if that's something that interests you, maybe after the call we can share with you some of that work; it's just math.
+
+--------------------------------------------------------------------------------
+Richard Bove,  Rafferty Capital - Analyst    [86]
+--------------------------------------------------------------------------------
+Yes, but the reason why I'm interested is because the whole discussion that we now have is that interest rates are staying flat and therefore bank earnings cannot go up because the other side of the equation, which is what happens to volume when interest rates go down, is just not discussed at all. So I'd love to talk to you more about it.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [87]
+--------------------------------------------------------------------------------
+Yes, okay. That'd be great.
+
+--------------------------------------------------------------------------------
+Operator    [88]
+--------------------------------------------------------------------------------
+Jim Mitchell, Buckingham Research.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [89]
+--------------------------------------------------------------------------------
+Oh, thanks. Thanks. Just a quick follow-up on the capital ratios. Paul, we saw a pretty big improvement across you and your peers in PP&R on seemingly lower op risk hits, particularly legal. Do we start to see that factor into the advanced approach calculation?
+You guys get punished pretty hard on op risk in the advanced approach. Do you start to see some -- I guess some light at the end of the tunnel of being able to reduce that given all the reductions in legacy risk assets that you've seen?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [90]
+--------------------------------------------------------------------------------
+Thanks for noticing. So let me start with saying that we are very pleased with our results in CCAR this year and we believe they really do reflect all the hard work we've been putting into that process and improving capital planning.
+Operational risk, we have a third of our advanced RWA roughly is operational risk and we would characterize most of that, or I might say all of it, as for businesses we're no longer in, products that we no longer sell and risks that I don't think we ever took as a basic Bank of America. So there's a lot of RWA sitting there and we have to work overtime to show the regulators that we can get that down.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [91]
+--------------------------------------------------------------------------------
+But you're not -- nothing to read into the results in CCAR yet anyway?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [92]
+--------------------------------------------------------------------------------
+No, I don't think so. Obviously, CCAR is on a standardized basis, so it doesn't incorporate operational risk.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [93]
+--------------------------------------------------------------------------------
+No, no, but in the PP&R they obviously made that point, that --.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [94]
+--------------------------------------------------------------------------------
+Yes, you're right.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [95]
+--------------------------------------------------------------------------------
+Okay.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [96]
+--------------------------------------------------------------------------------
+You're right. I think they improved their models. I don't know, but I think we're all looking at what they've done in trying to understand it. And I think they probably improved their models a little bit around op risk and there was a little bit less across all the banks.
+I think the banks that have the most maybe benefited -- because it was more of an average type of thing. So maybe we get a little extra benefit in that, but I don't know, to tell you the truth. We don't know what's in their models.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [97]
+--------------------------------------------------------------------------------
+Right, so it's just a little too early to see any kind of spillover benefits yet?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [98]
+--------------------------------------------------------------------------------
+Yes.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [99]
+--------------------------------------------------------------------------------
+Okay, thanks.
+
+--------------------------------------------------------------------------------
+Operator    [100]
+--------------------------------------------------------------------------------
+It appears we have no further questions at this time. I'll turn the program back over to our presenters for closing remarks.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman & CEO    [101]
+--------------------------------------------------------------------------------
+Thank you very much and we look forward to talking to you next quarter. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [102]
+--------------------------------------------------------------------------------
+This will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
+EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
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+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2016-Jul-27-FB.OQ-139115186913-Transcript.txt

@@ -0,0 +1,434 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2016 Facebook Inc Earnings Call
+07/27/2016 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook, Inc. - VP of IR
+ * Dave Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Carlos Kirjner
+   Bernstein - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Mark  May
+   Citigroup - Analyst
+ * Benjamin Schachter
+   Macquarie Research - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Anthony DiClemente
+   Nomura Securities Intl - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Good afternoon. My name is Chris and I will be your conference operator today. At this time, I'd like to welcome everyone to the Facebook second-quarter 2016 earnings call. 
+(Operator Instructions) 
+This call will be recorded. Thank you very much. Ms. Deborah  Crawford, Facebook's Vice President of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+Thank you. Good afternoon, and welcome to Facebook's second-quarter 2016 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO.  Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. 
+Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and the accompanying investor presentation are available on our website at investor.FB.com. And now, I'd like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+Thanks, Deborah. And thanks, everyone, for joining today. We had another good quarter and first half of the year. Our community continues to grow around the world. 1.7 billion people now use Facebook every month, and 1.1 billion people use it every day. Our business is growing at a healthy rate as well. Total revenue grew by 59% year over year to $6.4 billion. And advertising revenue was up 63% to $6.2 billion. Our results show our progress as we work to make the world more open and connected across our 3, 5 and 10 year horizon. Over the next three years, we're focused on continuing to build our community and help people share more of what matters to them.  
+The next five years are about building our newer products into full ecosystems for developers and businesses. Over the next 10 years, we're working to build new technologies to help everyone connect in new ways. I'll give an update on our progress across each of these areas, starting with how we're working to deliver better experiences for our community and more ways for people to share more of what they care about with anyone they want. We continue to  see excellent growth in our community. Over the past year, we've added over 200 million people using Facebook on a monthly basis. And in the second quarter, time spent per person increased double-digit percentages year over year across Facebook, Instagram, and Messenger, and that doesn't even include WhatsApp yet. 
+One of the biggest opportunities to grow our community is in developing countries where connectivity is less advanced than what we take for granted here at home. Over the past couple of years, we've been making steady improvements to our apps to make them work regardless of the device or  connection that people are using. We've also built a lightweight version of our Android app called Facebook Light that's tuned to work on 2G networks and is now used by more than 100 million people. We're also working on new tools to help people express themselves and understand what's going on with the people they care about. 10 years ago, most of what we shared and consumed online was text. Now it's photos. Soon, most of it will be video. We see a world that is video first, with video as the heart of all of our apps and services. 
+Over the past six months, we've been particularly focused on live videos. Live represents a new way to share what's happening in more immediate and creative ways. This quarter, Candace Payne's Chewbacca mask video was viewed almost 160 million times. Live is also changing the way we see politics as news organizations and delegates go live from the Republican and Democratic conventions. We've seen in Minnesota and Dallas how live can shine a light on important moments as they happen. This quarter, we also launched 360 photos. You don't need a special camera to take them. You just take a panorama or use the 360 camera app on your phone and post it. Since we launched, more than 4,000,360 photos have been shared on Facebook with a million more being shared every week. 
+We're making good progress on core services within the Facebook app like search. The growing way that people use search has defined what people are saying about a topic across the more than 2.5 trillion posts in our network. Now people are doing more than 2 billion searches a day between looking up people, businesses, and other things that they care about. Continuous  steady improvement to services like search are an important part of helping  people connect and realizing our mission. We're also improving the experience for our community by building our business with more engaging ads. We've always emphasized the importance of measurement and value in driving real results for the businesses that use Facebook and that means helping them create more relevant and engaging ads. 
+Over the next five years, we are working hard to build ecosystems around some of our newer products. Instagram now has more than 500 million monthly actives with more than 300 million daily. Now, we're working to make that experience even more engaging. Recently, Instagram began to rank its feed because we know that people have a better experience when they see more of the stories they care about. We're already seeing a positive impact in terms of time spent and the amount of content that people are sharing. We've also introduced our advertising tools on Instagram, and we're seeing marketers engage with people in creative and innovative ways. 
+In the two years since we separated Messenger from the main Facebook app, which was a  pretty controversial decision at the time, we've improved performance and given people new ways to express themselves. And now for the first time, more than 1 billion people are using Messenger every month. I'm also happy with the updates we're making to WhatsApp, which also has a community of more than 1 billion people. This quarter, we launched  new desktop apps and end-to-end encryption and millions of people are using WhatsApp's voice calling features. The scale we've achieved with our messaging services makes it clear that they are more than just a way to chat with friends. That's why we're also making it easier for people to connect groups and businesses as well. We're going to keep focusing on this over the next several years. 
+I'm also excited about the early progress we're making on our 10-year initiative. We're investing in new technologies to give more people a voice including, of course, the 4 billion people around the world who aren't yet online. And we're helping more people take advantage of the opportunities that come with the internet. We're still early in our journey with lots of hard work ahead, but we're making good progress like the first successful flight of Aquila,  our solar powered aircraft that will beam internet to places that have never been connected. Eventually, we're going to work with telecom operators and governments around the world to connect people on the outskirts of cities, rural areas, and disaster zones where you can't get traditional connectivity today. 
+We've also been making progress with  our initiatives around artificial intelligence and virtual reality. This quarter we announced DeepText, a deep learning-based engine that can understand the context of several thousand posts per second across 20 different languages. This is a long-term project but it also has some near-term benefits  like helping show people more of what they want to see and filtering out less of what they don't want to see. We're also investing in new platforms to help people connect and share. We believe that virtual reality can help people share richer experiences and help everyone understand what's going on around the world. 
+It's really early for us in VR, but we're hitting some important milestones. As of the second quarter, more than 1 million people a month are you now using Oculus on mobile phones through our Gear VR partnership with Samsung. More than 300 apps are already available at the Oculus store for Gear VR. We filled all of our preorders for Oculus Rift, and we are seeing increasing demand from retail as stores plan for the holidays. While it's still early for augmented reality, we're doing AR research and are seeing light weight versions of AR technology in mobile apps like MSQRD.  
+That's a  recap of the progress that we're making in our 10-year plan. We have a saying at Facebook that our journey is only 1% done. And while I'm happy with our progress, we have a lot more work to do to grow our community and connect the whole world. That means making big investments and taking risks focusing not just on what Facebook is, but on what it can be. I want to thank everyone in our community, all of our teams, our partners, and our shareholders, for being a part of this journey with us. And now, here's Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+Thanks, Mark, and hi, everyone. We had a great second quarter. Q2 ad revenue grew 63%. Mobile ad revenue reached $5.2 billion, up 81% year over year and was approximately 84% of total ad revenue. Our growth was broad based across verticals, marketer segments, and regions. We're excited to announce that we now have 60 million monthly active business pages on Facebook. We also continue to grow the number of active advertisers on our platform. This shows that both our free and paid products are providing value to marketers of all sizes around the world. We continue to  focus on our three priorities. Capitalizing on the shift to mobile, growing the number of marketers using our ad products, and making our ads more relevant and effective. 
+First, capitalizing on the shift to mobile. For 32 years, the advertising industry has gathered in Cannes to celebrate creativity. People have shifted to mobile and marketers know they need to catch up. Mobile is no longer a nice to do, it's a must  do, and we're working closely with marketers to help them make this transition. The best marketers understand that people watch video differently in mobile feed. The goal is to create what we think of as thumb stopping creative, videos that grab attention in the first few seconds even without sound. For example, to drive awareness for Sour Patch Kids gum, Mondelez  has targeted teens with non-chocolate candy interest. Working with VaynerMedia, O'Harra, and the Facebook creative shop, they created punchy 10 second looping videos tailored for Facebook and Instagram. The campaign helped the Sour Patch Kids portfolio detailed benchmarks for the entire candy industry. 
+We're excited to bring more relevant video ads to  people both on and off Facebook. In May, we expanded Audience Network to include video for brand objectives. This means that advertisers can place brand video ads not just on Facebook and Instagram but across a network of apps and sites. Our second priority is growing the number of marketers using our ad products. Over a third of small and medium businesses in the US don't have a website and having a mobile presence is even more difficult and expensive. Creating a business page on Facebook is as easy as setting up a personal profile. This is why Facebook pages are the mobile solution for many of the 60 million businesses using our products each month in the US and around the world. We've made it easy for business owners to manage their Facebook page from their mobile device. Over 85% of active business pages use mobile, and 40% of active advertisers have created a Facebook ad on their mobile device. 
+In Q2, we rolled out new tools to make it easier for businesses to promote posts and track performance directly from the Instagram app. We've worked hard to make becoming an advertiser as easy as possible for these businesses. With just a few steps and for as little as a few dollars, businesses can boost their posts to reach more people. Simplifying our ad products is key to advertiser acquisition. Over 80% of new advertisers in Q2 started with simplified products like boosted post. Once these businesses begin advertising with us, we make it easy for them to take advantage of even our most sophisticated capabilities. 
+For example, Lighting Etc., a third-generation family-owned business, used Facebook and Instagram ads to drive in-store sales. They targeted 25 to 45-year-old homeowners interested in interior design living within 35 miles of their showroom in Fort Worth, Texas. It was striking to them that on Facebook, the size of our community meant that they could reach over 300,000 people even with such specific targeting. They've seen a 40% increase in revenue in 2016, and they attribute this increase to their ads on Facebook and Instagram. 
+Our third priority is making our ads more effective and relevant. Our goal is to help our clients grow their businesses whether it be moving products off shelves, driving online sales, or building their brands. Our system constantly looks for the most efficient and effective way to drive these objectives. Businesses that want to build their brands need to reach a large audience with a compelling  story, and they're seeing strong results from immersive formats like video and canvas ads. Businesses working to acquire new customers need to reach high-quality leads and convert them to action. We introduced Lead Ads  in Q1 to make it easy for people to fill out forms on mobile devices right from news feed. 
+In Q2, we made it possible for advertisers to retarget people who opened or completed a lead ad form. For example, Nissan Turkey and the SEM agency used Lead Ads to collect over 20,000 high-quality leads from people interested in buying a new car. They then used retargeting to show relevant ads to people who had completed these Lead Ads and ultimately drove vehicle sales. The cost of a high-quality lead was 9.3 times lower on Facebook than all other online media. Businesses selling products are getting search like ROI from dynamic ads. Dynamic ads allow advertisers to upload their product catalog and target people with specific products in real time. Over 300 million people see dynamic ads each month, and over 2.5 billion unique products have  been uploaded by marketers. 
+In Q2, we expanded dynamic ads to Instagram and also launched dynamic ads for travel. For example, you can now advertise specific destinations and dates for hotel rooms. We're pleased with the value we're driving for our partners and the progress we're making across our three priorities. With only a small fraction of our 60 million business pages advertising, we have a lot of opportunity ahead. We also have a lot of hard work to do to help businesses make the shift to mobile and to drive results for our clients. I want to thank our clients around the world for their partnership and their ongoing input which informs our product development. I also want to congratulate our global teams on the results of their hard work and thank them for their dedication to our mission. Thanks, everyone. And now here's Dave. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+Thanks, Sheryl, and good afternoon, everyone. Q2 was another strong quarter for Facebook. Total revenue grew 59% to $6.4 billion, and we generated over $2 billion in free cash flow. These results highlight the continued growth and engagement of our global community and the strength of our ads business as advertisers benefit from our increasingly broad and deep portfolio of targeting creative and measurement schools. 
+Let's start with our community metrics. This past quarter was our strongest in over three years in terms of absolute year-over-year growth of monthly and daily actives on Facebook. In June, 1.13 billion people used Facebook on an average day, up 17% compared to last year. This daily number represents 66% of the 1.71 billion people who visited Facebook in the month of June. Mobile continues to drive our growth with over 1 billion people accessing Facebook via mobile devices on an average day in June, up 22% compared to last year. The growth of our other services also continues to be strong. WhatsApp and Messenger now each have over 1 billion monthly actives, and Instagram surpassed 500 million. 
+Turning now to the financials. My comments today will focus on our GAAP financial metrics, and all of our comparisons are on a year-over-year basis, unless otherwise noted. A reconciliation of our GAAP to non-GAAP financial metrics is included in our press release and earnings slides. Total Q2 revenue was $6.4 billion, up 59%. Q2 ad revenue was $6.2 billion, up 63%. Exchange rates did not impact our overall revenue growth rates this quarter as headwinds in certain currencies were offset by tailwinds in others. US and Canada and Asia-Pacific were our fastest growing regions with advertising growth rates of 69% and 67% respectively. Mobile ad revenue was $5.2 billion, up 81% and representing approximately 84% of total ad revenue. 
+Let's turn to the supply and demand factors that continue to drive our growth. Advertiser demand was particularly strong in Q2 across a broad range of verticals and advertiser objectives. Additionally, supply side factors including growth in users, time spent, and ad load, all contributed to our Q2 revenue growth. In Q2, the average price per ad increased 9% while total ad impressions increased 49%. The reported increase in price was again driven by the continued mix shift towards mobile where we only show higher-priced news feed ads compared to the mix of news feed ads and lower price right hand column ads on personal computers. The 49% increase in total ad impressions was driven primarily by growth in ad impressions served in Facebook's mobile news feed where the majority of our ads are shown. 
+Payments and other fees revenue was $197 million, down 8%. Remember that payments and other fees revenue is largely generated from  games played on personal computers, which has declined as people spend less time on their PCs. Q2 total expenses were $3.7 billion, up 33% inclusive of $825 million of share based compensation related expenses as well as $193 million of amortization of intangible assets. Q2 operating income was $2.7 billion, representing a 43% operating margin. We continue to be pleased with the profitable growth of the business while we invest for the long term. We ended Q2 with approximately 14,500 employees, up 32% year over year. We added about 900 employees in the quarter, with the majority of those in technical functions. We are seeing continued success with our efforts to hire top talent in a market that remains very competitive. 
+Our Q2 tax rate was 26%. GAAP net income was approximately $2.1 billion or $0.71 per share. Q2 capital expenditures were $1 billion. Year to date, capital expenditures totaled $2.1 billion driven by investments in data centers, servers, office buildings, and network infrastructure. Facebook generated over $4 billion in free cash flow in the first half of 2016, and as of June 30, we had over $23 billion in cash and investments. 
+Turning now to the outlook. First, some color on revenue. We have been pleased with the strength of our advertising revenue in the first half of 2016. As I discussed on our last call, while we expect the main drivers of our advertising revenue growth will continue throughout 2016, we will face tougher comparables as the year progresses given the accelerating revenue growth rates we experienced in the second half of 2015. Consequently, we anticipate lower advertising revenue growth rates in each successive quarter in 2016. Additionally, we anticipate ad load on Facebook will continue to grow modestly over the next 12 months and then will be a less significant factor driving revenue growth after mid-2017. Since ad load has been one of the important factors in our recent strong period of revenue growth, we expect the rate at which we are able to grow revenue will be impacted accordingly. 
+Turning now to expenses. Based on our updated view of the remainder of the year, we are tightening our expense guidance range.  We expect that full-year 2016 total GAAP expense growth will be approximately 30% to 35%, narrowed from our prior range of 30% to 40%. We expect full-year 2016 amortization expenses to be approximately $700 million to $800 million and full-year 2016 stock-based compensation related expenses to be approximately $3.1 billion to $3.3 billion. Accordingly, we anticipate that our total non-GAAP expenses, which exclude stock-based compensation and amortization, will grow in the range of 45% to 50%, narrowed from our prior range of 45% to 55%. 
+We anticipate full-year 2016 capital expenditures will be approximately $4.5 billion as we invest to support the rapid growth of our business. Finally, we expect that our Q3 and full-year 2016 tax rates will be similar to our Q2 rates. In summary, Q2 was another great quarter for Facebook, illustrated by the strong growth and engagement of our global community and continued broad-based strength of our ads business. We're pleased with the results, and we will continue to invest in order to best position Facebook for our long-term growth opportunities. With that, Chris, let's open up the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Thank you. We will now open the lines for a question-and-answer session. 
+(Operator Instructions) 
+Your first question comes from the line of Eric Sheridan with UBS. Your line is open. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [2]
+--------------------------------------------------------------------------------
+Thanks for taking the questions. Maybe two. One on the video platform going forward and you how you think about video as a distribution mechanism. How should we think about investments that need to with made in video on both technical infrastructure side as well as the sourcing of content side sort of broadened out the video offering over the next couple of years? And then maybe on  the last comment on ad load, just wanted to go back to that for a minute in terms of what you're seeing on ad load by region. Because we are seeing a widening gap in revenue per user between the US and Canada and the rest of the world. How much of that might be driven by ad load or ad product? Thank you so much. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+Sure. I can take the question on video distribution as it relates to CapEx and the ad load question and then maybe on the sourcing of content, I'll pass it back to Sheryl. So on the video platform, clearly from an investment perspective, you've seen us step up our CapEx this year pretty substantially, and that's baked into the guidance of $4.5 billion of CapEx, which if you recall is the high end of our prior range. We are investing across our infrastructure to prepare ourself for growth across all of our different services and a part of that investment is really to support video. That is definitely more taxing on the network, and we're investing heavily on the network side. And as well, it does also impact our overall needs within the data center, servers, and the like. So it's certainly an area that we're investing in heavily and we expect to be investing in heavily going forward, Eric. 
+And then on the ad load question, ad load is not -- it's not something that varies that dramatically by region. You're really looking at a number of factors. Really what's driving that is just the dispersion  of overall ad demand across region. We're seeing really good strength across the  globe on that front but ad load is not a big driver of discrepancies in ARPU that you see. That's really something that maps very closely to the size of the mobile ad markets per population in those countries. So it's not an ad load question. And then I'll hand it over to Sheryl to talk about video from a content perspective. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+When you think about what's happening on video on our platform, we're really excited by the production and consumption of video, and we're seeing the full range from people posting the things in their personal lives. The power of what a mobile phone can produce and distribute now is pretty incredible when you compare it to just a  few years ago to some of the most sophisticated content producers in the world producing for us. We're experimenting across a wide variety of things. We're doing a partnership with the NBA to stream some US men's Olympic team games in the next couple of weeks. That said, our primary focus is on short-form content, not long-form content and we're pretty excited to see the different forms of content people will create both to share messages to create new content and to engage audiences around the world. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+The next question is from Douglas Anmuth of JPMorgan. Your line is open. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [6]
+--------------------------------------------------------------------------------
+Thanks for taking the questions. I just have two. First on engagement, obviously the DAU and NAU numbers were strong and you gave the increase in the daily activity as well in the double digits. Can you just give us some color on the user trends underneath that a little bit, and more specifically perhaps what you might  be seeing in terms of younger users and different age demographics. And then secondly, just going back to the ad load, we have in the past heard some caution from you guys before in that area. Granted, it was a few years ago and at a much earlier stage. I guess my question is, if targeting continues to improve along with click-through rate and then  ultimately ROI, why does ad load have to become less of a factor going forward? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+Thanks, Doug. On the DAU and NAU front, a couple things. One is DAU and MAU are up sequentially and year over year in all regions and with trends that are largely consistent with past quarters. So really good, strong growth across the globe on a DAU to MAU ratio. We don't do specific breakdowns of those  metrics by demographic. We're obviously pleased with our overall level of growth and engagement. On the teen front, younger users, we continue to be the best way to reach the largest global audience of teens and millennials. Teens remain engaged on Facebook. Clearly, how they've used our service has evolved over the years, and in addition to Facebook they're using Instagram, Messenger, and WhatsApp. So from a teen perspective, that's some color there. 
+On the ad load front, ad load is definitely up from where  we were a few years ago. It's been an important driver of inventory growth, and really I think one of the things that's enabled us to grow ad load has been improving the quality and the relevance of the ads as you mentioned. And we've been able to do that without negatively impacting the user experience. We do expect that ad load will be a less significant factor driving overall growth, especially after mid-2017. The optimal ad load is really a mix of art and science. We've carefully tracked the impact of ads on the user experience over the last several years. We aren't seeing a cause for concern. 
+We also want to be thoughtful about making sure that each person's overall feed experience has the right balance of organic and ad content. And that factors into you how we think about ad load and where that might ultimately be. And that's really why we're talking  our expectation that as you get into mid-2017, ad load will not be a big factor in driving overall inventory growth. We still see the opportunity to grow inventory from the growth of people and engagement on Facebook as well as our other services like Instagram. Instagram does have a lower ad load than Facebook. 
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+The next question is from Brian Nowak from Morgan Stanley. Your line is open. 
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [9]
+--------------------------------------------------------------------------------
+Thanks for taking my questions. I have two. The first one on the US advertising, was up particularly strong. Any specific ad category, branded, direct response, et cetera, or ad unit like video that's driving this growth in the US? And then the second one just on live video. Recognizing it's very early with live video, but any help at all on what percentage of your users are engaging with live video and the type of uplift you're seeing on engagement. Thanks. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [10]
+--------------------------------------------------------------------------------
+Our growth this quarter was very broad-based across all of the regions. We had especially strong growth in APAC and the US and Canada, so that was part of the growth. In terms of our marketer segments from brands to direct response to SMBs to developers, the growth is really strong there as well. We're really excited today to announce that we have 60 million small business pages that are using Facebook on a monthly basis. And we're very focused on the opportunity to upsell them to advertising products. We think we have a good track record there. 
+We're also seeing a lot of strength in brand, and I think that's because we have a combination of the creative and the storytelling, so the art with the science of the targeting. And when people do that well together, you see great opportunities. So to share one example. Jack in the Box used our canvas ads, which are very immersive ads. They are really good for a brand experience to roll out a new menu item, their Double Jack burger. They worked with agencies, Horizon, David and Goliath,  and Adaptly, and they targeted millennials on Facebook to create two different custom audience groups. One group was customers who had visited the restaurant web page or engaged with previous video ads. 
+And the second group were people that hadn't engaged with them directly but were quick service restaurant purchasers. They had an average view  rate of 23 seconds across those canvas ads, so clearly people were really engaged in the planned experience of the ad, and they had a 13 point lift in ad recall and 9 point lift in purchase intent. I think what you're seeing is that across all of the objectives people have from brands, marketers to direct response to SMBs to developers, as our ad products get more sophisticated, our targeting and measurement get better. They have an increased opportunity to grow. And that's why we think our growth to date continues to be broad based. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [11]
+--------------------------------------------------------------------------------
+Brian, I'll take the live video question. It's hard to compete with the Double Jack burger. In terms of live video, it's really early. We're really excited about it in terms of it providing an authentic and real form of sharing for people, and we're really trying to give people the full range of tools to share what they care about with anyone that they want, and live is really effective there. We've seen experiences both in terms of the light hearted like Candace Payne and also   more serious issues around the US and around the globe. 
+So it's really an important part of what we're offering for people to share real experiences. Video as a whole is making a significant contribution to time spent growth. When we talk about the time spent per DAU growing worldwide across our family in double-digit percentages, video is making a contribution there more broadly. 
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+The next question is from Justin Post with Merrill Lynch. Your line is open. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [13]
+--------------------------------------------------------------------------------
+Yes, a couple. First, Mark, just maybe on core Facebook, there's been commentary out there that maybe there's less personal sharing. Just maybe comments on the direction of Facebook, what the activities are going on, how you feel about that. And then just about the ad loads, how are you deciding how much ads to show? Could you hold back a bit and drive higher pricing? How are you balancing that and why not hold back a little bit more now for longevity there? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [14]
+--------------------------------------------------------------------------------
+Sure, so I'll talk about sharing, and then I think Dave can probably talk about ad load and pricing. So the overall level of sharing is up on Facebook, and what we're seeing is that how people share is evolving as we move from desktop to mobile. So you can imagine more photos on people's mobile cameras, fewer long full photo albums, more ability to capture video, probably a little bit harder to type on mobile. So there's this evolution. The other thing that we see is that now people have tools to share more privately as well. So when you think about sharing on Facebook, you shouldn't just think about the kind of sharing that you see in news feed. So sharing with all your friends, sharing in groups on Facebook and public sharing, which are the trends that I was just talking about. 
+But another area that's growing incredibly quickly is private messaging. Between Messenger and WhatsApp, I think we're around 60 billion messages a day, which I think is something like 3 times more than the peak of global SMS traffic. That is something that is growing pretty quickly and that we're really excited about as well, and we're just going to continue working on giving people the best tools across the spectrum from private to public and across the spectrum from text-based and simple communication to richer type of media like photos, videos, and then eventually more immersive forms  like VR. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [15]
+--------------------------------------------------------------------------------
+Justin, in terms of ad load, we talked about the different factors that go into it. Obviously, just in driving the overall business, advertiser demand, that was particularly strong this period. And then also  we matched that with supply. The supply, the two big drivers are user and time spent and then ad load. And getting the balance and mix right is important and clearly how the pricing plays out is via the auction. And we've had a good balance of demand growth and supply growth, and that's led to our good, strong financial results and our ability to deliver very strong ROI to advertisers. 
+So we think we're in a good zone on the right ad load, and we do think there's opportunities to grow that modestly. But as we look forward into 2017, we think it will be a less significant factor driving inventory growth. We still think there's opportunities to drive inventory through user growth and time spent. I don't think we would think about necessarily dropping ad load to drive pricing. We're also very cognizant of providing good value to advertisers and getting that balance right is important to driving overall ROI as well as obviously providing better targeting and measurement tools for our advertisers. 
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+The next question is from Anthony DiClemente with Nomura. Your line is open. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities Intl - Analyst    [17]
+--------------------------------------------------------------------------------
+Great. Thank you for taking my questions. I have one for Mark and one for Sheryl. Mark, you mentioned search in your prepared remarks, 2 billion searches a day on Facebook. I also noticed you said you're making it easier for users to connect to businesses. How far away are you from commercial search on Facebook being viable? Why can't you do that today? And how big of an opportunity could commercial search be? 
+And then Sheryl, you mentioned the expansion of the Facebook Audience Network. Can you talk more about the revenue opportunity of bringing Facebook's targeting tools to other video publishers? How fast is Audience Network monetization growing? Is it accelerating, for example, and how you see the revenue opportunity of expanding the Audience Network across the mobile web as well? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [18]
+--------------------------------------------------------------------------------
+I can take search. So when we talk about our strategy, I often talk about how when we develop new products, we think about it in three phases. First, building a consumer use case. Then, second, making it so that people can organically interact with businesses. And then third, on top of that, once there's a large volume of people interacting with businesses, give businesses tools to reach more people and pay. And that's ultimately the business opportunity. So I'd say we're around the second phase of that in search now. 
+We have a pretty big navigational use case where people look up people and pages and groups that they want to get to and look at and search. One of the big growing use cases that we're investing a lot in is looking up the content in the ecosystem and that is an area that we're very excited about which helps people find more content. But certainly, there's a reasonable amount of behavior in there, which is looking for things that over time could be monetizable or commercial intense, and at some point,  we will probably want to work on that   but we're still in the phase of just making it easier for people to find all the content they want and connect with businesses organically. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [19]
+--------------------------------------------------------------------------------
+On the Audience Network, we continue to invest in ad tech, and the Audience Network is a key part of our focus there. We don't break out revenue by our different platforms, but the opportunity to take not just video ads but other ad formats we have, bring them to the rest of the web and other apps with our ability to target and measure, we think is a big one. And what we're starting to see is that people are using Facebook, Instagram, and Audience Networks to drive their objectives in a cohesive way. 
+So to share an example. Garmin launched the Fenix3 Sapphire watch, and they did it with video  ads on Facebook that worked without sound. They targeted outdoor enthusiasts then retargeted people who viewed the Instagram videos  with carousel ads on Facebook that highlighted the product features. Then they extended those ads on Audience Networks to maximize reach and they used the Facebook pixel to measure the incremental sales and got to a 9.7 times return on ad sales. That's a really good example of how you can take targeting and the ability to target across Audience Network, Facebook, and Instagram and drive people all the way down the funnel and we think more and more people will do that particularly as we do a better job of combining the interfaces. For example, you can buy now in one interface on Facebook, Instagram, and Audience Network. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [20]
+--------------------------------------------------------------------------------
+And then Anthony, just one thing to add on top of that. We recognize the majority of our third-party advertising revenue through the Audience Network on a net rather than gross basis. That will also minimize the impact that will have on the top line. 
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+The next question is from Mark Mahaney with RBC Capital Markets. Your line is open. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [22]
+--------------------------------------------------------------------------------
+Mark, when you see what seems like phenomenal success of Pokemon Go, what are your reactions to that? And then David, could you talk about the monetization ramp that you've seen on the messaging platforms? I know it's still very early days. Anything in there that strike you as being particularly substantive for material yet? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [23]
+--------------------------------------------------------------------------------
+I, like everyone else, am enjoying Pokemon Go. The biggest thing that I think we can take away from this as we invest in augmented reality in addition to virtual reality is that the phone is probably going to be the mainstream consumer platform that a lot of these AR features first become mainstream, rather than form factor that people will wear on their face. I think we're seeing this in a number of places, whether it's location through Pokemon or some of the face filter activity. I reference the MSQRD app that we acquired earlier in my remarks. That's kind of a fun way to augment social experience that you're having with someone. I think that there's a big opportunity to build out that platform and a lot more functionality around that. 
+And one of the big themes that we're talking about here is becoming video first. And as people look for richer and richer ways to express themselves, just like people in the past have shared a lot of text  and photos on Facebook, we think that in the future more of that is going to be video and more of these augmented reality tools I think are going to be an important part of delivering that experience and making that fun to use and expressive as it can be. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [24]
+--------------------------------------------------------------------------------
+And Mark, we've talked about our strategy on how we go about monetizing the different apps in our portfolio, and we usually talk about it in terms of three phases. Phase one is really growing the user base and engagement, and we're really pleased with where we are with Messenger and WhatsApp from that perspective, with both over 1 billion monthly actives. The second phase is really working on building organic interactions between businesses and consumers. And then finally, the third phase is about building those commercial opportunities. With Messenger, we're really at the beginning of phase two. Messenger today has 1 billion organic interactions between businesses and consumers each month. But in terms of where we are in having in terms of actual monetization, incredibly early on that front. We're really in that phase two where we're really talking about building those organic interaction. 
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+The next question is from Heather Bellini with Goldman Sachs. Your line is open. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [26]
+--------------------------------------------------------------------------------
+Great. Thank you very much. I was wondering, I guess this is a follow-up on Anthony's question, is there a way to think about maybe the percentage of your kind of top 100 customers or  however you want to define it that might be using FAN as an add-on to their Facebook spending? And I guess I'm wondering if you're seeing increasing leverage of FAN? And then the other question would just be, political spending obviously wasn't a big driver for you guys in 2012, but it does seem like it is potentially a great opportunity in the back half of the year. Was just wondering if you could comment on that at all. Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [27]
+--------------------------------------------------------------------------------
+On the political spending, our business is broad based enough that no one event drives our business. We're pretty large and diversified. While the political campaign, obviously  a lot of money is spent in ads. That's also true of an Olympics. It's also true of a World Cup. It's also true of a Superbowl. With all of these events taking place around the world, there's no one event that we think drives a huge portion of revenue. That said, we are pleased by what's happened on Facebook for the election cycle. Not just on the paid side but actually on the organic side as well. 
+We really see Facebook being embraced by politicians all over the world to get in touch with their constituents, and we're pleased with that. Every member of Congress right now has a Facebook presence, and we're seeing people like one example is Elise Stefanik, who is the youngest person in the Congress. She made a pledge when she was elected that she would explain every vote she takes, and she explains every vote she takes on Facebook with shorter explanations if they're not controversial but longer explanations. That's the kind of mission-based work we're happy about because it brings people closer to the people who are representing them. 
+We don't break out how many advertisers are advertising on the Audience Network but we're seeing solid and growing adoption of the Audience Network across the board as we are with Instagram. And we think all of these platforms together really help give us the ability to serve our clients in a very leveraged way and use the targeting and measurement capabilities we've invested in across multiple platforms. 
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+The next question is from Carlos Kirjner with Bernstein. Your line is open. 
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Bernstein - Analyst    [29]
+--------------------------------------------------------------------------------
+Hi. Thanks for taking my question. First, some people believe that much of what users see in the news feed is driven by their behavior and preferences, and as a consequence, the stories they end up seeing are almost always in line with their existing views and preferences. Does this phenomenon in the end increase -- does this phenomenon lead to increased adoption in use of Facebook creating more polarization of views and less effective communication at least in some areas of people's lives? Mark, how do you think about this line of thought that because people see things that are already in line with what they believe, communication is hindered. Second, when it comes to video ad formats, are you philosophically opposed to pre-rolls and if yes, why?  And if not, what is missing for you to adopt them? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [30]
+--------------------------------------------------------------------------------
+So we have studied the effect that you're talking about and published the results of our research that show that Facebook is actually and social media in general are the most diverse forms of media that are out there. And basically what -- the way to think about this is that even if a lot of your friends come from the same kind of background or have the same political or religious beliefs, if you know a couple hundred people, there's a good chance that even maybe a small percent, maybe 5% or 10% or 15% of them will have different viewpoints which means that their perspectives are now going to be shown in your news feed. 
+If you compare that to traditional media, where people will typically pick a newspaper or a TV station that they want to watch, and just get 100% of the view from that, people are actually getting exposed to much more different kinds of content through social media than they would have otherwise or have been in the past. So it's a good sounding theory, and I can get why people repeat it, but it's not true. So I think that that's something that if folks read the research that we put out there, then they'll see that. What was the other question? 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [31]
+--------------------------------------------------------------------------------
+Pre-roll. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [32]
+--------------------------------------------------------------------------------
+Pre-roll. I can take that one too. So we don't think it would be a good experience in news feeds because a lot of when people are finding videos on Facebook is you're scrolling through news feed, you're looking  at what stories seem interesting to you, which is why we did the auto play videos so that rather than having to take an action, you can start experiencing the video automatically and continue watching if it's something that you're interested in. If we started playing an ad in the middle of feed before you got to the video then that would really go against that. I think people would just watch a lot less of the organic videos that were posted because of that. But the important thing to keep in mind on this is we don't need to do pre-rolls because our model is not one where you come to Facebook to watch one piece of content. You come to look at a feed and putting the ads in between the stories is a much more effective way to do it and better for the user experience. 
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+The next question is from Ross Sandler  with Deutsche Bank. Your line is open. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [34]
+--------------------------------------------------------------------------------
+Great. I had two product-related questions for Mark. Mark, you guys mentioned when you released the latest Instagram MAU crossing the 500 million mark, you give out the breakdown of US, international. Looks like US has been around 100 million for about the past nine months. Is that just a pause along the growth path or is there something else that you're seeing that's causing that growth to stall out a bit in light of what you just said about engagement being up since you did the algorithmic reranking. Any color there would be helpful. Second question is just any update on Messenger M and how do you see that product potentially impacting engagement monetization on Messenger? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [35]
+--------------------------------------------------------------------------------
+On any update on M, I can start with that one. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [36]
+--------------------------------------------------------------------------------
+I was going to take that one. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [37]
+--------------------------------------------------------------------------------
+You're going to take that one. On the Instagram MAU  question, I don't think we're breaking out by region Instagram MAU. So no, I don't think there's any update there that I'm aware of. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [38]
+--------------------------------------------------------------------------------
+Okay. Yes, so we just haven't updated the stat. Yes. So for M, we've released the Messenger platform and in bots in  the last six months. F8 was the big announcement there. I think since then, I think we've announced we have more than 10,000 bots in the system which are basically making it so that different businesses can build automated ways to communicate with people. The way we think about this experience is that qualitatively, I don't know a single person really who wants to call a business to get support or interact with it, whether that's trying to get a reservation for a restaurant or getting customer support or calling to buy something. Those are slow interactions. They're synchronous. They consume your whole attention while you're doing them. 
+If we can make it so that you can have some of those interactions in an automated way where you fire off a text and then just get a response that quickly but asynchronously so it doesn't take up your full attention. I think that  that's going to be a much better experience that people really enjoy and like. So we're in the experimentation phase I think with the platform. We're seeing a lot of good ideas getting tried out, and I'm -- I personally enjoy a lot of the different bots set that people are using or making, especially the news ones where you get these digests at the end of the day of different kinds of content. And between that and M, which is kind of our own internal bot that we're building, I think this is going to be an interesting area to watch and encourage more interaction between people and businesses and texting. 
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+The next question is from Ben Schachter with Macquarie. Your line is open. 
+
+--------------------------------------------------------------------------------
+Benjamin Schachter,  Macquarie Research - Analyst    [40]
+--------------------------------------------------------------------------------
+Couple questions for Mark. The first one, what are the lessons you're learning from seeing the growth of Snapchat and some of the other newer networks, particularly among young people. Obviously Facebook continuing to do well but these things are growing. Second, related to video, what are the key problems that you really think you need to solve for consumers and for video producers and how is Facebook going to evolve to help solve those problems? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [41]
+--------------------------------------------------------------------------------
+Sure. And they're related. So overall, people are spending more and more time on mobile and that means that there are always more services that people use, whether it's YouTube or there's some really interesting ones with younger folks, especially like Musical.ly and Live.ly that I think are pretty interesting as well.  Snapchat, which you mentioned. Part of why I think you see this is that there are just so many different ways that people want to share, so many different kinds of content ranging from text to photo to video to just richer and richer more immersive content. And also there's a  range from private one-on-one type sharing to small groups, all your friends at once, large interspace communities, and then ultimately fully public. 
+There are different apps that explore different regions of that space and do a good job with it and offer ideas that I think the whole market needs to learn from. Right now, the big theme and strategy that we're executing is we're going to become the video first, and what I mean by that is that there's this trend where 10 years back, most of what you saw and shared online was text. And then we went through a phase where most of it is photos. We really believe that in call it five years, whatever the period of time that it takes to get there, I think most of what people consume online is going to be video. And that means that there need to be a whole range of new production tools and consumption experiences for enabling that. 
+For production, I think that means that you need to get the camera experience, the experience for capturing and uploading videos that you captured to be much better and a more central part of the experience. On consumption, there are innovations that we've had like auto play and feed but what's the next version of that that makes it so that people can have an even more native and default video experience when they're in news feed as well as private areas like Messenger and WhatsApp. I think you're going to see this across all of our apps, more focus on producing this kind of content and making it first class to consume as well, both in private and public context. And I think that's just a big trend across the market and one of the big things that if we get right, I think it's going to unlock a lot of sharing and opportunity. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [42]
+--------------------------------------------------------------------------------
+And then just following up on Ross' question on Instagram and US because I think Ross you were asking, we've provided some rough percentages around international and US and I just wouldn't -- I wouldn't -- those were very approximate and I wouldn't base any trending on that, on those percentages. 
+
+--------------------------------------------------------------------------------
+Operator    [43]
+--------------------------------------------------------------------------------
+The next question is from John Blackledge with Cowen and Company. Your line is open. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [44]
+--------------------------------------------------------------------------------
+Great. Thanks. For Instant Articles, I think it went live globally for all publishers around the time of F8 in April. Just wondering if you can provide an update on the progress and how you see Instant Articles evolving over the next couple years. And then maybe Dave on the 49% year-over-year impression growth, how much of that was driven by ad loads? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [45]
+--------------------------------------------------------------------------------
+I can take Instant Articles quickly. I think it's going well. It's a good user experience. People like it. The hypothesis when we rolled it out was that if we removed the latency, which is often 10 to 15 seconds of opening up a web view for news feeds that more people would read news. I think the initial data suggests that that's probably true. So that's good. We're getting more partners on and over the long term, I think one of the big things that we need to do is see if we can not only make this good for engagement for our partners but also a really positive business driver for them, too. That's something I'm excited about and we'll hopefully  have more news on that coming up. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [46]
+--------------------------------------------------------------------------------
+On the 49% year-over-year growth in impressions, we're not providing a specific breakdown there. I would say that it's primarily driven by growth in Facebook mobile news feed. We've talked about the drivers of supply being growth in DAU, growth in time spent per DAU and ad load. And obviously, we've given stats around -- rough stats around -- we've given specific stats around DAU. We've talked about time spent per DAU being up double digit. I think you can make some assumptions around that. So that's probably the way to triangulate on that. I think we have time for one more question, Chris. 
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+Certainly. The final question is from Mark May with Citi. Your line is open. 
+
+--------------------------------------------------------------------------------
+Mark  May,  Citigroup - Analyst    [48]
+--------------------------------------------------------------------------------
+Thanks a lot. I had two as well. You probably won't give specific revenue numbers, but just if you kind of in aggregate look at some of the non-Facebook app revenue streams, if it's FAN, Instagram, et cetera, curious to get a sense of the traction and materiality of those. Would you expect, Dave, that in aggregate that those would become kind of material meaning that sort of 10% plus threshold some time this year? Just trying to get a ballpark sense of the level of traction and diversification of revenue outside the core Facebook app. And then along the lines of your commentary around ad load, how should we be thinking about -- your MAUs are obviously very significant. DAU to MAU quite high. Do you continue to see that as being a primary driver of ad impression and ad revenue growth going forward as well? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [49]
+--------------------------------------------------------------------------------
+Yes, thanks, Mark. Like you said, we're not specifically breaking out revenue numbers. One thing to just keep in mind is Instagram is known and operated, property is represented gross in our revenue. Where as I mentioned the Audience Network by and large is going to be recognized net rather than gross. That is going to make it smaller in how it's going to appear in the revenue numbers. 
+The overall growth is still being driven predominantly by Facebook. Instagram is clearly making a contribution, and then as is the Audience Network. In terms of ad load, as I said, it's been one of the factors driving supply. It's certainly been helpful. But there's also DAU growth and time spent per DAU growth to time spent per person and we continue to feel that there are opportunities to execute on those and continue to grow inventory in that way. So that's where we would focus. As we drive DAU faster than MAU, then that's going to increase that ratio but we're really focused on driving DAU and time spent per person. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [50]
+--------------------------------------------------------------------------------
+Great. Thank you for joining us today. We appreciate your time and we look forward to speaking with you again. 
+
+--------------------------------------------------------------------------------
+Operator    [51]
+--------------------------------------------------------------------------------
+Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines. 
+
+
+
+
+
+
+
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exam/original-files/Problem_1_Sample/2016-Jul-28-AMZN.OQ-138879486315-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2016 Amazon.com Inc Earnings Call
+07/28/2016 05:30 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com, Inc. - CFO
+ * Darin Manney
+   Amazon.com, Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Victor Anthony
+   Axiom Capital - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Ray McDonough
+   Oppenheimer & Co. - Analyst
+ * Carlos Kirjner
+   Bernstein - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Brian Pitz
+   Jefferies LLC - Analyst
+ * Gene Munster
+   Piper Jaffray & Co. - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q2 2016 financial results teleconference. At this time all participants are in a listen only mode. After the presentation we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Darin Manney. Please go ahead.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+Hello and welcome to our Q2 2016 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks.
+The following discussion and the responses to your questions reflect management's views as of today July 28, 2016, 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 10K and subsequent filings.
+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.
+Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2015. Now I will turn the call over to Brian.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+Thanks, Darin. I'll begin with comments on our second-quarter financial results.
+Trailing 12-month operating cash flow increased 42% to $12.7 billion. Trailing 12-month free cash flow increased to $7.3 billion, up from $4.4 billion. Trailing 12-month free cash flow, less lease principal repayments, increased to $3.9 billion, up from $2.4 billion. Trailing 12-month free cash flow, less financed lease principal repayments and assets acquired under capital leases, increased to $2.5 billion, up from an outflow of $492 million.
+Worldwide revenue increased 31% to $30.4 billion or 30% excluding the $166 million favorable impact from year-over-year changes in foreign exchange. Worldwide paid unit growth was 28%. Worldwide seller units represented 49% of paid units.
+Now I will talk about our segment results. North America revenue grew 28% to $17.7 billion. North America operating income was $702 million, a 4% operating margin, compared with $348 million in the prior year. This includes $5 million of favorable impact from foreign exchange.
+International revenue grew 30% to $9.8 billion. Excluding the $184 million year-over-year favorable foreign exchange impact, revenue growth was 28%. International operating loss was $135 million, compared with a loss of $189 million in the prior year. This includes $40 million of favorable impact from foreign exchange.
+Amazon Web Services revenue grew 58% to $2.9 billion. Amazon Web Services operating income was $718 million, a 24.9% operating margin, compared with $305 million in the prior year. Our operating income was $1.3 billion, or 4.2% of revenue, up approximately 220 basis points year over year. This includes $45 million of favorable impact from foreign exchange. Net income was $857 million, or $1.78 per diluted share, compared with the net income of $92 million, or $0.19 per diluted share.
+I'll conclude my portion of today's call with guidance. For Q3 2016, we expect net sales of between $31 billion and $33.5 billion, or growth of between 22% and 32%. This guidance anticipates approximately 30 basis points of favorable impact from foreign exchange rates. Operating income to be between $50 million and $650 million, compared with $406 million in third quarter 2015.
+We are grateful to our customers and remain heads-down focused on driving a better customer experience. We believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks, and with that I will hand it back to Darin.
+Thank you, Brian. Before we move to questions I need to remind you that our guidance incorporates the order trend that we've seen to date, and what we believe to be appropriate assumptions.
+Our results are inherently unpredictable and may be materially affected by many factors including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC.
+Our guidance also assumes that we do not conclude any additional business acquisitions, investments, restructurings or legal settlements and that foreign exchange rates remain approximately where they have been recently. It is not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance.
+With that let's move to the Q&A portion of the call. Operator, please remind our listeners how to initiate a question.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [1]
+--------------------------------------------------------------------------------
+At this time, we will now open the call up for questions. In the interest of time, we ask that you limit yourself to one question.
+(Operation Instructions)
+Thank you. Our first question is from Mark May of Citi. Please proceed.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [2]
+--------------------------------------------------------------------------------
+Thanks for taking my question. We've noticed some data points out there that suggest that you're accelerating your build-out of fulfillment capacity in North America and obviously also in India. Can you give us a sense of what sort of impact that, that might have in the near to mid-term on your CapEx, depreciation and ultimately CSOI? Especially as it relates to your Q3 guidance? And then just a maintenance question, how much is FX impacting your Q3 guidance? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+Okay. Thanks, Mark. Yes, let me talk a little bit about guidance, and I'll incorporate the answer to the fulfillment question. So, you'll notice on the top line guidance of $31 billion to $33.5 billion or 22% to 32% growth incorporates the Prime Day results and I can talk more about that later. But Prime Day was very successful for us. It was up 60% on a worldwide basis over the prior year, and it was also a record day for our Amazon devices, as well as sellers and customers alike.
+In the bottom line, you'll need to remember that Q3 is a typically a lower operating income quarter as we prepare for Q4, the holiday peak. It's a little bit more exaggerated this year in that we're opening 18 fulfillment centers this quarter. To put that in perspective, we launched six in Q3 of last year. This will bring us up to 21 net FCs for the year by the end of Q3, and that compares with 10 fulfillment centers for the first three quarters of last year on a net basis. So, why are we expanding so much? If you remember back to Q4 and the capacity constraints we had in Q4, primarily due to really strong FBA growth, we talked a lot in the Q4 call about the operational cost of that in Q4. Customers are well taken care of, but we had additional fulfillment costs from being so tight on capacity.
+This year, with that in mind and then knowing that our growth rate is actually accelerating on a unit basis, we are - Q2 was 28% unit growth for paid units, but fulfilled by - units fulfilled by Amazon is much higher than that due to the growth of Prime and FBA. That compares with last year in Q2 when we saw 22% unit growth. So we're 600 basis points faster growth in Q2 this year than last year and that 22% last year turned into 26% in Q4. So it ramped up in the back end of the year.
+So a lot of data points there, but the bottom line is that there's a large step up in the amount of fulfillment capacity in Q2 - excuse me, Q3 versus Q2. There's a couple of other factors while I'm at it for guidance. We are also nearly doubling our content spend in the second half of this year versus the second half of 2015. We have a great slate of new Amazon Originals coming out later this year, both in the US and internationally, and we're nearly tripling our number of new Amazon Original shows - TV shows and movies compared with the second half of last year. There are other investments, certainly, that are increasing sequentially. I'd point to India and AWS, but primarily the two biggest issues in Q3 guidance I would say are the operational ramp and also the increase in digital content spend.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [4]
+--------------------------------------------------------------------------------
+And, Mark, to follow up on the other question, our net sales guidance anticipates approximately 30 basis points of favorable impact from foreign exchange rates.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [5]
+--------------------------------------------------------------------------------
+And, Brian, where does that bring your video content spend to with the doubling in the second half if we look at it on an annualized basis?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [6]
+--------------------------------------------------------------------------------
+We're not disclosing that at this time.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [7]
+--------------------------------------------------------------------------------
+Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+Our next question comes from Douglas Anmuth from JPMorgan. Please state your question.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [9]
+--------------------------------------------------------------------------------
+Thanks for taking the questions. I just want to go back to Prime Day for a minute. I didn't hear any commentary around new Prime members in particular. Obviously a lot of other metrics that you gave but hoping you could provide a little bit more color around that.
+And then also, is there anything else that stood out in terms of what you learned around operations and systems ahead of the holiday season? And then just going back to the 3Q guide, what's the right way for us to think about stock-based comp in the third quarter and if we looked at your 2Q numbers, is that a fair assumption for what you're thinking about? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [10]
+--------------------------------------------------------------------------------
+Sure. Let me circle back on Prime Day. So again, it was the biggest global day ever for Amazon and was up 60% on a order product sales basis versus Prime Day 2015. It was a record day for Amazon devices. It was a great day for small businesses and sellers who saw great year-over improvement in their sales. And more importantly, it was a great day for customers. Globally they saved over double what they had saved in Prime Day 2015.
+So we're very pleased with the results of Prime Day, and the impact of Prime Day is factored into this guidance. As far as new customers and new Prime members, we're not disclosing that, but suffice to say that it was a great day for both existing Prime members and also new customers who were trying us out for the first time.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [11]
+--------------------------------------------------------------------------------
+And on the stock-based compensation, you'll recall beginning in Q1 this year, we began allocating stock-based compensation and other operating expense to our North America, international and AWS segments. So we're including that in our guidance on operating income and have not separately guided to stock-based comp and other income expense this quarter.
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+Our next question comes from Gene Munster from Piper Jaffray.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [13]
+--------------------------------------------------------------------------------
+Hello, good afternoon. First, love the conference call format here. Get right to it. In terms of questions, the customer count, can you give us a little bit of guidance on that? And then also talk about the theme of automated consumption and separately, the importance of Prime Now and how you can grow those SKUs. Thanks.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [14]
+--------------------------------------------------------------------------------
+Hi, Gene. This is Darin. I'll start with the customer accounts. As we noted again in our Q1 release, our active customer accounts exceeded 300 million. However, today we're not going to update that number.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [15]
+--------------------------------------------------------------------------------
+To your question on Prime Now, so I will point out Prime Now is now in more than 40 metro areas worldwide. In the past quarter we expanded further internationally to Germany, Spain and France, so it's a global program, again, offering free two-hour delivery on tens of thousands of items. We also have in the same vein of, I think what you called maybe automated consumption, the same day has expanded. Now we've added 11 metro areas, bringing the total to 27 metro areas that are qualified for same day.
+So, yes, we think this is an important part of our Prime offering. We know customers love it. We're very happy with their order patterns from Prime Now, and very happy with it. Of course, we do always talk about - we always usually get asked about profitability, and it is a very hard service to deliver and make money on. But we know customers love it and we're in a great position to do this because of our long-term approach, our drive of greater efficiencies and our proximity to the customer with our vast global FC network.
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+Our next question comes from Heath Terry from Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [17]
+--------------------------------------------------------------------------------
+Great, thanks. I was wondering as it relates to the Q3 guidance, can you give us a bit of a sense of just how we should think about margins in the AWS business, especially as the next eight availability zones roll out? Presumably that kind of increase in capacity likely has an impact on margins, but would appreciate any direction you can share on how to think about that.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [18]
+--------------------------------------------------------------------------------
+Sure. We don't give - obviously we don't give segment-based guidance. But to your question about AWS, we actually see nine availability zones in four regions coming out in the next - in the coming year. The impact on short-term is pretty much indistinguishable from the growth that we're seeing in our expansion of our base customers in our existing regions, so we don't see a large step-up from the addition of new regions relative to the large and rapid growth in the business itself.
+We do think that it does pay benefits both for ourselves and for our customers because of the expansion, and we're happy to have added the region in Mumbai this past quarter. We think when we expand geographically, existing customers will run more of their workloads on AWS. Sometimes they have local latency concerns or security issues that require them to run things in their country, so that helps. And we also open up to new customers when we add these regions. So not a large impact on Q3 guidance, but certainly an exciting investment for our customer base.
+
+--------------------------------------------------------------------------------
+Operator    [19]
+--------------------------------------------------------------------------------
+Our next question comes from Carlos Kirjner with Bernstein.
+
+--------------------------------------------------------------------------------
+Carlos Kirjner,  Bernstein - Analyst    [20]
+--------------------------------------------------------------------------------
+Thank you. Two questions if I may. As I look at your tech and content expense as a percentage of revenues, we see year-on-year decline for the last two quarters, which is something we hadn't seen since mid-2010, and of course it's reflected in the AWS margins. Can you help us understand what has driven this significant change in relative trajectory in tech and content expenses? And the second question is, why is it that the rate at which you are deploying Prime Now is so much greater or faster than the rate at which you are deploying Fresh? What's different between them and how is it that you are deploying Fresh in new markets but not as fast as Prime Now, and what drives the difference? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [21]
+--------------------------------------------------------------------------------
+Sure. On tech and content, that's going to be a combination of our people cost related to many areas of the website and also the infrastructure cost to run it, at both the Amazon Web Services and also the Amazon site. We've been seeing some great efficiencies in our infrastructure, both internally as Amazon and also as part of AWS. We have great people working on not only better efficiency, but also driving cost out of our acquisition prices. So, there's a lot of great work going on there and I think that's what you're seeing reflected in the tech and content line. Again, this can fluctuate quarter-to-quarter, but we're happy with the current trend and you see it in the AWS margins.
+On Prime Now versus Fresh, they are separate - sorry. The - we'll point out in Q2 that we added London and Boston as two new sites in London for AmazonFresh, and that was the first international location. But we've been running AmazonFresh for seven years, or excuse me, since 2007 in Seattle. And what you've seen as we've been testing the model, we've been expanding in North America and more so we've been expanding within the cities that we're in, adding zip codes, adding additional customers. So, the move into Boston and also now into London give us some really good data points and as - it's a great customer feature for the Prime offering.
+Prime Now is a little bit easier to build up from scratch, I would say. The - it has a different purpose, although some of the products overlap. Again, this is more about immediacy of one-hour and two-hour delivery of a curated list of important products that people need in a short period of time. So, they have different roles. Some of the products overlap, of course, but we're happy with both, and we think that customers like both of them.
+
+--------------------------------------------------------------------------------
+Operator    [22]
+--------------------------------------------------------------------------------
+Our next question is from Brian Nowak from Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [23]
+--------------------------------------------------------------------------------
+Thanks for taking my questions. I have two. The first one is on the Echo. Anything you could share at all on some of the most commonly used searches? How are consumers using the Echo as of now most commonly, and then anything on uplift in purchase behavior from Echo households? And the second one on Prime, on AWS margins, can you just walk us through some of the puts and takes that have been driving the AWS margin expansion we've seen in the first half of this year? Is it utilization, product mixes? What's been driving the margin expansion? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [24]
+--------------------------------------------------------------------------------
+Sure. Well, in Echo, again, we continue to build out the list of devices, launching the Dot and Tap and Fire TV skills this past year. And now we have 1,900 third-party skills for the Alexa, including new skills from Kayak, Lyft, NBC, Honeywell and more. So there's a lot of uses that we're seeing for Echo. A lot ties into our Prime Music offering. It's just a great way to access Prime Music and more and more the Amazon site. We don't have anything to disclose on physical orders from - through - excuse me, orders through Echo.
+On Amazon Web Services margin, again, this is primarily due to efficiencies gained on our infrastructure, better utilization, better cost out. There is a - certainly a mix of products and services. I don't have a bridge for you on whether that's helpful or hurtful, but the - these margins in AWS will fluctuate from quarter to quarter, and that's what you're seeing. But we're very happy with the year-over-year improvement.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+Next question is from Mark Mahaney from RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [26]
+--------------------------------------------------------------------------------
+Okay. Brian, could you give us some whys as to the revenue growth acceleration that you're seeing, a little more color about the revenue growth acceleration in North American retail and in international retail? I remember last quarter you called out really starting to see, I don't know, critical mass, tipping point, whatever the buzzword is, from Prime and from FBA in international markets. Is that what's continuing, I assume, to drive that re-acceleration in any geographic country comments behind that? Thanks a lot.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [27]
+--------------------------------------------------------------------------------
+Sure. Yes, I have the same buzzwords for you, Mark. It's really -- the flywheel of Prime is definitely working. It's as simple as that. The low prices, vast selection and convenience continue to resonate with customers. Prime membership increases and selection through FBA makes Prime more valuable. So it's a bit as simple as that in the consumer business in North America and international, we are seeing great acceptance of Prime and usage of Prime benefits. We continue to expand the list of Prime benefits for customers to make it more valuable, and none is more valuable than FBA, which we've talked a lot about the value of Prime to FBA and vice-versa.
+FBA is bringing more Prime-eligible selection to Prime and then the growth of Prime and the type of customers that utilize Prime and their buying behavior is a great traction for other FBA sellers. So that is essentially what we're seeing, and we're certainly pleased with the customer response to those offers globally.
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+Our next question comes from Youssef Squali from Cantor Fitzgerald.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [29]
+--------------------------------------------------------------------------------
+Thank you. Two questions, please. Brian, your operating income has been come in stronger than expectations, but more importantly, stronger than your own guidance, at least in the last couple of quarters. I was just wondering as you look back at where you guided relative to actual, where do you think that delta was most pronounced? Why wouldn't we assume that maybe, at least on the margin, the investment intensity in the business has maybe decelerated a bit?
+And second, on Prime Video, just was wondering, considering what the main competitor there is doing, i.e., expanding aggressively around the world, you guys have been growing in a more measured manner, is that still the plan or are you guys interested in maybe instead of moving into a few countries, expand globally in one fell swoop? That's it. Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [30]
+--------------------------------------------------------------------------------
+Sure. Let me start with the second question first. So on Prime Video, again, we're very happy with the customer adoption of Prime Video, and we know the customers love it. We like the results that we see, particularly with the free trial conversion, the renewal rates for subscriptions. So it's clearly working. I mentioned earlier how we're doubling the investment rate in the second half of the year versus last year's second half, and we're tripling the Amazon Originals content.
+That Originals content for TV and movies, that content can be used globally. We've talked a bit about our Prime launch in India, and alluded to the fact that we'll be having video soon in India, but local content and also Amazon Originals. So, stay tuned for that. I don't have any more to announce on that today. On the variance to guidance, what I'll say is, we came in the very high end of our revenue guidance. I would say that our business model usually reacts well to high volume as we get a really good leverage on our fixed expenses. So that's part of what we saw, very strong operating efficiencies as we hit essentially the highest end of our revenue guidance.
+But we do have a lot of diverse profit streams here at Amazon and a lot of investments going on at any point in time. I think I heard a question there about level of investment. We continue to invest heavily. In fact, I just called out a few things that are going to be stepping up in investment levels in Q3, mostly ops and digital content. So we continue to invest on behalf of customers. But we also work very hard at efficiencies and scaling the businesses that we have. So we take both roles very seriously around here, investing on the right - in the right things, seeing results on behalf of customers, and also driving efficiencies. And there can be timing, quarter-to-quarter, the operating margin and levels of investment can fluctuate, but certainly continue to expand.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+Our next question comes from Jason Helfstein from Oppenheimer. Mr. Helfstein, your line is live.
+
+--------------------------------------------------------------------------------
+Ray McDonough,  Oppenheimer & Co. - Analyst    [32]
+--------------------------------------------------------------------------------
+Hi. Sorry about that. This is Ray McDonough on for Jason Helfstein. Just on the AWS side, we've been hearing a lot of talk and especially a lot of media reports that larger customers tend to use AWS, they might use Google and Microsoft Azure in tandem in a multi-cloud kind of architecture. Just wondering your thoughts on how you see AWS fitting in the overall ecosystem and kind of your place longer term in the ecosystem.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [33]
+--------------------------------------------------------------------------------
+Sure. Well, first of all, we believe customers will choose AWS primarily for three factors, the functionality and pace of innovation that we bring to the table, our partner and customer ecosystem and our experience. We've been in this business longer than anyone. Having said that, there's plenty of room for multiple winners in this business. What we focus on is innovating on behalf of customers and expanding the geographic footprint to make our services more widely available.
+You can see us continue to invest in things like new application services, higher up the stack, additional technologies that will make integrating with AWS seamless for those companies that have a hybrid IT environment and then continuing to add functionality for data analytics, mobile, Internet of things, machine learning offerings, things like that, that will add greater and greater value for AWS customers. And I would say the rapid pace of innovation continues to stretch our lead in that dimension. We have had 422 new significant services and features added in the first half of this year. That's a faster pace than last year when we added 722 services and features. So we feel good about the business position we're in and our position with customers.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+Our next question comes from Colin Sebastian from Robert W. Baird.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [35]
+--------------------------------------------------------------------------------
+Okay. Thanks, guys. As another follow up on the margins, I was hoping you could comment on any impact from the investments and build out of enhanced transportation capabilities including the air cargo leases. And then secondly, was hoping you could identify any categories within EGM that are becoming more meaningful drivers of growth or at least are an increasing focus on the retail side? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+Yes, sure. First, on EGM, I'll just say the growth is across a lot of different products, none to exactly call out here, and we think that a lot of it is, of course, driven by the growth of Prime itself. EGM in North America grew 32%, which was higher than the revenue growth rate, and also grew 36% internationally. So when people join Prime, they are certainly buying EGM in strong quantity. So that continues to grow with the growth of the Prime program.
+On transportation, I think your question was about whether that's impacting our short-term results. No, the answer is no. We are certainly expanding our service offerings in the transportation side and we have been for many years, things like sortation centers and delivery methods. The plane deal that we were talking about is essentially planes that we're going to be leasing from other companies, and you'll hear more about that as we go forward, but that is to essentially take on the demand for internal flights as we move product around. It certainly will be well utilized.
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+Our next question comes from Brian Pitz from Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Pitz,  Jefferies LLC - Analyst    [38]
+--------------------------------------------------------------------------------
+Thanks for the questions. First, on FC build out, is the cost of building centers scaling over time given the use of Kiva, other technologies or general learnings, or are those costs still relatively consistent? And also, we noticed some device sellout in the next four to five weeks, post-Prime Day. Was this a bit of a planned inventory reduction for some of the devices or did volumes take you by surprise here?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [39]
+--------------------------------------------------------------------------------
+I will start with the second question. So I would just say Prime Day had enormous impact on the device business and devices were well featured and also well adopted by customers. So it was the largest device sales day that we've ever had and essentially pretty much across all of our device types, E-readers, tablets, Fire TV and Echo.
+And I'm sorry, your first question was around - the cost of fulfillment centers. Not disclosing that we do continue to change our fulfillment centers. We've changed, again, the automation, the size, the scale many times and we continue to learn and grow there. So no general trends I can point to on cost per fulfillment center to start up, but because they do vary in size and mission and some have fully outfitted in using Amazon Robotics, others - some don't for economic reasons. Maybe the volume is not perfect for robot volume. But, yes, so I can't give you any real distinct trends there.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+Our next question is from Justin Post from Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [41]
+--------------------------------------------------------------------------------
+Great. Thank you. First on the customers, I'm guessing - I'm wondering why you aren't giving the number, a lot of people use it for their models. And then second thing, when you look at the US Prime penetration versus total US customers, how do you feel about that and do you think there's still a lot of room for Prime growth in the US? Thank you.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [42]
+--------------------------------------------------------------------------------
+Hi, Justin. This is Darin. I'll comment on the customer accounts again. We may consider updating that in the future, but really we encourage you and our investors to look at our free cash flow measures, our revenue and our GAAP operating profit since our customer purchasing behavior can vary.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [43]
+--------------------------------------------------------------------------------
+And on Prime penetration, of course, we haven't released Prime subscription levels. We have talked about growth certainly globally and in North America. What I can tell you there is we still think there's a lot of room in Prime. We've tailored programs to students, we've tailored video programs, we've rolled out monthly plans, we have plans with grocery delivery.
+So there's a lot of different flavors of Prime and we are aggressively looking for a perfect Prime for everybody. We know that, again, when customers try Prime, they like it. So it's really just about getting them to try Prime and continuing to deliver great Prime benefits and great low prices and selection.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+Our next question comes from Ross Sandler from Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [45]
+--------------------------------------------------------------------------------
+Thanks, guys. I just had two. First as a follow up on the logistics topic. So, in addition to the cargo planes you just mentioned for in-network moving products around, you guys have registered and received a US maritime license to operate as a freight forwarder and you recently announced this partnership with the UK for drone delivery that you've been working for a couple years. At a high level, can you just talk about how the overall logistics strategy is evolving from trucks and fulfillment centers to incorporate some of these new methods and how that might impact your unit costs going forward?
+And then the second question's on AWS. So you continue to put up really strong results, and you guys obviously talk to a lot of customers across lots of different verticals. Just a high level, what percent of enterprise workloads do you think have shifted to the public cloud at this stage? Is it low-single digit to mid-single-digit? And any color there on where we are in terms of penetration in the space. Thank you.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [46]
+--------------------------------------------------------------------------------
+So thank you, Ross. This is Darin. Let me take that first question. On Prime Air in the UK, we've been working with and developing Prime Air for some time to develop a rapid delivery system that is safe, environmentally sound and it really enhances the services that we provide for millions of customers. And we're extremely happy to partner with the UK government to advance the safe use of drones for small parcel delivery. This is providing us with permission to trial new methods in the space, including beyond line-of-sight operation, sense-and-avoid technologies and flights where one person operates multiple drones.
+So we definitely appreciate the pragmatic and forward-looking approach on this topic with the UK, and we're going to continue to work with regulators and policymakers in many countries, including the US, so we're excited about there. As for the ocean-going licenses, we have no comment on that today.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [47]
+--------------------------------------------------------------------------------
+As far as AWS, essentially penetration question you asked. We think still very early. Again, we like our position, our industry leading position in the cloud space, and we're working on things that would incent more and more customers to accelerate their cloud conversion. The lower prices and services that we offer, and as I said, we'll work on things that will make it easier and easier for customers to work with us with their hybrid data centers or transfer their volume to us.
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+Our next question comes from Eric Sheridan from UBS.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [49]
+--------------------------------------------------------------------------------
+Thanks for taking the questions. Maybe one clarification and one big picture topic. On the clarification, appreciate the disclosure on content and how that'll double year-on-year in the second half. For purposes of just making sure we can understand the trajectory, is there any way to frame it within second half of this year versus first half of this year, just so we can try to triangulate on a gross margin basis from the content spend? And the bigger picture topic would be China, hasn't come up yet on the call. I wanted to understand your latest thoughts there on either the competitive landscape, relative positioning in China and how you think about investments in China. Thank you.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [50]
+--------------------------------------------------------------------------------
+So, hi, Eric. This is Darin. I'll take the second question on China. So we continue to operate well in China. We see China as a - and the way we're approaching China as a way to - a trusted avenue for our Chinese customers to access authentic international brands and we'll focus on those global brands and bringing those to Chinese customers. Offerings like the Amazon Global Store where Chinese customers can access those international brands on the China website and have them shipped directly to their houses is something we're focused on. So, yes, it's still early days and some of those experiments that we're doing, but we're seeing good traction on those things and we like that.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [51]
+--------------------------------------------------------------------------------
+Yes, and on the content spend, I think the only other data point I can give you is probably a dated one at this point, but we spent $1.3 billion in 2014, that's the last number that we disclosed and we continue to add content. The best I can give you at this point is that it will be double, nearly double what we spent in the second half of 2015.
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+Our final question will come from Victor Anthony from Axiom.
+
+--------------------------------------------------------------------------------
+Victor Anthony,  Axiom Capital - Analyst    [53]
+--------------------------------------------------------------------------------
+Thanks for putting me on. Maybe I'll just ask a question about India. You called out India was - you had the most visited e-commerce site as well as the most downloaded mobile app, and you also launched Prime. So maybe you could just talk about the opportunities and the challenges that you see in that market. And second, there was some press reports that you invested about $500 million of incremental capital in Italy. I was wondering, what are you seeing in that market that justifies that level of investment?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [54]
+--------------------------------------------------------------------------------
+Sure. So India, we're very encouraged by what we've seen so far in India, both with customers and also sellers; that's a third-party seller market. You heard that we launched the Prime program this week, which will be a whole new experience for Indian customers. In hundreds of cities we'll now have unlimited free one-day and two-day delivery, and we also mentioned that Prime Video is coming there, both Indian and global content.
+We're also starting to see exclusive online sales partnerships. Recently, we've had partnerships with Motorola, Samsung, Lenovo on select phones. But more importantly, again, we really like the opportunity in India. We like the initial results that we see from customers and also sellers. We really like our team there. We have a great team of Amazonians who've been very inventive in India.
+Every time there's an obstacle or something that's different from the US or another major business, they'll invent around it, whether it's a shipping method or a payment method or whatever. So, very creative and the customer response has been really strong. So we are very excited about the Prime program. We think it'll enter into a new chapter in India, and we've seen great success in every country in the world that we've launched Prime, and we feel India is going to be no different. So we're looking forward to seeing what we can do on behalf of the Indian customer.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [55]
+--------------------------------------------------------------------------------
+And hi, Victor, this is Darin. On Italy, yes, we continue to invest in Italy and really throughout Europe to keep pace with the strong customer demand we see. Since opening Italy in 2010, we've invested over EUR450 million and created 1,700 jobs in Italy, and this increased investment will be to add future FC near Rome and other infrastructure assets. So, yes, this is really to support both the customers that we have there in Italy and throughout Europe, and we'll continue to invest in the coming years.
+So thank you for joining the call today and for your questions. A replay will be available on our investor website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter. Thank you.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2016-Nov-02-FB.OQ-137048274923-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2016 Facebook Inc Earnings Call
+11/02/2016 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook, Inc. - VP of IR
+ * Dave Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - CEO
+ * Sheryl Sandberg
+   Facebook, Inc. - COO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Brian Fitzgerald
+   Jefferies & Co. - Analyst
+ * Ross Sandler
+   Deutsche Bank - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Mark May
+   Citigroup - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Peter Stabler
+   Wells Fargo Securities - Analyst
+ * Anthony DiClemente
+   Nomura Securities Intl - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Good afternoon. My name is Chris, and I'll be your conference operator today. At this time I'd like to welcome everyone to the Facebook third-quarter 2016 earnings call. 
+(Operator Instructions) 
+This call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+Thank you. Good afternoon, and welcome to Facebook's third-quarter 2016 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those statements contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 
+During this call we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.FB.com. Now I'd like to turn the call over to Mark. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+Thanks Deborah, and thanks everyone for joining today. We had another good quarter. Our community continues to grow around the world. We're pleased to see nearly 1.8 billion people now use Facebook every month, and nearly 1.2 billion people use it every day. It's also great to see the continued growth and strength of engagement on our platform. And our ads growth is growing at a healthy rate as well. Total revenue grew by 56% year over year to $7 billion. And advertising revenue is up 59% to $6.8 billion. 
+I want to start by talking about our work around putting video first across our app. People are creating and sharing more video. And we think it's pretty clear that video is only going to become more important. So that's why we're prioritizing putting video first across our family of apps and taking steps to make it even easier for people to express themselves in richer ways. One way we're putting video first is through live video on Facebook. Since May the number of people going live at any given moment has grown by 4 times. People have gone live from all seven continents, and also from outer space. 
+Another recent example is Instagram Stories, which we launched in August. Instagram Stories is a lightweight way for people to share moments of their day through photos and videos that appear in a slideshow format and disappear after 24 hours. Stories now has more than 100 million daily actives. We also improved the explore tab in Instagram to include more videos in stories, and it has 100 million daily actives now as well. In addition to making it easy to share video, we also want to make it easier to capture video. In most social apps today, a text box is still the default way we share. Soon, we believe a camera will be the main way that we share. We're already testing this in our main Facebook app with a version that has a camera directly just one swipe away from newsfeed with creative effects for your photos and videos. And in Messenger we're testing new camera and video features. We'll be experimenting with even more visual messaging tools over the next few months, as well. So those are a few examples of some of the things that we're doing to put video first across our family of apps. 
+Now I'll give you an update on our progress over our 3-, 5-, and 10-year time horizon. Over the next three years we're focusing on making our core services more useful and engaging. The 2016 Summer Olympics were huge on Facebook, with more than 270 million people creating 1.5 billion interactions. Facebook helped bring the world together. And athletes, fans, media went live throughout the Games, including athletes who went live from the Olympic Village, and Michael Phelps who even announced his retirement on our platform. 
+This election season has also driven a lot of conversations, including on Facebook where we've made it easier for voters and candidates to communicate with each other. In the first nine months of this year 109 million people on Facebook in the US generated over 5.3 billion posts, comments and likes ands shares related to the election. During the primaries and in September, we also added a register-to-vote link at the top of our Facebook app that we estimate helped more than 2 million people register to vote, some who were registering for the first time. Facebook really is the new townhall. And we're proud of the role that we've played in enabling dialogue and increasing civic engagement. That's the three-year update. 
+Over the next five years we're going to keep building ecosystems around products that a lot of people already use every day. Instagram, Messenger and WhatsApp each have large communities. But we have a lot more work to do on all of them. I think about our progress here in three phases. The first phase is building a great consumer experience and getting it to scale. The second phase is about enabling people to organically interact with businesses. And then the third phase is to give businesses tools to reach more people. That's where we build our business. 
+Right now Instagram has moved into that third phase. Instagram has more than 500 million monthly actives and more than 300 million daily actives. We're making good progress helping businesses and marketers use Instagram in new ways. And Sheryl will talk more about that in a few minutes. Messenger is early in the second phase. We're helping businesses and consumers increasingly interact in richer ways. To date there are 33,000 bots live on Messenger. We also launched Messenger Light, which is designed to make messaging fast and easy with a wide variety of Android phones and for people who are slower networks as well. A lot of businesses use WhatsApp already. But we're going to really start working on the second phase in the next. Right now we're testing new camera features and we're continuing to keep features fast and reliable on multiple devices in every network condition. 
+Finally, we're starting to build communities around completely new apps. This quarter we launched Workplace to help make organizations more connected and productive. Workplace is a communications platform that uses features that people know, like newsfeed, groups and messages to help them collaborate and share at work the same way that they do ever else. Already more than 1,000 organizations are using Workplace including Starbucks, Royal Bank of Scotland, and (inaudible), and we're adding more all the time. 
+We're also getting new services to scale in the core app. In October we also launched the Marketplace tab to help people discover, buy and sell things with people in their community. While we just launched Marketplace, many millions of people have been buying and selling things in Facebook for sale groups for a while. We think this is going to be an important tool going forward. 
+Over the next 10 years we're going to continue to invest in the platforms and technologies that will connect more people in more places and allow everyone in the world to have a voice. We focused our long-term innovation road map around three areas: connectivity initiatives that bring more people online, artificial intelligence, and virtual and augmented reality. On connectivity, through our efforts with Internet.org, we've connected 40 million people, based on our best estimates. And we're making good progress with our Express Wi-Fi program which empowers entrepreneurs to build a business by providing their community with access to the internet. On artificial intelligence we're starting to see the impact that AI can have on enhancing people's experiences on Facebook and showing them more of what they care about. More than 40 teams at Facebook and more than 25% of our engineers are already using AI to power the products and services they build. We've made changes to and improvements to our AI in order to filter out misleading clickbait stories from newsfeed. And we're using AI to help find terrorist propaganda on Facebook. It's still early, but we think that AI will help improve the quality of what people see and can share on our platform. 
+We also took some important steps forward on virtual reality to help people experience the world in richer and more immersive ways. At Oculus Connect we announced that touch controllers for Rift will ship in early December with 35 games and experiences exclusively built for touch. Since we believe the next phase of VR is great software experiences, we're investing another $250 million in virtual reality content on top of the money that we've already invested. 
+So this was a very busy third quarter. And 2016 is shaping up to be a year of important progress for Facebook. Our business is performing well. And while I'm happy about what we've accomplished, we're really just getting started. We want to continue to invest aggressively to accomplish our goals, which is why we're hiring, especially in engineering, which is going to be one of our top priorities going into 2017. Dave will say more about this in his remarks. Everything we do is about opening the world to everyone and helping more people to connect and share. So I want to thank our entire community, all of our teams, our partners, and our shareholders for being a part of this journey with us. Now here's Sheryl. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+Thanks Mark, and hi everyone. We had a great third quarter. Q2 (sic) ad revenue grew 59%. Mobile ad revenue reached $5.7 billion, up 70% year over year, and was approximately 84% of total ad revenue. Our growth was broad based across all regions, marketer segments, and verticals. In Q3 we announced that we have over 4 million active advertisers on Facebook and over 500,000 active advertisers on Instagram. The number of advertisers on both platforms continues to grow quickly. And we're pleased to see more and more of them using the full range of our ad products. 
+We continue to focus on our three priorities: capitalizing on the shift to mobile, growing the number of marketers using our ads products, and making our ads more relevant and effective. First, capitalizing on the shift to mobile. People have shifted to mobile, and we remain focused on helping businesses catch up. We know that marketing shifts take time. The first TV ads showed people standing in front of microphones reading their radio ads. Similarly, many of the first mobile video ads were  TV ads dropped into mobile. Ads optimized for each platform often perform better. So marketers are increasingly tailoring their creative for mobile. 
+We're excited to see the world's largest advertisers realize that the small screen is big. In September P&G Chief Brand Officer Mark Pritchard, GM CEO Mary Barra, and I addressed the Ad Week audience together. Mark described how P&G is creating mobile video ads designed to grab attention in the first few seconds. He shared the example of Tide. In a typical TV ad they start with a clean dress or shirt, show it getting stains, and then cleaned with Tide. On mobile they need to communicate the product value more quickly. So they start by showing Tide cleaning a stained garment. 
+Mary shared GM's success with Facebook Mobile video ad. In Q3 GM subsidiary Holden used Carousel Ads with video to maximize its sponsorship of Australia's Premier Rugby Tournament. Holden created a video series about their support of youth rugby. The ads generated an 8-point lift in brand favorability for the overall audience  and a 15-point lift amongst their  target audience of women over 35. For many small businesses a shift to mobile means leveraging video for the very first time. Rather than needing a camera crew and production budget, anyone with a smartphone can shoot a video and share it on Facebook. In the past month alone over 3 million small businesses have posted a video on Facebook, including organic posts and ads. 
+Our second priority is growing the number of marketers using our ad products. We continue to focus on our advertiser pipeline. In Q2 we announce that over 60 million businesses use our free Facebook pages product each month. And we introduced the Instagram equivalent, Business Profiles, which are being used by 1.5 million businesses. On past calls I've talked about product simplification as a driver of advertiser growth on Facebook. Now with the launch of promoted posts, we're seeing that on Instagram too. Like boosted posts on Facebook, promoted posts on Instagram are an easy way to start advertising. And we're pleased with adoption. Over 85% of business pages are active on mobile. We're making it easier for advertisers to manage campaigns from their phones. 
+In Q3 we added a feature that shows marketers a preview of a potential ad in newsfeed just as our customers would see it. They can then run the ad with just a few taps from their mobile device.  Making it easy to advertise from a mobile phone is especially important in emerging markets. For businesses operating in areas with weak network connections, we continue to build advertising tools into Facebook Light, our low bandwidth app, and are making more of them available offline. 
+Our third priority is making our ads more relevant and effective. Our goal is to be the number one driver of growth (inaudible) for our clients. In Q3 we introduced tools to help businesses find people around the world who look like their current customers and target the ones most likely to convert. For example, SA Company, an outdoor gear and apparel business started by a young man out of his parents' home, used international look-alike targeting to reach customers in 32 countries and increase sales by 37%. We're focused on driving purchases online and in stores. In Q2 we launched estimated store visits, which show advertisers how many people came to their store after seeing an ad. And this quarter we made it possible for advertisers to optimize campaigns for in-store visits. We also expanded dynamic ads, a proven way to drive online sales for in-store retail objectives. Businesses can use dynamic ads for retail to show people the products available at their closest location in real time and reach people likely to visit their stores. To prove the value we're driving for our partners we continue to invest in measurement. This quarter we announced new third-party partnerships with Nielsen Datalogix, Visual IQ and Marketshare to help our clients measure how Facebook ads drive business results. 
+We're pleased with the value we're driving for our partners. And we remain focused on helping them make the shift to mobile. With only a small fraction of businesses on Facebook and Instagram advertising, we have a lot of opportunity in front of us. We also have a lot of hard work to do to help our partners around the world use mobile to drive their businesses. I want to thank our clients around the world for their partnership, and congratulate our global teams on the results of their continued focus and dedication. Thanks. And now here's Dave. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+Thanks Sheryl, and good afternoon everyone. Q3 was another strong quarter for Facebook. Total revenue grew 56% and exceeded $7 billion for the first time. And we delivered $2.4 billion in GAAP net income, up 166%. We saw healthy growth and engagement in our community, as well as broad-based strength in our mobile apps business. Let's start with our community metric. In September 1.18 billion people used Facebook on an average day, up 172 million, or 17% compared to last year. This daily number represents 66% of the 1.79 billion people that used Facebook in the month of September. Mobile continues to drive our growth, with 1.09 billion people accessing Facebook on mobile on an average day in September, up approximately 197 million, or 22% compared to last year. 
+Turning now to the financials. My comments today will focus on our GAAP financial metrics. And all of our comparisons are on a year-over-year basis, unless otherwise noted. A reconciliation of our GAAP to non-GAAP financial metrics is included in our press release and earnings slide. Q3 total revenue was approximately $7 billion, up 56%. Q3 ad revenue was $6.8 billion, up 59%. Exchange rates did not impact our overall growth this quarter, as headwinds in certain currencies were offset by tailwinds in others. Asia Pacific and North America were our fastest growing regions, with ad revenue growth rates of 64% and 62% respectively. Ad revenue grew at a rate of 50% or more in all regions in Q3. Mobile ad revenue was $5.7 billion, up 70% and representing approximately 84% of total ad revenue. On prior calls we have discussed the supply and demand factors that drive our mobile ads business. As Sheryl noted earlier, advertiser demand remained strong in Q3 across all geographies, verticals, and marketer segments. We also benefited from  growth in users, time spent, and ad load. It is worth noting that desktop ad revenue grew 18%, which is higher than growth rates in recent quarters and was aided by our efforts to limit the impact of ad blockers on advertising served via web browsers. 
+Our price volume trends were similar to those we reported last quarter. The average price per ad increased 6% in Q3, while total ad impressions increased 50%. The reported increase in price continues to be driven by the ongoing mix shift towards mobile, where we show only higher priced feed ads. Impression growth was primarily driven by mobile's feed ads on Facebook and Instagram. 
+Payments and other fees revenue was $195 million, down 3%. Payments and other fees revenue is largely generated from being played on personal computers, which has declined as people spend less time on their PCs. Q3 total expenses were $3.9 billion, up 28%. This includes $839 million of share-based compensation expenses and related payroll taxes, as well as $195 million of amortization of intangible assets. In Q3 we hired over 1,200 people and ended the quarter with approximately 15,700 employees, up 31% compared to last year. We remain committed to investing aggressively in hiring, including expanding our technical and recruiting teams globally. 
+Q3 operating income was $3.1 billion, representing a 45% margin. Our tax rate was 25%. GAAP net income was $2.4 billion, or $0.82 per share. Q3 capital expenditures were $1.1 billion. Year to date through September capital expenditures were $3.2 billion, up 76%, driven by investments in data centers, servers, office buildings, and network infrastructure. In addition to our new data center projects in Texas and Ireland, we recently broke ground on our seventh data center facility in New Mexico, which we anticipate will come online in late 2018. We generated approximately $2.5 billion of free cash flow. And ended the quarter with $26.1 billion in cash and investments. 
+Turning now to the outlook for the remainder of 2016. First, some color on revenue. We continue to expect that revenue growth rates will decline in Q4 as we lap a strong fourth quarter in 2015. We also continued to expect that our total payments and other fees revenue in Q4 will be lower than it was in the fourth quarter of last year. 
+Turning now to the 2016 expense outlook. Based on our year-to-date results and our updated view of the remainder of the year, we are adjusting our expense guidance ranges. We now expect that full-year 2016 GAAP expense growth will be at the lower end of our prior range of 30% to 35%. We expect full-year 2016 amortization expenses to be approximately $700 million to $800 million, and that full-year 2016 share-based compensation expenses to be approximately $3.2 billion to $3.3 billion. Accordingly, we anticipate that our total non-GAAP expenses, which exclude those share-based compensation and amortization expenses, will grow in the range of 40% to 45%, down from our prior range of 45% to 50%. We anticipate full-year capital expenditures to be approximately $4.5 billion as we invest aggressively to support the rapid growth of the business. We expect that our Q4 and full-year 2016 tax rates will be in line with the year-to-date tax rates. 
+I also wanted to provide some brief comments on 2017. First on revenue. As I mentioned last quarter, we continue to expect that ad load will play a less significant factor driving revenue growth after mid-2017. Over the of past two years we have averaged about 50% revenue growth in advertising. Ad load has been one of the three primary factors fueling that growth. With a much smaller contribution from this important factor going forward, we expect to see ad revenue growth rates come down meaningfully. Secondly, on expenses. Although it is premature to provide specific expense guidance, as Mark mentioned, we anticipate 2017 will be an aggressive investment year. Adding top engineering talent remains one of our key investment priorities as we continue to execute on our 3-, 5-, and 10-year road map. We will continue to invest in our ability to recruit top technology talent, both in the Bay area and beyond. In addition, we expect to grow capital expenditures substantially as we continue to fund the ongoing data center expansion efforts that we have under way. 
+Finally, I wanted to share some plans on the use of cash starting in 2017. Beginning in January, we intend to fund withholding taxes due on employee equity awards via net share settlement rather than our current approach of requiring employees to sell our shares of common stock to cover taxes upon vesting of such awards. We expect this change will increase our cash flows and correspondingly result in less dilution -- our cash outflows, and correspondingly result in less dilution. If we had used this approach in 2016, our cash outflows would have increased by approximately $1.8 billion in the year through September. 
+To wrap things up, Q3 was another strong quarter for Facebook. Our results reflected the continued growth and engagement of our community around the world and the strength of our mobile apps business. With that, operator, let's open up the call for questions. 
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Thank you. 
+(Operator Instructions) 
+Your first question comes from the line of Brian Nowak with Morgan Stanley. Your line is open. 
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [2]
+--------------------------------------------------------------------------------
+Thanks for taking my questions. I have two. Just the first one. The past couple quarters you've given us a metric on the growth and time spent per user across the three big platforms. Any update at all on that around this quarter and what you're seeing? The second on the Instagram Stories, 100 million daily views. Any help at all on what the demographics or the age of those people look like? And how do you think about engagement of those users? Thanks. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+I can take the first one, Brian, on the time spent metric. We're pleased with the growth in time spent per DAU that we're seeing across the Facebook family of apps. And that includes the Facebook mobile app where we saw good year-over-year growth in time spent per DAU. There video is making a big contribution to time spent growth. We are not providing a specific stat on time spent growth on an ongoing basis. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [4]
+--------------------------------------------------------------------------------
+We're also not providing a specific breakdown of the DAU growth in Instagram Stories. But we're really excited about the engagement with the product and how it's growing across the board. 
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+The next question is from Eric Sheridan with UBS. Your line is open. 
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [6]
+--------------------------------------------------------------------------------
+Thanks for taking the questions. Maybe one for Sheryl and one for Dave. Sheryl, on local business and small business as you continue to see success there, wonder if we could get increased color on what you're seeing from an adoption curve on business pages? What are people looking for in terms of measurement attribution? What's Facebook delivering for those advertisers? Any color there would be very, very helpful. Dave, as we try to digest some of the comments you made about ad load and revenue as we exit 2016, go to 2017, how should we also be thinking about the mix of ad units as you continue to see more e-commerce and video in the platform? And how should we be thinking about the pricing of ad units as that mix changes over time? Thanks so much, guys. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [7]
+--------------------------------------------------------------------------------
+On local, we think this is a really big opportunity and you see this in the large base of existing businesses using Facebook and Instagram increasingly. There's 60 million small business pages up on Facebook and 1.5 million Instagram business profiles, which are the similar -- the equivalent for Instagram. And the reason we think people are so active is, it's just really expensive and hard to have your own mobile site or your own, even, web page. 35% of small businesses in the United States, which is the most developed market, in many cases don't even have a web page of any kind. And it's cheaper and easier to build a web page than it is to build a mobile app and get distribution or downloads. So what's happening is that people are really using the Facebook business pages, and increasingly the Instagram business profiles, as their mobile presence. And we think that's what's working. And then we're working hard to build products that work in-store visits and then use simplified ad products that convert them over to advertising. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [8]
+--------------------------------------------------------------------------------
+And Eric, it's Dave. Just really reiterating what I said last quarter about our expectations on ad load going into mid-2017. It's been one of the key factors in terms of driving growth, along with time spent -- user growth and time spent growth and advertiser demand. So we continue to see good opportunities to grow time spent, continue to see good opportunities to grow users, and we continue to see good opportunities to grow advertiser demand. On that latter point, really the mix of ad units is part of what we're doing, I think, really well. We're developing a number of new ad products as well as enhancing the ad products that we have out in the market today. So we're taking what is a great mobile ad product on Facebook and Instagram and making it even better. And I think the investments that we're doing there will continue to enable us to drive advertiser demand. Those key factors will continue, we believe, to drive growth next year. So what I'm specifically talking about is ad load and our anticipation that it's going to be a less significant factor as we get into mid-2017. 
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+The next question is from Anthony DiClemente with Nomura. Your line is open. 
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Securities Intl - Analyst    [10]
+--------------------------------------------------------------------------------
+Good afternoon. Thanks for taking my questions. For Mark, in terms of video and your broader media content strategy, just trying to think about your investment in Facebook Live. And then trying to frame that against investments in, I guess, non-live forms of video, such as maybe short form, prerecorded professional content. How do you weigh investing in live versus, let's call it, on-demand content? And maybe a related question would be, Fox Sports and Sports Illustrated are co-producing some original content for Facebook Live. I think they're doing a pregame show ahead of the big game tonight. That seems like in some ways it's an entree into sports, perhaps, for Facebook. Could you give us an update on whether or not you see any advantage or any benefit in licensing sports content over time versus having one of the publishers do it on the Facebook platform? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [11]
+--------------------------------------------------------------------------------
+Sure. So there was a lot in there. I'll address most of it. The video on demand content is the vast majority of video that is both shared and consumed on Facebook, not live video. But live is growing very quickly. Part of the reason why we're investing in it is we see that video as a medium is not only in the future going to be about people producing content that looks like traditional content and then consuming it in a static rectangle video screen. Live video we think represents an example of something new, which is video which is a medium for doing something that's really interacting with other people. Whether you're a public figure that is using it to hold a townhall or interact with a lot of people at the same time, or you're hanging out with your friends by going live and you have 10 people who are just there with you, chatting with you while you're doing something, going about throughout your day. It's not the kind of traditional video experience. It's actually a more social experience. 
+I think 360 videos in another way are another example of this kind of interactive video experience. And my guess will be that we will see more different kinds of video media as time goes on. I think Stories is another example of this, that we're seeing it with Instagram Stories and with Messenger and the initial test that we have with Messenger Day where that is another interesting format for how you can put videos together. I think that's going to be more and more. To put that all in context, the majority of the consumption today is video on demand. We are very interested in making sure that the business model that we have works for folks who produce content as their business, to make sure that they can make money from it, so that their best content comes on Facebook. It's going to be a lot of growth in all of these things across all of our family of apps. 
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+The next question is from Mark May with Citi. Your line is open. 
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [13]
+--------------------------------------------------------------------------------
+Thanks a lot. I think the first one's for Mark. When you went mobile only, or started this concept, you had to tweak the app because it wasn't necessarily optimized for mobile. As now you move to more of a video first approach, what needs to happen to the Facebook app, both from a consumer-facing and from an ad tools perspective, to make sure that you're optimized for video? What needs to change? 
+I think the next question's for Dave. As the rate of growth in ad load slows and as -- and also as you continue to enhance targeting and as more video advertisers come onto Facebook, would you expect that ACPMs will rise and offset part, if not all of this, impact of the ad load slowing? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [14]
+--------------------------------------------------------------------------------
+I can talk about shifting to put video first across our whole family. There are two broad sets of improvements that I think we need to make. One are to the capture and sharing tools that we offer. So the example of that is the new camera that we're working on and all the creative tools around that. And then on the other hand, we also need to improve the infrastructure to deliver the best videos to people and do that quickly. So if you think about what is enabling video to become huge right now, it's that fundamentally the mobile networks are getting to a point where a large enough people around the world can have a good experience watching a video. If you go back a few years and you tried to load a video in newsfeed, it might have to buffer for 30 seconds before you watched it, which wasn't a good enough experience for that to be the primary way that people shared. But now you can -- it loads instantly.  You can take a video and upload it without having to take five minutes to do that. So it's a good experience. 
+So we're very focused on creative tools. You can see that a little bit in the announcement and launch of Instagram Stories and what we're doing with Messenger, and some of the initial tests in Facebook, and the camera work that we're doing in WhatsApp. This is across the whole family of apps. This is a big part of the product experience that we want to deliver. Then the actual delivery of video side, it's just much more intensive technically. There aren't that many companies that can do this at the scale that we're talking about. This has been a big advantage for us in rolling out things like Live, we've had this infrastructure that we've been building out for a decade all around the world. And that allowed us to build a product like live where someone has to stream something live from their phone to potentially hundreds of thousands of people around the world from a phone. That's a difficult scaling problem. So we've been able to build that up, not just because of the ongoing investment in technology and infrastructure here, but because we're building on the strong base. That goes not only for just being able to deliver the content, but being able to understand what it is so we can rank it in newsfeed better and show people the right content. But all of these things are going to be part of a cohesive experience to get behind our community. And when people are ready and want video to be the primary way that they're sharing and consuming content, we're going to be there ready. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [15]
+--------------------------------------------------------------------------------
+Mark, yes, and on ad load growth slowing and the impact on effective CPMs, I think when you think -- when you look at our business, demand has been one of the key factors driving growth. So we've built up a large base of advertiser demand. We've got 4 million advertisers on Facebook, 0.5 million advertisers on Instagram. We continue to innovate on the products, make this more effective and make this a great gateway for businesses to come onto Facebook and come into mobile and spend. And we expect we've got a lot of great opportunities to continue to innovate on that front. 
+We've also been innovating over the past several years. Demand has been a big factor and what's been driving our growth to date. On top of that we've grown users and time spent. And then we've also grown ad load. So I do think as we look into 2017, we do expect that as you get to mid-2017 ad load will be less significant factor contributing. We'll continue to get benefits of being able to grow our revenue with advertiser demand, and continuing to innovate there. But I do think that as we slow ad load growth, we're going to have a slowing in revenue as well. So that's our expectation. But obviously we're going to continue to work hard to innovate in the ad product space. 
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+The next question is from Mark Mahaney with RBC Capital Markets. Your line is open. 
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [17]
+--------------------------------------------------------------------------------
+Two questions. A product question for Mark. You talk about some of these features and making the camera more of a central way of communicating on Facebook. How long do you think the iterations, or the testing is going to go, until as an average user I would notice that in my newsfeed? Like I do see much more prevalence of live video, and it doesn't seem to me yet a perfect experience. But just in terms of other features and out putting the camera at centerpiece? Do you think this is something that's going to be obvious to people in the next year, couple of months? Just what's the timing of the innovations? And then real quickly, MAU growth seemed to accelerate in both Asia and Rest of World. Any color on what would have caused that, or any particular markets? Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [18]
+--------------------------------------------------------------------------------
+I can take the MAU growth first. And then Mark can talk about camera. On the MAU front, we're seeing very strong overall growth in terms of the 240 million-plus MAUs that we added. If I was to point to -- there's really no single driver, but I'll point to a few that contributed. It also plays into the fact that we're seeing good growth in places like India, Mexico, Brazil, and others. First, we're improving our Android experiences. And we've talked about the impact that Facebook Light has had on that, just making easier registration processes, just making Android -- our Lightweight Android app easier to use. Secondly, Mark talked about the Internet.org efforts that we have. That's been a contributing factor to MAU growth. And then finally, we're seeing the introduction of low price data plans in markets like India and Mexico contributing. So there's no single factor. But those are all contributing factors in terms of MAU growth. And then Mark, do you want to talk about the camera? 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [19]
+--------------------------------------------------------------------------------
+Sure. So we already rolled out the first test of the new camera in Ireland. We're a Company that believes in testing things and getting feedback from our community before we roll it out broadly. We think we have a lot to learn. And the methodology of how we develop is we try to build things quickly. And rather than just relying on our own intuition, although we do rely on that a lot, we will try to put it out in the market and get feedback and then roll it out from there.  So we rolled out what we believe is a good experience in Ireland. They're the first part of the community to get access to these new features. From there we'll start to roll it out broadly across the world, hopefully sooner rather than later. 
+Same thing on the Messenger side, as I mentioned these products around My Day. It's a similar video medium to Instagram Stories and a similar camera to what we're building in the Facebook apps as well. And that we've rolled out in a few countries as well. And similarly based on the feedback that we're getting, I would expect that we'll be rolling that out pretty widely across the world soon, as well. 
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+The next question is from Douglas Anmuth with JPMorgan. Your line is open. 
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [21]
+--------------------------------------------------------------------------------
+Thanks for taking the questions. We're going to stick with video. One for Mark and then one for Sheryl. Mark, how do you think about whether, with video in terms of doing it on core Facebook itself or on a separate video app, some of the puts and takes there between those two? And then Sheryl, can you just talk about with video how you see marketers using Facebook more to complement TV? And what it would take to shift dollars over in a bigger way going forward? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [22]
+--------------------------------------------------------------------------------
+So in the main Facebook app we're doing a number of different things. One is that video is naturally becoming a larger share of the content in newsfeed because both people and pages are sharing more videos in the mix. And people want to consume that content. So there's not really a question of whether that should be a separate app. This is what people want newsfeed to be increasingly. So this is what it will become. There is a second experience called Video Home which we start talking about earlier in the year. And we've rolled out, again, in a few markets, and those tests have gone well. So we're also hoping to roll that out pretty soon widely. 
+And that's the new experience, which if you come to Facebook and you specifically want to watch some different kinds of videos or you want to see what videos a recent page that you follow has posted. Or the Presidential debate is on and you want to find a good place to go online to get that,  you can go to Video Home and see that. That is the new experience that we're building. And building that is part of Facebook, is a great way for people to see it and get exposure to it. And we'll see where that goes over time. I think it's a good experience inside Facebook. But we also have had examples over time, like Messenger for example, where we started them on Facebook and decided that in order to fulfill their potential it needed to be its own experience over time. We'll look at all those options. But for now I really think that video home is going to be a great experience. And I'm excited to roll that out. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [23]
+--------------------------------------------------------------------------------
+When we think about video ads and what platform they run on, we really believe that over time the dollars will shift with eyeballs. And our goal is to be the best dollar and the best minute people spend measured across channels. It's definitely true that most of our advertisers are advertising on TV and advertising with us on mobile. And they should be. We've done studies that show with Nielsen that our ads can be a really big complement to TV, particularly enabling you to reach people who really aren't on TV and you can't reach. I think the power of what we're able to do really goes to the targeting. And what we're seeing is big brand advertisers, and this is actually a particularly strong growth -- this quarter was particularly strong for brand, are really recognizing that they can do big brand buys on our platform like they would do on TV, but make them much more targeted. 
+So for example, Nestle Purina Petcare did an ad campaign with Germany -- in Germany with ZenithOptimedia. And they defined five distinct cat owner personality times. And created different creatives for each group. So that's kind of a big brand thing. There's -- the cat food category is big and they want brand awareness. But rather than just run one ad, they were able to run five based on the kind of interest space and personality targeting that really only we can do. And the results were amazing. They got an 89% increase in brand awareness and a 20% lift in sales. And so we think what we offer is the power of the broad reach of TV, but an ability to target much more efficiently. 
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+The next question is from Ross Sandler with Deutsche Bank. Your line is open. 
+
+--------------------------------------------------------------------------------
+Ross Sandler,  Deutsche Bank - Analyst    [25]
+--------------------------------------------------------------------------------
+Great. I just had one for Mark. Any update on the revenue ideas for Messenger that might be getting traction? I know it's still early days, but any kind of early indications there? And based on the three phases you laid out earlier in the call, when can we expect Messenger to move into phase three? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [26]
+--------------------------------------------------------------------------------
+So I'd say we're pretty early in phase two. Just to recap the framework that we have here. The strategy is there are three phases that we build, and then build businesses around these apps. The first is build an experience and get it to scale. Build a community that can get to hundreds of millions or 1 billion people or more. The second phase is help people not only interact with the people they care about, but also the businesses and other public entities that they care about as well. Then the third phase is once there's good organic interaction between people and those businesses, give those businesses tools that they can pay for to reach more people and amplify those interactions. 
+So I mentioned this stat earlier. That we have about 33,000 bots live in Messenger, including experiences across a range of verticals from news to e-commerce to local businesses and all kinds of different things. And where we're seeing some early progress, I'd say we're still pretty early on in getting this to be widely rolled out. I think we're going to need many more than 33,000. And the number of people using them, I think, is still pretty early in terms of there are more than 1 billion people using Messenger. So we need to get that rolled out pretty widely. 
+So I'm not sure that I have an answer for you just yet on exactly when we're going to move to the third phase. The one thing that I would say in terms of making money through Messenger is we're already driving results for businesses by letting them advertise in newsfeed to open up threads in Messenger, which is different from the long-term vision that we have here around creating interactions that start in Messenger. I think that that ultimately will be most of the value that's generated. But in the near term what we found is that a lot of businesses are creating ads in newsfeed that then they can [call] off and do transactions with people in Messenger. That's going to be pretty meaningful over the next few years. 
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+The next question is from Heather Bellini with Goldman Sachs. Your line is open. 
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [28]
+--------------------------------------------------------------------------------
+Great. Thank you. I just had a couple questions left. One, I was just wondering, given your comments on the local and small business opportunity, I'm wondering what your view is on Facebook's potential role in the payment ecosystem and how that might evolve over time? And also if you could share with us how the rollout of Instagram Shopping, which people have started to talk about, how that might evolve over time as well? Thank you. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [29]
+--------------------------------------------------------------------------------
+In terms of payments, we really see payments as primarily a way to enforce the other activities we want to see on Facebook and Instagram. Payments enable advertisers to pay us. We are using payments in some of our other products in ways that enable some of the interactions we want to see. When we think about Instagram Shopping, it's very early tests. But it really follows the kinds of things we do in other areas of our products and services like Messenger. What we see is that people in Instagram are using Instagram to browse for products and make those connections. And so we then make the product investment to make those a little bit easier, similarly to some of things we've done in Messenger, some of the things we've done in Marketplace. We're watching for what is the organic activity between businesses and consumers. And then we're building products to enhance and enable that organic activity. 
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+The next question is from Peter Stabler with Wells Fargo Securities. Your line is open. 
+
+--------------------------------------------------------------------------------
+Peter Stabler,  Wells Fargo Securities - Analyst    [31]
+--------------------------------------------------------------------------------
+Good afternoon. Thanks for taking the question. One for Sheryl. Sheryl, you guys have talked about your top verticals as being e-com, CPG, entertainment media, and gaming. And despite your really significant growth I can think of some categories where you've got more considered purchases where you're probably punching below your weight in terms of share. So auto, telecom, travel, financial services. Wondering if you could talk a little about some of the unique challenges with those verticals and how you guys are attacking them? Thanks so much. 
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook, Inc. - COO    [32]
+--------------------------------------------------------------------------------
+Those are -- you have our top verticals correct. And we see a lot of strong growth in those verticals. Our top verticals this time were e-commerce, CPG, retail, and entertainment media. We do see growth in the other verticals as well. You're right that historically it took us a longer time to break into some these, particularly travel and auto were things that took us longer. But we are seeing some really nice traction. I talked about Mary Barra and what she and I did together in New York at Ad Week. And we're seeing them not just use the platform for advertising, but really use the platform. So earlier this year they rolled out a car at CES on Facebook Video rather than at a car show. And that was a big moment for us, I think, in the auto vertical. And we continue to work with them and lots of other partners. 
+Measurement's really key there. The better we can do with dealers and with auto manufacturers of measuring all the way through to purchase, the better off we are. And I think they know that people are doing the research for autos and the purchases they make, which is a very long sales cycle, on their mobile phone. And they want us to be part of that. Similarly with travel, this is a vertical that we are really investing in. We have rolled out different types of product ads that we think will help. So in Q2 we rolled out dynamic ads that were specifically focused on the travel vertical. And I'll share one example. 
+Celebrity Cruises used these dynamic ads for travel on both Facebook and Instagram to increase their online bookings. They worked with one of our F&Ts, Sticher Ads. And they created custom audiences who viewed specific itineraries by state. So they looked for people that at a certain date had viewed specific itineraries. And then created dynamic ads which showed the available cruises and pricing, and had a book-now button. They saw a 3 times increase in their online bookings. And I think those kind of results are made possible by more vertical-specific products. And we're going to continue to invest there. 
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+The next question is from Justin Post with Bank of America Merrill Lynch. Your line is open. 
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [34]
+--------------------------------------------------------------------------------
+Hi. Thanks for taking my call. Dave, could you clarify a bit on investment year, what that means? Does that mean expenses growing faster than revenues? I think Mark mentioned $250 million on content for VR. Anything else in there that we should be thinking about? And then maybe one housekeeping, ad blocking. Could you quantify how much that might have helped desktop revenues? Thank you. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [35]
+--------------------------------------------------------------------------------
+Justin, just on investment year, and not giving specific commentary around revenue growth versus expense growth. What I wanted to provide was just some color around our thinking about investments going into 2017. Obviously on the CapEx side we've got a number of projects underway on the data center front. So clearly on that front we've got a lot of projects that are going to need ongoing funding going into 2017. So that we've got good visibility on. 
+In addition, it's too early to give specifics, I wanted to give some directional color around expense growth. We've already invested in accelerating our recruiting efforts. I wanted to highlight that. That's primarily around technology, technical recruiting, software engineering. And we have a lot of opportunities that we see to invest in the long-term growth of the business. And so that's our plan going into 2017. 
+On ad blocking. In terms of the impact, I would just point out that this quarter we had 18% year-over-year desktop revenue growth. If you look at recent quarters, it was about half of that growth rate on a year-over-year basis. So that increment, that acceleration in desktop revenue growth is largely due to our efforts on reducing the impact of ad blocking. So that's what led to the acceleration of desktop revenue growth. 
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+The next question is from Brian Fitzgerald with Jefferies. Your line is open. 
+
+--------------------------------------------------------------------------------
+Brian Fitzgerald,  Jefferies & Co. - Analyst    [37]
+--------------------------------------------------------------------------------
+Thanks. You've been tweaking the newsfeed algorithm to prioritize friends and family original content. We're curious what kind of impacts you're seeing there? And is it driving more engagement and more sharing of originals? Thanks. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [38]
+--------------------------------------------------------------------------------
+Sure. So newsfeed is an ongoing work that we're always improving. What we basically are trying to do is work on, over time, adding more and more signals to the newsfeed model to help us fully value what people in the community value about the different content that we show them. So what we realized was that the model that we had previously didn't fully capture the nuance and how people preferred certain content from friends and family. So we ran a bunch of qualitative studies and talked to a bunch of people, and incorporated those signals into the model. And that has had the result that people in our community who gave us that feedback and who we worked with on this, what we'd expected, in terms of both increasing the quality of the content that people see and, therefore, also enabling people to share more with their friends and the people that they want. One thing that I would clarify is that I think sometimes people -- in your framing of your question you asked if we'd tweaked newsfeed to do this or that. This is an ongoing iterative process. We're constantly learning about what our community wants. We will constantly be trying to incorporate new information and signals into the model to help value all of the content in the system as accurately as possible. The biggest job that we have is to show people in the community what's going to be meaningful and important to them. And that is our goal in all of these changes. 
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+The next question is from Youssef Squali with Cantor. Your line is open. 
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [40]
+--------------------------------------------------------------------------------
+Yes, thank you. Two questions. About AI, can you help us understand your ambitions for (inaudible)  its current form? Does it have a place in the workplace or internally maybe to enhance productivity, et cetera? About the additional functionality of additive pages with the delivery and a few others, can you just help us understand what you're doing around discoverability?  How will people actually find these services? And do you need tools for that, and maybe timing? How quickly can we see these tools being rolled out? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [41]
+--------------------------------------------------------------------------------
+I did not fully understand the first question so I'm going to talk about our AI work overall. In general what we want to do is try to understand the content that people are sharing and that's out there for them to see as best as possible. So for example, that means being able to read and understand news articles or posts that people make or messages that a person might send to a business so we can help that business auto reply to them and get information back to the person really quickly. Or understand the content so we can better understand what might be interesting to a person and show in a newsfeed. Similarly, aside from the conversational linguistic understanding, there's a whole thread of the work that we're doing on visual understanding. So understanding photos, what's in photos, what's in videos, what people are doing. That allows us to not only do things around accessibility to show someone who is visually impaired to be able to read to them what might be in a video or a photo, but it also helps us rank newsfeed better so that way we can help understand what is in the content and show people more of what is going to be meaningful to them. It helps us identify content that might be offensive or graphic that might violate the policies of Facebook so we can flag that and review that better. 
+That's the main thread of the AI work that we're doing, is trying to understand conversational and linguistic context and computer vision, photographic and video signals, to understand what's going on there. And that will apply across basically every product that we build at the Company. Of course, there's some deeper AI research that we're doing that feeds into those applications as well that can apply to things like ranking for newsfeed and search and ads and all of our systems more broadly. 
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook, Inc. - CFO    [42]
+--------------------------------------------------------------------------------
+On the discoverability of pages, a couple of things that I would point out there. First, we continue to invest in search. So obviously that's a good way for people to discover interesting pages, interesting businesses around them. So search is one angle there. And then, of course, ads. We've got 60 million businesses with pages. They manage those pages. And then they can promote those pages via our easy to use ad products. We try to make it very easy for businesses to promote pages, promote posts, and the like. That's an important on-ramp to mobile advertising for a number of businesses around the world. So those are the two ways that I think of from enhancing discoverability of pages on Facebook. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [43]
+--------------------------------------------------------------------------------
+Operator, I think we have time for one last question. 
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+Okay. The last question is from John Blackledge with Cowen and Company. Your line is open. 
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [45]
+--------------------------------------------------------------------------------
+Great. Thanks. Just as relates to video search, do you think that Facebook has the video content depth at this point for users to search for video content and be pleased with the experience? And then second for Mark, while Facebook embarks on its video first strategy, how should we think about Facebook also evolving into a transactional platform with the recent introduction of the Marketplace? Thank you. 
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - CEO    [46]
+--------------------------------------------------------------------------------
+Sure. So search is an area that we've been working on for a while to improve. I don't know what the most recent public stat is on that, so I'm not going to say a stat. But it's grown a lot. So we're happy with that. And we think that that reflects that people are getting value from the search experience, which a lot of the growth comes from people searching for posts and content in the system, not just looking up people and pages in the system. So yes, on search, there's that. And then of course I think that search is often driven by what unique content is in a system and not just the ability to find it. I think what people are going to search Facebook for are finding people and content that they know is on Facebook and that isn't in other places. That I think is driving most of the volume today. And I think can get us to be -- we're already one of the largest search engines in the world, but to be even bigger on that front. 
+You asked about transactions as well. And we spent a lot of time on this call talking about putting video first. That has certainly been the biggest theme of the last quarter. And is the biggest part of the product strategy for Facebook and Instagram, and is a big part of the product strategy for Messenger and WhatsApp as well. In terms of transactions, one of the big things that we see happening in messaging long term is that it's a great channel for people to interact with a business one on one, and either do transactions in a private space or get support, or for businesses to reach out with very personally tailored messages and have an ongoing engagement with a person. That's something that we're very excited about building. And that is going to be the business that we hope to build on Messenger and WhatsApp over time. So we're looking forward to that. 
+Marketplace I think is going to be a great example of this, too. What we're seeing in pages and marketers on Facebook is they want to both get awareness and drive all the way down to generating transactions. And Marketplace I think is going to help people do that. We're starting with people being able to sell things to -- and connect to other people who want to buy them, just like they've been doing in for-sale groups for many years. But we're excited to evolve this and grow it over time as well. 
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook, Inc. - VP of IR    [47]
+--------------------------------------------------------------------------------
+Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again. 
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines. 
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2016-Oct-27-AMZN.OQ-139909051245-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2016 Amazon.com Inc Earnings Call
+10/27/2016 05:30 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com, Inc. - CFO
+ * Darin Manney
+   Amazon.com, Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Gene Munster
+   Piper Jaffray & Co. - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Neil Doshi
+   Mizuho Securities - Analyst
+ * Youssef Squali
+   Cantor Fitzgerald - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Colin Sebastian
+   Baird Equity Research - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Thank you for standing by. Good day, everyone and welcome to the Amazon.com Q3 2016 financial results teleconference.
+(Operator Instructions)
+Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Darin Manney. Please go ahead.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+Hello and welcome to our Q3 2016 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you which includes our financial result as well as metric and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2015.
+Our comments and responses to your questions reflect Management's view as of today, October 27th, 2016, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial result is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filing.
+During this call, we may discuss certain non-GAAP financial measures. In the press release, slides accompanying this webcast and our filings with the SEC, each of which are posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.
+Our guidance incorporates the order trends that we have seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world event, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investment restructurings or legal settlements. It is not possible to accurately predict demand for our goods and services and therefore our actual results could differ materially from our guidance.
+With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+(Operator Instructions)
+Our first question comes from Douglas Anmuth with JPMorgan. Please state your question.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [2]
+--------------------------------------------------------------------------------
+Thanks for taking the question. The international retail segment margin was the lowest we have seen in quite a while. I was hoping that you could provide some of the key drivers there in terms of the drag and any color on how to think about the incremental international investment that might be impacting the 4Q guide. Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+Sure. Thanks, Doug. Specifically to international, we are seeing expansion to support selection expansion fulfillment network increases. We're also investing in digital content and additional prime benefits, Fresh location and Prime Now. By far the biggest individual thing is the investment in India that we continue to make. Very excited about the initial reaction in India from both customers and also sellers. That is essentially the international margin guidance in Q4.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [4]
+--------------------------------------------------------------------------------
+Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from Gene Munster with Piper Jaffray. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Gene Munster,  Piper Jaffray & Co. - Analyst    [6]
+--------------------------------------------------------------------------------
+Great. Thanks. I guess when we think about the progression in margins in the second half versus the second half of 2015 and kind of the flat lining of overall margin at this point, excluding AWS, should we think about this as a temporary plateau that will at some point will resume once you start leveraging your fulfillment build-out or is there something structural that is philosophically changing with the way that you operate your business. Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+Yes. Thanks, Gene. We will continue to invest in the business where we are seeing significant customer traction. The things that I'm about to mention fall into that category. The largest individual reasons for the ramp-up in investment between the first half and second half of this year and also second half of this year versus second half of last year are the things that I mentioned on the call last quarter.
+First, video content and marketing associated with that is nearly doubling year over year in the second half of the year. It continues to be a large increase for both Q3 and Q4. In the quarter in Q3, we added 18 fulfillment centers and we have added 5 more in October. For the year, we will add 26. Most of those are in North America.
+That compares to 14 last year and I would -- looking back, there is -- the last time we had double-digit increase in fulfillment centers was 2012 when we added 11 in the third quarter. There was a rare aggregation of startups in Q3 and into Q4. It is helping us position better for Q4 volumes, because paid unit growth continues to be strong and Amazon fulfilled unit growth, which includes what we ship, includes FBA is significantly higher than even that. We are continuing to build for high AFN, or Amazon fulfilled network demand, including both retail and FBA.
+The number of warehouses that we added represent the 30% increase in square footage year over year. Last year we increased square footage by just under 20%. The definition of square footage in this case is all of our warehouses, plus our sortation and delivery centers, so it's pretty much our end-customer service centers. It's pretty much our square footage that support operations.
+Those will dissipate as we -- as they burn in. We've talked about fulfillment centers initial startup costs include increase in fixed cost but also variable cost as we train workers and also bring in inventory. There's a number of transportation costs also related to the startup of a new fulfillment center, both inbound and outbound. They are inherently less efficient than more established, mature buildings. There will be a cycle where those will be more productive next year than they are this year and more productive in 2018 than they are in 2017.
+What you are seeing, essentially, in the second half of this year is a step-up investment, primarily around digital content and also the fulfillment center investment, but also things like Echo and Alexa which we're adding a lot of resources to, India and AWS as we add people there to support additional service rapid growth in that business.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [9]
+--------------------------------------------------------------------------------
+Thanks for taking my question. I have two. The first one, just to go back, Brian, to the fulfillment build. In the past you talked about how it takes time to kind of get the fulfillment centers to peak efficiencies. With these new FCs opening, can you talk about if you become more efficient, so if you get into a lower volume quarter next year, there's less risk of deleverage or should we still think about it's going to take time to get up to peak efficiency?
+The second one at AWS, Amazon the Company is good in removing friction in the purchase process. Can you talk about some of the main hurdles you have to overcome for large enterprises to start using AWS more? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [10]
+--------------------------------------------------------------------------------
+Sure. In the fulfillment network, as we build it yes, they will be more productive next year than this holiday peak and probably even more productive in 2018. I can't forecast it for you into next year quite yet, but we certainly had productivity and additional costs in Q3 and even into Q4 of this year as we built the additional capacity. Again, the underlying reason for that capacity build is the strength in paid units and even more so in the units that we're fulfilling, driven by our FBA program.
+The FBA program is the key pillar of our Prime offering. It adds selection. It makes Prime stronger. That's a self-reinforcing loop where Prime -- the Prime success attracts more sellers. We're glad to have that problem. We are just working very hard to get capacity in place and productive use for Q4 and beyond.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [11]
+--------------------------------------------------------------------------------
+Hi, Brian. This is Darin. On the AWS question, we continue to invest in AWS on behalf of our customers. In addition to the technologies that make integrations easier and it helps companies move from an on-prem or a hybrid IT environment into AWS if we're going to continue to do that. Specifically, the database migration tool that are helpful for customers when they move production databases from on premises to the cloud with virtually no downtime.
+Also, many of our AWS customers are beginning to choose and continue to choose the AWS schema conversion tool which really switches database engines to get out of old-guard proprietary databases and on to AWS. We will continue to react to customer needs and that will include opening up new regions. We have opened up Ohio this past quarter. We've highlighted that we will have a number of regions coming online in a few months. Yes, we're doing a lot of things to help make it easier for all customers to migrate to AWS.
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [13]
+--------------------------------------------------------------------------------
+Okay. Hey, Brian, would you give us any commentary on two categories in particular, groceries and fashion and apparel? Particularly on groceries, I know in the release there was a couple of data points about Fresh rolling out into newer areas like Maryland. Great to see that. Can you just talk about that in the investment horizon? Is that moving the needle for you and how big that -- any way to help us quantify how big that already is to your -- to the revenue growth that you're seeing, particularly on groceries and any particular comment on fashion and apparel. Same line of thinking. Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [14]
+--------------------------------------------------------------------------------
+Sure. Thanks, Mark. I will start with Fresh and groceries in general. Yes, this quarter we launched in Northern Virginia, Maryland, Dallas and Chicago. We also launched a new pricing plan, which is a monthly $14.99 add-on to Prime in the US. We have expanded, as you know, previously into London.
+We're very happy with the progression both in the geographies that we have been in for a long time where we are at, continuing to add zip codes and additional neighborhoods and also in these new cities. Certainly a business where we continue to work on costs and profitability. We are finding at the very attractive service to our customers, which is what we're after.
+Similarly, but not exactly the same, is the Prime Now business which has similar overlap on things besides groceries. It is a slightly different model, obviously, where we're more about immediacy and smaller list items available in one to two hours. There's certainly a lot of people who are using that for groceries and consumable items. That is now up to 40 cities across 7 countries versus 17 this time last year. We're also adding Amazon Restaurant Delivery to the Prime Now offer in 19 metropolitan cities in the US. That is up from two last year.
+We continue to believe consumables, groceries are a key part of the offer to customers. We are playing with very different models to see which works and for what needs. We're very happy with the Amazon Fresh and we have now expanded quite a bit as you see in this year. Prime Now we're also very happy with, although obviously the economics in that business are even tougher, but we do feel that our scale makes that possible because of our geographic footprint and how close we already are to customers.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [15]
+--------------------------------------------------------------------------------
+Hi, Mark, this is Darin. On fashion, fashion and apparel continue to be a large part of our EGM business and one that we're very excited about. We continue to make it easier for brands and manufacturers to come on board in that category. We continue to work with brands to come on board. We're happy with the traction that we're seeing with those brands. As we get more and more selection, we're really pleased with the customer engagement that we have there, both from the discoverability, the technology that goes behind making it easier to shop fashion on our site, as well as the (inaudible) selection by adding the brand.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [16]
+--------------------------------------------------------------------------------
+Sorry. To answer your question about whether that is part of investment. Yes, it certainly is part of our investment. The larger ramp, if you will, in investment that we're seeing from the back end of last year and also the first half of this year is more related to digital content and the building our fulfillment network, which I already discussed.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of Mark May with Citi. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [18]
+--------------------------------------------------------------------------------
+Thanks a lot. In some of these incremental investment areas like warehouses, logistics and also content, I know in some cases you expense up front. In some cases you amortized over time. Wondering if you can give us a sense of how much of the recent step-up is being expensed. I'm particularly looking at your COGS as a percent of retail revenues that was up year over year for the first time in quite a while. How much of that was because of content that expensed in the period? Just trying to better understand that.
+I think also you have been changing around, and this is happening here shortly, FBA pricing, including increasing your storage fees but also reducing your handling fees. I guess the question is, are these changes designed to just pass through kind of increasing shipping costs or is this more of a net neutral change where really the goal is to try to free up capacity in some of your facilities? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+Let me start with your second question on FBA. Yes, we did make some changes to the pricing formula for this holiday season. They're essentially meant to incent the right behavior among sellers around holiday. The biggest issue you're trying to get at is having the most valuable products for holiday in the warehouse, in the Prime space and not having the warehouse filled with things that may not sell until after the New Year. We are trying to incentivize that behavior. We're also trying to incentivize getting inventory into the warehouse quicker. Yes, the formulas were -- the changes to the pricing formulas were really with that in mind, to help the flow and the space utilization in Q4.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [20]
+--------------------------------------------------------------------------------
+Yes. Hi, Mark. This is Darin. On the capitalization point, I'd say the things that get capitalized are the core buildings and the leasehold improvements in the buildings. The things that we're seeing hit the P&L are the fixed and variable expenses that it takes to run the building. I think that is what Brian is pointing out most pointedly in terms of what is impacting our profitability of second half. Yes, the capitalization is relatively small in terms of -- other than the building itself.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of Youssef Squali with Cantor Fitzgerald. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Youssef Squali,  Cantor Fitzgerald - Analyst    [22]
+--------------------------------------------------------------------------------
+Yes. Two quick questions. With the step-up in investments and content from Prime Video as you mentioned before, you would also be stepping up the international expansion? Maybe you can just remind us how many countries you're in with Prime Video and whether there is a potential chance of stripping Prime Video from Prime to allow it to be extended to other countries. Do you -- I know you're not guiding to 2017, but just looking at the capacity increase that you had for FCs for 2016, should we expect that kind of as an ongoing expense going forward or is the current build-up enough to give you spare capacity to cool that down for 2017? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [23]
+--------------------------------------------------------------------------------
+Sure. First on your video comment, we're in four countries right now, the US, UK, Germany and Japan and we have stated that we will be in India soon. The content that we are creating, through Amazon studios, we are generally holding the worldwide rights to and can use that in other countries as well. The cost of that then get amortized to the country and becomes part of the international segment results. Yes, we consider that to be very valuable as opposed to versus licensing many times, by country the third-party rights to content that we don't create ourselves.
+Your question on fulfillment expenses, I can't extend the guidance into next year. We will do that, obviously, at the end of next quarter. I would say we are -- this was in extraordinary step-up as I mentioned in Q3 that is tied to very rapid growth in not only paid units but Amazon fulfilled units. Really our forecast for additional capacity additions and the rate of addition will be tied to those growth factors as well.
+We will have to see. We right now are working on getting the capacity in. It was very lumpy this time, with 18 warehouses in one quarter and another 5 in the first three weeks of the next quarter. Obviously we will be working on the efficiencies of all of the warehouse we have, including the ones that we just started up this year.
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of Colin Sebastian with Baird Equity Research. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Baird Equity Research - Analyst    [25]
+--------------------------------------------------------------------------------
+Thanks. A follow-up on the FC question. I guess more specifically, it sounds like you have enough capacity in terms of fulfillment centers for the holidays. Also wondering what your comfort level is in terms of your shipping partners to manage those deliveries. Secondly, was wondering how you would characterize the pricing environment for AWS, in particular with more deep pocketed competitors in the space now. Google in fact highlighted this on their conference call today. Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [26]
+--------------------------------------------------------------------------------
+Sure. Let me start with transportation. Yes, we are looking forward to a great holiday. That includes working with our shipping partners, both in the US and globally. We have worked very closely with them to line up capacity, share capacity plans. We certainly have additional delivery capability of our own, but with all of our partners, we work well in advance of the holiday to get our plans in place. We feel very confident we're looking forward to a great holiday not only for customers but also for sellers.
+On your question on AWS, I didn't listen to the Google call. You will have to fill me in on that later. The thing that I can tell you about pricing is that our pricing is -- price reductions are a core part of our philosophy, of course. We had a price decrease in Q3. That was our 52nd since we started this business. It's -- we are comfortable with price decreases. Not only did we lower the prices of our products but we also create new services that are cheaper that customers can switch to. They can also benefit from that as well.
+If you step back and say, why do people choose AWS? I'll give you the points I said last quarter. Basically what we hear are the functionality and pace of innovation. It is greater than our competition. We have added new -- more new significant features and services this year already than we had all of last year when we added 722. We have a partner and customer ecosystem. You've read about the VMware deal that we signed this quarter. We continue to extend with partners and build ecosystems that better can support customers.
+Finally, experience. We have been in this business a long time, longer than anyone else. We've used that time to make our product and services better. There's going to be a lot of winners in the space, as we said, but we are very happy with our position and the customer reception to our products.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of Justin Post with Merrill Lynch. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [28]
+--------------------------------------------------------------------------------
+Great. Thank you. I guess when you look at fourth-quarter guidance and you back out AWS, it suggests that margins are -- on the core business are going to be pretty down versus last year. Do you view this as an abnormal investment cycle or just part of the overall kind of ebbs and flows of the business? Long term, I know several years ago you talked about maybe high-single-digit, low-double-digit margins long term. I wonder if you could refresh us on that and also let us know if you think international has structural marginal differences than the US, the core retail business.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [29]
+--------------------------------------------------------------------------------
+Sure. Yes. As far as the continuation of the investment and into next year, I cannot give you as much color on that today. What I can tell you again is that we have ramped up considerably. We have been investing quite openly in a lot of areas and continue to do so. We are experiencing a ramp-up, if you will, in the second half of this year, particularly tied again to the fulfillment center and expanded also the video content spend.
+We will continue to invest in video content. We will continue to invest in fulfillment space to handle higher and higher paid unit volumes than shipped unit volumes. We will continue to invest in things that we believe enhance the customer experience, particularly the Prime experience. Devices we will invest in, particularly Alexa and the Echo products. We will continue to invest in getting faster and faster shipping methods for our consumers. We believe that is working. We are very happy with the results. We're very happy with all of the customers we have but particularly the Prime customers that we have.
+As far as long-term operating margins, I can't forecast that right now. I can't forecast that for our AWS business, either. We are, again, working on two fronts. We are honing the businesses that we're in and making them as efficient, as profitable as possible while also investing very pointedly and very wisely, we believe in things that will enhance customer experience and create lasting businesses for us down the line.
+We have said we want things that customers will love, can grow to be large, will have strong financial returns and durable and can last for decades. That is still our mission. We have pillars of the business right now with Marketplace, AWS and Prime and we're actively looking for a fourth and fifth pillar.
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of Heath Terry with Goldman Sachs. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [31]
+--------------------------------------------------------------------------------
+Great. I'm wondering, there obviously have been some headlines since the call that you did earlier with the press on the scale of this investment cycle relative to other investment cycles that you have been through. With the 2014 cycle sort of being the most recent, could you quantify a little bit more how you would compare this investment cycle to that most recent one? To the extent that we're in the midst of this investment cycle, would you say we're in sort of the earlier or later stages? Any sort of clarity around that would be useful. Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [32]
+--------------------------------------------------------------------------------
+Sure. Yes. The word cycle, if I mentioned that, was an omission. It was a misspeak. The investment that we are seeing is a step-up versus what we have experienced in particularly the first half of this year and the last half, the second half of last year, which I mentioned.
+We have said investments are going to be lumpy. They are going to be high sometimes and they will be moderate at other times. We are right now, the second half of this year looks like a big step-up compared to the first half, and it is. But, again, it is all areas that we will continue to investment in, some of which I just actually went through the laundry list.
+I would not characterize it as the cycle. I would characterize it as continued investments. We make investments with the idea that they are going to pay off and they pay off in either directly in the business they're in or in their contribution to the total business, many times as a part of the Prime program.
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of John Blackledge with Cowen and Company. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [34]
+--------------------------------------------------------------------------------
+Great. Thanks. Two questions. It seems that you're increasing your efforts in the auto vertical with the recent launch of Amazon Vehicles. Just wondering if you can discuss some of the dynamics of the auto industry that make it attractive and maybe how it aligns with the Prime value prop. Also wondering if you had any plans to work directly with auto shops, just given your ability to service most areas in one to two days.
+The second question, on grocery, would you consider physical locations in an effort to kind of expand and/or accelerate growth in that vertical? Thank you.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [35]
+--------------------------------------------------------------------------------
+Hi, John. This is Darin. On vehicle, Amazon Vehicles is really a car research destination and built the automotive community for customers. Gets information that they need when shopping for vehicles offsite or shopping for parts and accessories on-site. The features include research tools, community engagement, where you can talk to other customers. Certainly we try to build a one-stop shop for vehicles as an extension to the automotive store, which engages customers to add information about their cars in the garage which makes it actually easier to shop for parts and accessories for your particular vehicle.
+We think there's a lot of opportunity there to add convenience for customers. On the b2b side, certainly we do have an Amazon business offering. Businesses of all shapes and sizes can sign up to be a b2b customer. The selection that we have in our parts and automotive categories are certainly open to that channel. I wouldn't speculate on anything that we might do in a particular vertical for those business customers.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+Sure. Your comment on -- your question on grocery and physical stores, I can't comment on any rumors or speculations there might be regarding that. What I will tell you is that we have experimented with physical stores. As you may know, we have three physical bookstores, one in Seattle, one in San Diego and one in Portland and two more coming, one in Boston and one in Chicago.
+What we're finding is they're great places for customers to browse what ends up being a curated selection of books and they also get to try out our devices, which is very beneficial. They get to touch and try our e-readers, tablets, Fire TV and Echo. We like what we see with that connection. We also have pop-up stores that you may see and also college pick-up points. We will try different delivery methods or pick-up points or ways of getting product to customers, but nothing specific to point out on the grocery side right now.
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+Thank you. Our next question comes from the line of Ben Schachter with Macquarie. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [38]
+--------------------------------------------------------------------------------
+Given the low unemployment rates that you are seeing in the US, do you expect any unusual impact on wages for seasonal workers this year? Are you seeing overall wage pressure in the fulfillment centers? Separately, if you could talk about trend lines you are seeing in paid units versus shipping units. Are they diverging meaningfully versus the past? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [39]
+--------------------------------------------------------------------------------
+Yes. On wages, nothing to point out for this holiday. Our challenge generally is the volume of head count that we're looking to hire. We work well in advance with agencies to help to get seasonal employees and many of them turn into full-time employees after the holiday. Nothing specific on the wage pressure front. As you probably saw, head count is up 38% year over year in Q3 and that is continuation of a lot of ops roles that are supporting this high demand, the opening the fulfillment centers we talked about, new Fresh locations, Prime Now, but also and a lot of hiring in our tech areas, strictly around AWS and also the Echo/Alexa areas.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+Thank you.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [41]
+--------------------------------------------------------------------------------
+I'm sorry. The second question?
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+Sorry, go ahead. Okay. Our final question will come from the line of Neil Doshi with Mizuho. Please proceed with your question.
+
+--------------------------------------------------------------------------------
+Neil Doshi,  Mizuho Securities - Analyst    [43]
+--------------------------------------------------------------------------------
+Thanks. Can you provide a little more color into the investments that you're making in India? What is driving that growth and what stage is India in today relative to some of the other large international markets that you have launched in the past?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com, Inc. - CFO    [44]
+--------------------------------------------------------------------------------
+Yes, sure. We are very encouraged by what we're seeing in India, but it is certainly very early on still. Most recent highlights would be the launch of the Prime program in India this past quarter. It's now one of the top-selling units on Amazon.India. It has been well received by customers.
+It is hard to compare India to any other country. It is very different in its stage and structure. Being a third-party market has caused a lot of invention on our side. We're being creative. The team there in India has been very creative on whenever they find a roadblock or something that has not existed in another country, they create it themselves, whether that's from delivery stations to working with small merchants to you name it. We're very happy with both the customer engagement that we're seeing and also the seller engagement, which is very important in India. Very pleased with the team that brought that over there and the way they work with teams throughout the world.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Director of IR    [45]
+--------------------------------------------------------------------------------
+Brian, to step back to Ben's other question on units. Ben, this is Darin. Paid units grew at 28% again this year, as it did in the prior quarter. As Brian pointed out earlier, our AFN units, our Amazon Fulfilled Units, which includes our first-party units as well as FBA unit that's that go through our warehouses, are continuing -- are certainly higher than that 28%. That is a result of the traction we're getting with our FBA sellers.
+Thank you for joining us on the call today and for your questions. A replay will be available on our investor relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2017-Apr-18-BAC.N-141158160180-Transcript.txt

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+
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+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2017 Bank of America Corp Earnings Call
+04/18/2017 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian T. Moynihan
+   Bank of America Corporation - Chairman, CEO and President
+ * Paul M. Donofrio
+   Bank of America Corporation - CFO
+ * Lee McEntire
+   Bank of America Corporation - SVP of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Betsy Lynn Graseck
+   Morgan Stanley, Research Division - MD
+ * Glenn Paul Schorr
+   Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst
+ * John Eamon McDonald
+   Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst
+ * Brian Kleinhanzl
+   Keefe, Bruyette, & Woods, Inc., Research Division - Director
+ * Marlin Lacey Mosby
+   Vining Sparks IBG, LP, Research Division - Director of Banking and Equity Strategies
+ * Saul Martinez
+   UBS Investment Bank, Research Division - MD and Analyst
+ * Steven Joseph Chubak
+   Nomura Securities Co. Ltd., Research Division - VP
+ * Kenneth Michael Usdin
+   Jefferies LLC, Research Division - MD and Senior Equity Research Analyst
+ * Gerard S. Cassidy
+   RBC Capital Markets, LLC, Research Division - Analyst
+ * Andrew Lim
+   Societe Generale Cross Asset Research - Equity Analyst
+ * Matthew D. O'Connor
+   Deutsche Bank AG, Research Division - MD in Equity Research
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to today's Bank of America First Quarter Earnings Announcement Conference Call. (Operator Instructions) Please note this call may be recorded. (Operator Instructions) 
+It is now my pleasure to turn today's program over to Mr. Lee McEntire. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good morning. Thanks to everybody for joining us this morning for the first quarter 2017 results. Hopefully, everybody's had a chance to review our earnings release documents that were available on our website.
+Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information on those, please refer to either our earnings release documents, our website or our SEC filings.
+With that, I'm pleased to turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Take it away, Brian.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [3]
+--------------------------------------------------------------------------------
+
+          Thank you, Lee, and good morning, everyone, and thank you for joining our first quarter results. 
+I'm going to begin on Slide 2, and first, this quarter is another solid example of driving responsible growth at Bank of America. My teammates continue to deliver for customers around the world, and not many companies have the resources we have to help our clients drive the global economy. 
+But with that, we understand responsibility comes with doing this, and we do it in a responsible way. Responsible growth is driving more sustainable returns for you as shareholders, also. This quarter, we produced strong revenue growth. We drove cost savings that offset higher revenue-related cost, and we managed risk well, and we returned more capital to you, our shareholders, through dividends and increased repurchase of shares, than any period since the crisis. 
+Turning to Slide 3. Our company produced earnings of $4.9 billion after tax in the first quarter of 2017. Those earnings were up 40% compared to the first quarter of last year, driven by 700 basis points of operating leverage. Revenue rose 7%, and we managed to keep overall expenses flat. 
+Our earnings per share were $0.41 per share. On a diluted basis, that was up 46%. This is the fourth quarter in a row we've exceeded $0.40 of EPS per share. We did that in quarter 1 despite $1.4 billion of annual retirement-eligible incentives and seasonally elevated payroll tax costs. And importantly, we have done this in a responsible manner, not reaching for growth outside of our established risk and customer framework, and we achieved this in an economy which continues to grow in the 1.5% to 2% range. 
+On a year-over-year basis, our average deposits were up over $58 billion. Average loans were up $21 billion, and sales and traded revenues, excluding DVA, were up 23% with better client activity. We saw $29 billion in long-term asset under management flows this quarter within our wealth management business. Asset quality remains strong with a provision expense of $835 million. Net charge-offs were down 13% from the first quarter of 2016 but were modestly up from the fourth quarter of '16 as expected from the normal seasonality, especially in consumer credit cards. 
+Regarding progress against long-term metrics, the first task the company had many years ago was to become stabilized, then it was to reduce our legacy costs and simplify the place, and then we drove towards sustainability of our results. Once results became more sustainable, we pushed towards generating return on tangible common equity above our cost of capital. We've now shown that we have a return on tangible common equity in the double digits the last 4 quarters. And keep in mind that we have been doing this while our capital continues to build. The next step is to push that towards our 12% target.
+This quarter, our return on tangible common equity was 10%, where our return on assets was 88 basis points. These are reported numbers. The efficiency ratio was 67%. These figures reflect solid progress in this quarter against our long-term targets but are even closer if you were to allocate the seasonal aspects of the retirement-eligible compensation costs and elevated payroll tax expenses across the years as just opposed to putting it all in the first quarter. 
+And even though quarter 1 is typically a good capital markets quarter for us, if you just spread those costs, you'll see that across all the quarters, the metrics this quarter would have been reflecting an efficiency ratio of nearer 62%, a return on assets nearly 100 basis points and a return on tangible common equity of 12%. So simply put, we're getting there. 
+On Slide 4, as I mentioned, the key to profit building in this environment is to drive good core customer growth and revenue while controlling our costs to drive operating leverage. We have established record for the past -- we have an established record for the past several years of producing quarterly operating leverage on a year-over-year basis. 
+This quarter, you can see on the Slide 4, that our revenue growth on a year-over-year basis across each of our business segments. We're also able to hold the expenses overall in the company flat through the careful management of cost. As you can see in this slide, that's 700 basis points of operate leverage for the total company. 
+Some of our businesses, like our consumer business, have been driving operating leverage consistently for many years in a row now. Some, like our Global Banking business, are using operating leverage to drive the company to the best line of business efficiency ratio among our businesses. Other businesses continue to have leverage opportunities that are becoming more clear. This is the case in our wealth management or our Global Markets businesses. 
+As we turn to Slide 5, you can see the line of business results. Each business improved their efficiency ratios. Each line of business reported returns well above the firm's cost of capital. 
+Consumer Banking continued its strong performance and transformation, produced $1.9 billion in after-tax earnings this quarter, growing 7%. And on a pretax, pre-provision basis, PPNR, which excludes the prior year's sizable reserve release, the PPNR was up 17% year-over-year. The efficiency ratio in this business was down 500 basis points to 53%. 
+Global Wealth and Investment Management improved earnings 4%, earning $770 million after tax, improving its profit margin to 27%. This is a new record for the business. 
+Our Global Banking business produced a record revenue quarter led by strong Investment Banking results, and that generated $1.7 billion in after-tax earnings. It remains our most efficient operating business at 44%. 
+Lastly, our Global Markets business earned $1.3 billion in after-tax earnings, generating a 15% return on its allocated capital. Improved performance in sales and trading revenue combined with strong expense discipline that drove those results. 
+Our Other category shows a loss, driven mostly by the $1 billion in first quarter FAS 123 costs and related personnel taxes, which gets allocated across the business segments throughout the year. But the reduction in losses year-over-year was driven by improved operating costs in the company and lower litigation expense. 
+As you'll see from the slides Paul will walk you through later, our businesses have important leadership positions across the board. We believe they have room to grow both market share by deepening relationships with existing customers and by winning customers from the competition. 
+Overall, I'm pleased with the results this quarter. We grew the top line, we grew the bottom line, and we did it the right way, all while making significant investments in people, technology and more capabilities for our customers. And all that will bode well for future growth. 
+While many of you might focus on rates and our leverage to rising rates, note that the $1.5 billion in year-over-year revenue growth is split 40% for NII, which is driven by rates and by also the growth in loan and deposit balances, and the other 60% was driven through noninterest revenue. 
+As you know, we remain focused on things we know we can control and drive. We maintained our discipline on both expenses and pricing. Our rates paid has remained steady at 9 basis points on deposits while, at the same time, we have grown those deposits 5% year-over-year or $58 billion. 
+On lending activity, there's been a lot of discussion regarding a slowdown. In our core middle market business, representing a broad base of American companies, our business loans grew 7% year-over-year. In our smallest -- smaller business segments, business banking and small business, we were up 3%. And small business had the best production quarter in its history. 
+We assisted our markets clients with their financing needs, which also put capital in the system for economic growth. All this growth occurred in a sub-2% GDP growth environment. Our clients stand ready, they're engaged, and they're ready to grow faster as the economy continues to grow and improve. 
+Now let me turn it over to Paul to talk -- go through the other details about the quarter. Paul?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Brian. I will start with the balance sheet on Page 6. Overall, end-of-period assets increased $60 billion from Q4. The growth was fairly evenly split between 2 elements: First, we saw higher trading-related assets in Global Markets business with incremental customer activity following a seasonal slowdown at the end of Q4; secondly, we had higher cash levels driven by seasonal deposit growth, primarily from tax refunds. 
+Deposits rose $55 billion or 5% from Q1 '16 and are up $11 billion from Q4. Q1 deposit growth was primarily driven by customer tax refunds in our consumer business. Loans on an end-of-period basis were steady with Q4 as solid commercial growth was offset by seasonal declines in credit card and runoff of legacy noncore loans. 
+Lastly, common equity increased $1.3 billion compared to Q4 as $4.4 billion in net income available to common was reduced by $3 billion and capital returned to shareholders through dividends and net share repurchases. 
+Global liquidity sources increased in the quarter, driven by higher deposit flows and bank funding. We remain well compliant with fully phased-in U.S. LCR requirements. Book value per share rose 5% from Q1 '16 to $24.36. 
+Turning to regulatory metrics and focusing on the advanced approach. Our CET1 transition ratio under Basel III ended the quarter at 11%. On a fully phased-in basis compared to Q4 the CET1 ratio improved 20 basis points to 11% and remains well above our 2019 requirement of 9.5%. 
+CET1 capital increased $1.6 billion to $164 billion, driven by earnings and the utilization of deferred tax assets offset by return of capital. The ratio also benefited from an $11 billion -- excuse me, a $14 billion decline in RWA, driven by lower exposure in our Global Markets business, lower card exposure and legacy asset runoff. 
+We also provide our capital metrics under the standardized approach, which remains relevant for CCAR comparison purposes. Here, our CET1 ratio is 10 basis points higher at 11.6%. Supplementing leverage ratios both for parent and bank continued to exceed U.S. regulatory minimums that take effect in 2018. 
+Turning to Slide 7 and on an average basis. Total loans were up $21 billion or 2% from Q1 '16. Loan growth in our business segments was primarily offset by continued runoff in noncore Consumer Real Estate loans in All Other. Year-over-year loans in All Other were down $23 billion. On the other hand, loans in our business segments were up $44 billion or 6%. 
+Consumer Banking led with 8% growth. We continue to see good growth in residential mortgages although our originations slowed in Q1 '17, given the increase in mortgage rates in Q4 and Q1. We saw growth in credit card and vehicle loans. Home equity pay-downs continue to outpace originations. 
+In wealth management, we saw a year-over-year growth of 7%, driven by residential mortgages. Global Banking loans were up 4% year-over-year. Loans in our commercial business grew 6% year-over-year despite a slight reduction in commercial real estate. We think these growth rates are responsible, given the economy grew around 2% year-over-year. 
+Middle market revolver utilization rates have now climbed back to record levels. On the bottom of the chart, note the $58 billion, 5% year-over-year growth in average deposits, which is driven by 10% growth in Consumer Banking. 
+Turning to asset quality on Slide 8. The stability of our asset quality and loss trends reflects many years now of disciplined client selection and strong underwriting practices that are foundational to our responsible growth and through-the-cycle performance. 
+Credit quality remains strong. Total net charge-offs of $934 million or 42 basis points on average loans increased slightly from Q4 due to expected seasonality in our credit card products but were down 13% from Q1 '16. Provision expense of $835 million rose $61 million from Q4 but was down $162 million from Q1 '16. 
+Net reserve releases in the quarter of $99 million was fairly consistent with Q4 and the year-ago quarter. Note that Q1 '16 included a significant increase in reserves in Global Banking for energy exposures. That was mostly offset by releases in consumer reserves in that quarter. 
+Our reserve coverage ratios -- excuse me, our reserve coverage remains strong with an allowance-to-loan ratio of 125 basis points and a coverage level 3x our annualized charge-offs. NPLs and reservable criticized exposure both declined notably. 
+On Slide 9, we break out credit quality metrics for both our consumer and commercial portfolios. On the consumer chart, you can see the impact of the seasonal increase in credit card losses. Note that delinquency trends remain low and improved modestly from Q4. Commercial losses continue to be low. 
+Turning to Slide 10. Net interest income on a GAAP non-FTE basis was $11.1 billion, $11.3 billion on an FTE basis. NII improved $730 million from Q4, primarily due to higher rates. The net interest yield increased 16 basis points to 2.39% from Q4 as loan yields improved 17% while the rates we paid on deposits was flat at 9 basis points. 
+Q4 and Q1 increases in long-end interest rates resulted in slower prepaids and less premium amortization on our securities portfolio this quarter. Increases in the short end in terms of interest rates caused our variable rate assets to reprice higher while we maintain good pricing discipline on deposits. We also benefited from normal seasonality in Q1 in our leasing business. 
+And in addition, we benefited from less unfavorable hedge ineffectiveness as compared to Q4. But one can think of the reduction in the hedge ineffectiveness as roughly offset by 2 fewer days in the quarter. 
+Now as Brian mentioned, we remain disciplined around deposit pricing given the investment we have made in customer relationships through Preferred Rewards and other deepening activities. 
+So your natural next question is what should shareholders expect for Q2 with respect to NII given the March rate hike by the Fed? Based on our models and assumptions, we believe NII should continue to improve, but the improvement is expected to be much more modest than Q4 to Q1 driven by a number of factors, most notably, the increase in long-term rates in Q1 -- in Q4 and Q1 drove a significant portion of the Q1 improvement. 
+In terms of Q2, think about it this way. Given where we are today, with the Fed funds rate hike in March and the long end down since the end of the first quarter, I would focus you on our asset sensitivity disclosures. 
+As of 3/31, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3.3 billion over the subsequent 12 months, which is consistent with our position at year end. Nearly 3/4 or $2.5 billion of this modeling is driven by our sensitivity to short-end rates. Given a 1-month LIBOR rise of about 25 basis points with the March hike and the long end down, we should focus on the $2.5 billion short-end benefit. Dividing that by 4 gets you a quarterly run rate of roughly $600 million for a 100 basis point shock. Assuming it's only 25 basis points instead of 100 would get you to approximately $150 million benefit in the quarter. 
+From there, we would expect continued modest growth in NII in the second half of 2017 assuming modest growth in loans and deposits and rates at least above where they are today. 
+Turning to Slide 11. Noninterest expense was $14.8 billion. We were able to hold expense flat compared to Q1 '16 despite 9% growth in noninterest income and several other expense headwinds. The efficiency ratio improved 400 basis points year-over-year. And if you allocate Q1's $1.4 billion of incentive for retirement-eligible employees and the seasonally elevated payroll tax across all 4 quarters, then the efficiency ratio would be 62%. 
+Our company-wide simplification efforts and the $110 million in lower litigation costs offset a number of higher expenses year-over-year, including: $150 million of higher incentives for annual retirement-eligible employees and seasonally elevated payroll taxes; $190 million of higher incentives associated with the revenue growth across wealth management, Global Banking and Global Markets; and $160 million of higher expenses due to changes in our share price with respect to accounting for employee stock-based awards. The year-over-year swing is caused by the share price decline in Q1 '16 compared to an increase in Q1 '17. We also had $100 million in higher quarterly costs for FDIC assessments. Finally, note that employees are down 2% from Q1 '16, and we continue to add client-facing associates. 
+Turning to the business segments and starting with Consumer Banking on Slide 12. Consumer Banking had another solid quarter. This segment produced $1.9 billion in earnings, growing 7% year-over-year and returning 21% on allocated capital. Note that, that 21% return is on $37 billion of allocated capital, which is an increase of $3 billion this quarter given growth in their loans and deposits. 
+On a pretax pre-provision basis, which adjusts for the sizable release of reserves in Q1 '16, earnings rose $559 million or 17%. Year-over-year, average loans grew 8%, average deposits grew 10% and Merrill Edge brokerage assets grew 21%. That drove revenue growth of 5% led by a 9% increase in NII from Q1 '16. 
+Note that the rate paid on deposits in this business declined 1% -- excuse me, declined 1 basis point year-over-year to 3 basis points as a result of disciplined pricing. Noninterest income included improvements in service charges and a small increase in card income that was more than offset by a decline in mortgage banking income. The decline in mortgage banking income was due to both lower volumes from less refinancings as well as our strategy of holding more of our production on our balance sheet versus selling it to the agencies. 
+Through continued efforts to drive down costs, the efficiency ratio improved nearly 500 basis points to 53%. Cost reductions also helped drive the cost of deposits down 10 basis points from Q1 '16. Consumer Banking credit quality remains solid, with the net charge-off ratio declining 4 basis points to 121 basis points. 
+Turning to Slide 13 and looking at key trends. First, as usual, in the upper left, the stats are a reminder of our strong competitive position; second, as we point out each quarter, while we report NII and noninterest income separately, our strategy remains focused on relationship deepening and growing total revenue while improving operating leverage through expense discipline. 
+So as you review the top boxes on this page, note that we drove 8% operating leverage this quarter. Also, note that our relationship deepening is improving NII and balance growth while holding the fee lines flat as we reward customers for doing more business with us. 
+Average deposits continued their strong growth, up $57 billion or 10% year-over-year, outpacing the industry. Importantly, 50% of these deposits are checking accounts, and we estimate that 89% of these checking accounts are the primary accounts of households. This means these are operational accounts used to pay mortgages and car payments and other bills. So outflows chasing rates is less likely in our view. We also believe these deposit accounts offer clients significant value in terms of transparency, convenience and safety, which also means they are less likely to move their relationships. 
+With respect to card, spending levels and new issuances were solid. However, the industry's trend of increasing rewards continues to mitigate our overall card revenue growth. Digitalization and other productivity improvements, as well as lower fraud costs, continue to lead expenses lower. 
+Expenses declined 3% from Q1 '16 despite increases in the FDIC assessment rate and charges. Focusing on client balances on the bottom left, you can see the success we continue to have growing deposits, loans and brokerage assets. 
+Merrill Edge continues to attract customers who want a self-service investment option as accounts are up 11% from Q1 '16. We now have more than 1.7 million households that leverage our financial solution advisers and self-directed investment platform. This quarter also included the successful rollout of Merrill Edge Guided Investing for clients who want some advice from our CAO office but don't desire a fully advised relationship. 
+With respect to loans, residential mortgages continued to lead our growth. As expected, the sudden rise in long-term rates in late 2016 caused a noticeable decline in mortgage production from Q1. While mortgage originations was down, we continue to hold more of our loans on the balance sheet. In Q1, we retained about 80% of first-mortgage production on the balance sheet. We believe retaining these mortgages will provide better economics over time, plus retention deepens our relationship with these customers. 
+Consumer vehicle lending remains solid, up 12% year-over-year, and we continue to remain focused on prime and superprime borrowers. Our net charge-offs at 38 basis points remain not only low, but also lowest among peers. U.S. consumer card average balances grew 3% year-over-year, and spending on our credit cards was up 8% compared to Q1 '16. 
+Turning to Slide 14. We remain a leader in digital banking and we continue to see momentum in digital banking adoption. Given the rollout of Zelle this quarter, Bank of America customers can now use their online app to transfer money, request money and split bills person-to-person with more ease than before. While still in its infancy, customers sent $8 billion in payments through our person-to-person apps in Q1, which is up 25% year-over-year. 
+Importantly, as digital banking adoption rises, particularly around transaction processing and self-service, we expect to see continued improved efficiency and customer satisfaction. Mobile devices now account for 1 out of every 5 deposit transactions and represent the volume of nearly 1,000 financial centers. Sales on digital devices continue to grow and now represent 22% of total sales. 
+Still, with all the digital activity, we have not forgotten and remain focused on the 800,000 people walking into our financial centers across the U.S. on a daily basis. Many of these customers still use our branches to transact, but many others use our branches as financial destinations, where they can learn more about products and services, work face to face with a specialized professional and generally improve their financial lives. We want to encourage that, and that's why we have an extensive branch refurbishing underway. By the way, that's also helping increase customer satisfaction. 
+We're also building new centers in markets where we have never had financial centers but where we have presence across Global Banking, wealth management or both. These markets include MSAs like Denver, Minneapolis and Indianapolis. 
+In addition, we are testing smart centers, which utilize video-assist -- video-assisted ATMs and other very [ useful ] conferencing capabilities in regions where it makes sense. 
+Turning to Slide 15. Let's review Global Wealth and Investment Management, which produced earnings of $770 million and record pretax operating margin of 27% while returning 22% on allocated capital. These solid results were produced in a period of change for the industry as firms and clients anticipate new fiduciary standards and other market dynamics, such as the shift between active and passive investing. 
+Net interest income rose 3%, driven by loan growth. Year-over-year, noninterest income also rose 3% as 8% higher asset management fees were partially offset by lower transactional revenue. Year-over-year, while total revenue grew 3%, expenses grew 2%, creating an important but modest operating leverage. Also note the $29 billion of long-term AUM flows this quarter, reflecting strong client activity as well as the continuing shift from IRA brokerage to AUM. 
+Moving to Slide 16. We continue to see overall solid client engagement. Client balances climbed to nearly $2.6 trillion, driven by higher market values, solid long-term AUM flows and continued loan growth. Average deposits of $257 billion were flat compared to Q4 while ending deposits were down, primarily reflecting some movement to investment assets. Average loans of $148 billion were up 7% year-over-year. Loan growth remains concentrated in Consumer Real Estate. 
+Turning to Slide 17. Global Banking had record revenue this quarter, up 11% year-over-year led by Investment Banking activity. Revenue growth, coupled with expense management, improved the efficiency ratio 500 basis points to 44%. 
+In addition, provision expense of $17 million in Q1 '17 was more closely aligned with charge-offs while Q1 '16 included approximately $500 million in reserve increases for energy exposure. This resulted in a 58% year-over-year improvement in earnings to $1.7 billion. 
+Global Banking continues to drive loan growth within its risk and client frameworks, albeit at a slower pace. Total Investment Banking fees for the company were $1.6 billion, which was up 37% from Q1 '16. By comparison, overall industry fee pools were up 19% year-over-year. 
+A number of items to note given the strong performance. First, this was a record Q1 in terms of revenue from IB fees. Client underwriting activity in the capital markets was quite strong. We also earned record M&A fees this quarter with involvement in 6 of the top 10 completed transactions. 
+Debt underwriting was up 38% year-over-year led by strong performance in leveraged finance. Equity underwriting was up 65% year-over-year. Expenses decreased from Q1 '16 despite higher revenue-related incentives, higher FDIC insurance costs and costs associated with adding 340 new relationship managers over the past couple of years. 
+Return on allocated capital increased 18% -- excuse me, increased to 18% despite adding $3 billion of allocated capital this quarter. 
+Looking at trends on Slide 18 and comparing to Q1 last year. Average loans were up $14 billion or 4%. Growth was driven by our commercial bank, where lending was up 6% despite subdued real estate lending. As Brian said, we feel good about this growth rate given 2% GDP environment. We stand ready to support clients who want to borrow directly from us or tap the capital markets. One of the benefits of our universal banking model is our ability to deliver for clients across a complete product set and geographies. 
+Average deposits increased 2% from Q1 '16. As expected, we saw a seasonal decline in deposits from Q4. We remain mindful of the LCR rules as we grow deposits. 
+Switching to Global Markets on Slide 19. The business had a strong quarter, which once again benefited from the breadth of our product and geographic footprint with leadership positions in a number of areas. This quarter saw strong issuer activity and tighter spreads across credit products, which played well to our strength in mortgage and corporate credit. The business improved operating leverage with revenue, excluding DVA, growing 27%, while expenses increased modestly after adjusting for litigation recovery in Q1 '16. 
+Global Markets earned $1.3 billion and returned 15% on allocated capital. This includes a reduction of capital of $2 billion given the great work the team has done optimizing the balance sheet and reducing RWA in the past year. It is worth noting that we achieved these results with a lower VaR and 6% fewer people than last year. With respect to expenses, Q1 '16 litigation included a sizable litigation recovery. Excluding litigation, year-over-year expenses were up 2% while revenue grew 19%. 
+Moving to trends on Slide 20 and focusing on the components of our sales and trading performance. Sales and trading revenue of $4 billion, excluding net DVA, was up 23% from Q1 '16. Excluding net DVA and versus Q1 '16, FICC sales and trading of $2.9 billion increased 29%. Within FICC, the year-over-year improvement was driven by improved client activity in corporate credit and mortgage products. Equity sales and trading was up 7% year-over-year to $1.1 billion despite weaker cash equity volumes. We saw increased activity in Europe and Asia across all products. We also are beginning to see the benefits of deploying additional balance sheet to meet the financing needs of clients. 
+On Slide 21, we show All Other, which reported a net loss of $834 million. This was an improvement from Q1 '16, driven by lower litigation and mortgage servicing costs. The only other thing worth pointing out here is a reminder that this is where we book the annual retirement-eligible incentive and elevated Q1 payroll tax before they get allocated out to the line of business throughout the year. 
+The effective tax rate for the quarter was 26% and included approximately $200 million of tax benefit from the deductions on deliveries of share-based awards exceeding the related compensation costs. A recent change in accounting rules requires booking this difference to the tax income expense instead of directly to equity. The effective tax rate would have been 29.4% excluding this benefit, which is in line with our expectation of approximately 30% for the rest of the year. 
+Okay. A few points -- a few summary points as I wrap up. This quarter shows the value of our businesses as rates begin to rise and as we experience increased capital markets activity. For years, we have stayed focused on growing responsibly, including staying within our risk and client frameworks and making our growth more sustainable by simplifying the company and improving efficiency. 
+In Q1, consistent with this strategy, we stuck to our strong underwriting standards while growing loans and trading assets. Asset quality remains strong and net charge-offs low. We grew deposits while managing deposit rate paid. We grew AUM while helping clients adapt to a changing industry. When client activity picked up, we were ready with a breadth of capabilities to raise capital and manage risk in major markets all around the world. We continue to invest in new technology and capabilities while adding sales professionals in certain businesses. We lowered non-personnel expenses, offsetting some seasonal and other expense headwinds this quarter. We created operating leverage in each of our business segments. And we returned more capital to shareholders than in any quarter since the financial crisis. 
+These results tell us that responsible growth is working, with more to come as the economy continues to improve. Many of you have been waiting patiently for us to approach our long-term targets. I hope you noted that if one allocates annual retirement-eligible incentives and seasonally elevated payroll tax throughout the year, we are basically at our return targets this quarter. We know we have more work to do to be consistently achieving all our targets, but we have more confidence than ever that responsible growth will get us there. 
+With that, we'll open it up to Q&A.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) And we'll take our first question from Glenn Schorr with Evercore ISI.
+
+--------------------------------------------------------------------------------
+Glenn Paul Schorr,  Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst    [2]
+--------------------------------------------------------------------------------
+
+          First, a very quickie. Did you mention what NPLs you sold during the quarter? And if there was any P&L impact?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Small and small. Small sell, small impact.
+
+--------------------------------------------------------------------------------
+Glenn Paul Schorr,  Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst    [4]
+--------------------------------------------------------------------------------
+
+          No problem. I'm curious, I think we've all taken note of the responsible growth, what you've done, heard your comments on it relative to the economy. I'm curious, as we watch the industry loan growth come down for a bunch of different reasons, can B of A continue on this path? I don't want to say irregardless of what the industry backdrop is, but can it buck the trend of the declining loan growth that we're seeing in most other places?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [5]
+--------------------------------------------------------------------------------
+
+          Glenn, it's Brian. I think at the end of the day, banks reflect the economy and help make the economy happen. So we've been able to grow loans 5%, 6% in the core, so the middle market segment, 7% actually year-over-year. Credit card's been picking up a little bit, home equity is strong, residential mortgage down. So if you look at it overall, we've been out -- able to outgrow the economy, but we're going to be dependent upon the economy keep growing. But what we've shown you across the last couple of years, with the discipline we have, are driving deeper penetration in our customers, working hard on our relationships even with repositioning portfolios that you can see in some of the slides and/or making sure that we maintain great discipline, we've been able to grow the mid-single digits, as we've told you, against the backdrop of an economy growing at 1.5% to 2%. If that grows faster, we'll grow faster. If that stays in that range, we should be able to continue to grow at that level.
+
+--------------------------------------------------------------------------------
+Glenn Paul Schorr,  Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Okay. Maybe on the credit front. As you've mentioned, credit's awesome in most places, and I saw criticized credit came down with energy improving. Are there any areas that are criticized credits increasing, like something like retail?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [7]
+--------------------------------------------------------------------------------
+
+          No. Credit looks good across the board, and it's performing as we model and expect.
+
+--------------------------------------------------------------------------------
+Glenn Paul Schorr,  Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst    [8]
+--------------------------------------------------------------------------------
+
+          Okay, last little one. Zelle -- you mentioned the increase in Zelle activity. Do you make money on that? Or is that mostly a customer retention tool?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [9]
+--------------------------------------------------------------------------------
+
+          I think, Glenn, think about it this way, is the way people pay each other. So you -- we don't charge for it. It's just a service as part of a core DDA account, just like checks or just like an ATM card would be to withdraw. It's just more efficient for the customer, more efficient for the -- for us, too, ultimately, because the payback will be taking cash out of the system. And so year-to-date, we're up about -- even before Zelle is announced, for the first quarter, P-to-P payments at Bank of America are up 25% first quarter of '17 versus first quarter of '16. So this is growing fast and will continue to grow. And what we'll do, we'll swap out other payment forms which cost us more to execute, but it's free to the customer.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from John McDonald from Bernstein.
+
+--------------------------------------------------------------------------------
+John Eamon McDonald,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst    [11]
+--------------------------------------------------------------------------------
+
+          Paul, just a clarification regarding the second quarter framework you provided for net interest income. Does the $150 million potential bump, based on the disclosures, include the benefit of loan growth? Or was that just the rate impact? And could it be a little better if loan growth continues?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [12]
+--------------------------------------------------------------------------------
+
+          Well, the loan growth is embedded in our 100 basis point shock. So theoretically, it includes it. But if loan growth's a little bit better than we think, it could be better; if it's a little lower, it would be less. That's one of the variables that we have to think about when we think about NII growth.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [13]
+--------------------------------------------------------------------------------
+
+          John, just one of the things to keep in mind there is remember, we just capitalized or put in the run rate, for lack of a better term, $600 million-plus, fourth quarter to first quarter, and this is on top of that, too. That first benefit as you think for the year, that benefit is now locked in and moves its way through the system.
+
+--------------------------------------------------------------------------------
+John Eamon McDonald,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Got it, got it. So that's incremental to the 1Q print. Okay. And then can you remind us what kind of deposit repricing beta you assume in the disclosures, Paul?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [15]
+--------------------------------------------------------------------------------
+
+          Sure. So in a 100 basis point rise on interest-bearing deposits, and remember, we have a large amount of noninterest-bearing deposits, but on interest-bearing deposits, we're kind of low 50-ish for that full 100 basis point rise. As you can expect, the first 25, 50 of the 100 is going to be a little bit different than the second 25 or 50, and that's about as much that I'd want to give you given the competitiveness around this topic.
+
+--------------------------------------------------------------------------------
+John Eamon McDonald,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Okay, and a separate question on capital. With the CET1 at 11% now versus the 2019 requirement of 9.5%, what kind of buffers are you thinking of holding? And what level of CET1 feels right -- like, the right target for you, longer term?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [17]
+--------------------------------------------------------------------------------
+
+          So with respect to buffers, I wouldn't want to give an exact number for all sorts of reasons. We put a lot of thought into how we manage our capital and liability structure, including buffers. Having said that, we have 150 basis points of cushion right now on fully phased-in minimums and a lot of time between now and 2019. So maybe we'll talk more about it as we get a little closer. But right now, we feel good where we are.
+
+--------------------------------------------------------------------------------
+Operator    [18]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Steven Chubak with Nomura Instinet.
+
+--------------------------------------------------------------------------------
+Steven Joseph Chubak,  Nomura Securities Co. Ltd., Research Division - VP    [19]
+--------------------------------------------------------------------------------
+
+          So just wanted to kick things off with a question on the 2018 expense target of $53 billion that you guys had outlined on previous calls. Can you just remind us what the revenue growth assumptions were underlying that target? And just given some of the acceleration that we've seen in fee income growth and the higher incentive comp, is that still an achievable target in your view?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [20]
+--------------------------------------------------------------------------------
+
+          The revenue growth assumptions were like we said. If long term, we believe we can grow faster than GDP growth and that's embedded in those assumptions. I think a way for you, Steve, to think about it is look at the Global Markets year-over-year. And what you see there is with that substantial rise in revenue, the expense growth absent -- last year, we had a credit and litigation, this year we had an expense. So you had a pretty good reversal there. Absent that, it was 2% growth. And as Paul said, it had 6% less people. Comp expenses were up a bit even though revenue was up quite a bit. So we can manage against that with the inevitable thing that if revenue grows faster, we might have a little bit more expense pressure. But I think you and I will be very happy to see that happen.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [21]
+--------------------------------------------------------------------------------
+
+          Look, the only thing I would add, just for the record, is when we gave that guidance around this time last year, we specifically said it was based upon the economic environment at that time, and that if things got better, we'd have to adjust. If things got worse, we'd have to adjust. Having said all that -- that's just for the record, having said all that, we're still focused and comfortable we can get to the $53 billion, approximately $53 billion for full year 2018. That's what we said.
+
+--------------------------------------------------------------------------------
+Steven Joseph Chubak,  Nomura Securities Co. Ltd., Research Division - VP    [22]
+--------------------------------------------------------------------------------
+
+          Got it, and then just one question on the provision outlook. Just given the continued favorable credit and delinquency trends, how should we be thinking about the trajectory in the near term? Is a run rate of, I guess, around $850 million, plus or minus, a reasonable target?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [23]
+--------------------------------------------------------------------------------
+
+          The way I would think about it in Q2, provisions should roughly match net charge-offs. But remember, we're bouncing around the bottom with respect to net charge-offs in commercial. So a material credit can move the needle one way or the other. Absent that caution, we will build as we grow loan balances. But we should expect to see that offset, perhaps, by further runoff of noncore Consumer Real Estate, and we have a high energy reserve.
+
+--------------------------------------------------------------------------------
+Steven Joseph Chubak,  Nomura Securities Co. Ltd., Research Division - VP    [24]
+--------------------------------------------------------------------------------
+
+          And just one final question on capital return, just touching on John's last question. How should we be thinking about the capital return trajectory given the 150 basis points of excess? And I'm also wondering whether some of the recent rhetoric from the regulators suggesting a disinclination of sorts to have a qualitative CCAR failure, whether that informs your approach at all in terms of future payouts.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [25]
+--------------------------------------------------------------------------------
+
+          I think we have been building our capital [ ask ] year-over-year, and you should expect us continue to do that since we have both a strong cushion under CCAR. We'll see with this year's results, we don't know yet obviously. But from last year, just extrapolating. And also, our start point is higher and our run rate of earnings is now very consistent. So capital return's part of our story, and we'll continue to pursue it.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [26]
+--------------------------------------------------------------------------------
+
+          We've made progress every year, you've seen that. And I would remind everybody that we tapped the de minimis last year as well. So with the stability of our earnings, with the progress we're making on CCAR, as Brian said, we hope to continue to make progress.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Ken Usdin with Jefferies.
+
+--------------------------------------------------------------------------------
+Kenneth Michael Usdin,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Just first clarification, just coming back to the NII commentary, does the $150 million also incorporate the extra day you get in the second quarter? Because that's usually pretty meaningful for you guys.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [29]
+--------------------------------------------------------------------------------
+
+          Yes, I would think about the extra day as kind of being offset by the seasonality we have in Q1 for leasing.
+
+--------------------------------------------------------------------------------
+Kenneth Michael Usdin,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [30]
+--------------------------------------------------------------------------------
+
+          Okay. So you've got -- you're saying you got a benefit in the first and that kind of washes to the second. So really, your net is the $150 million?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [31]
+--------------------------------------------------------------------------------
+
+          Yes, approximately $150 million. And as you know, there's a lot of things that go into that modeling.
+
+--------------------------------------------------------------------------------
+Kenneth Michael Usdin,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Understood. Okay, great. So on the consumer fee side, I wanted to just ask, we saw kind of a little bit of a positive turn in both card income and also in the brokerage line, which is the first time in a while we've seen both of those move the right way. Any better line of sight at this point on just the trends getting better underneath the surface? Whether it's the rewards competition or the fee capture pressures in brokerage kind of starting to get into the run rate, and we can kind of expect to see growth from here?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [33]
+--------------------------------------------------------------------------------
+
+          Look, we've seen modest growth in card balances. We think that should continue. We're adding new accounts. We added 1.2 million cards this quarter. Combined debit, credit spend was good year-over-year and really good recently. But as you point out, the card income line remains -- I think in terms of growth, remains muted by competition around customer rewards. I guess what I would point out and just remind everybody is that just focusing on the fee income line sort of ignores some of the key benefits of our strategy, which is to attract relatively higher-quality card customers and reward them for deepening their relationship with us. The strategy, we think, is driving incremental deposit growth and making them stickier, and that helps NII. And by the way, these customers have lower loss rates as well as reduced need to interact with call centers, so that helps us lower costs. In terms of the service line or service charges, they've shown some modest growth, driven by growth in new accounts, and we expect that probably to continue here.
+
+--------------------------------------------------------------------------------
+Kenneth Michael Usdin,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [34]
+--------------------------------------------------------------------------------
+
+          And can you just touch on brokerage?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [35]
+--------------------------------------------------------------------------------
+
+          You mean brokerage...
+
+--------------------------------------------------------------------------------
+Kenneth Michael Usdin,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [36]
+--------------------------------------------------------------------------------
+
+          Wealth and brokerage.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [37]
+--------------------------------------------------------------------------------
+
+          Yes. Well, wealth and brokerage is being driven by the long-term trend that we've been seeing with growth in AUM as transactional brokerage continues to decline. We saw that again this quarter. This quarter, we had significant growth in AUM, which offset that sort of continuing decline in brokerage. I think AUM fees were up 8% this quarter.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Betsy Graseck with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Lynn Graseck,  Morgan Stanley, Research Division - MD    [39]
+--------------------------------------------------------------------------------
+
+          A couple of questions. One on the expense discussion earlier. On Page 4, you highlighted very clearly the strong operating leverage that you've got year-over-year from the various industries, various segments that you run. The question I have is, where should we expect the next leg of improvement on expenses could come from? Because one of the questions I've gotten from people today is this is fantastic operating leverage, but where are the levers to take it further?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [40]
+--------------------------------------------------------------------------------
+
+          Right. I think when we started a few years ago at $70 billion operating expenses, to bring it down to this level, it was more obvious. Betsy, now it's everywhere. It's everywhere, a little bit everywhere and a lot of hard work. So headcount generally is drifting down year-over-year at around 4,000 or 5,000 people. That gets harder, but what we're doing is taking out people and putting them into the front line in the client-facing roles, and so we're seeing that shift go on. [ You're ] continuing to work our real estate portfolio down, again, through colocations in cities. So you'll see us take 3 buildings in an area and put them in 1, and you've seen some announcement in that regard. In our data centers, we're accelerating the process that you'll -- that -- to consolidate data centers, and that helps continue to knock down the number of data centers. It takes $0.5 billion investment to -- or a $0.25 billion investment to build one, to bring it in. And so you'll see that go on. And then it's everywhere we turn, every place we look, just keep working at the pieces. But at the end of the day, continue to watch the FTE headcount numbers drift down and also how we move those around from less managers to more client-facing people and less layers in the company, which we've been after. And so it is just hard work across the board using our simplify and improve and what we call organizational health going on in our company, and we're seeing the aspects of that. That -- by the way, I think last -- in '16, to give you an example, I think we invested -- got about $400 million, $500 million in savings from some ideas, but it took us an investment of a couple hundred million dollars to get that. And so even that investment rate is important to getting the sales out. And so we're not asking you to exclude, but there's severance cost in here, there's real estate repositioning costs, all of that which actually comes down as you get further and further towards the optimization level.
+
+--------------------------------------------------------------------------------
+Betsy Lynn Graseck,  Morgan Stanley, Research Division - MD    [41]
+--------------------------------------------------------------------------------
+
+          Okay. So that speaks to why you can continue the revenue growth but yet still bring these expenses down. Got it. Two other quick ones. One on fixed income. You mentioned that credit was a source of strength this quarter. Others have highlighted credit as a weakness. So maybe you could speak to what you're seeing in your client base that drove such a strong credit quarter in FICC.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [42]
+--------------------------------------------------------------------------------
+
+          Well, first I would say, look, we've been making a lot of investments in our Global Markets business across equity, across macro. Credit has always been a traditional strength of Bank of America Merrill Lynch, a lot of very strong bankers combined with strong sales and trading effort. Corporates raised money this quarter in the capital markets. We have a strong relationship. So we saw a lot of increased activity on the primary side, which helps your sales and trading on the secondary side. That's one. Two, with spreads tightening a little bit and with clients' activity picking up as they were repositioning given the change in markets, the change in spreads, again, we have strong corporate credit trading desk. We have strong special situations in credit. We have strong mortgage. And they just saw a lot of client activity given what happened in the quarter. So when -- we've often said, when client activity picks up, you're going to see this business perform. And for us, client activity was more this quarter and it showed up in our results. And again lastly, it's a breadth of products. It's significant presence and scale in every major market around the world. So it's not just the U.S. We saw activity in emerging markets around the globe. We were there for -- when our clients needed us.
+
+--------------------------------------------------------------------------------
+Betsy Lynn Graseck,  Morgan Stanley, Research Division - MD    [43]
+--------------------------------------------------------------------------------
+
+          Okay. And then lastly, you mentioned on the call during the prepared remarks that you "remain mindful of the LCR rules as we grow deposits". Could you elaborate on your thoughts behind that?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [44]
+--------------------------------------------------------------------------------
+
+          Sure. Particularly on the wholesale side, there are 3 types of deposits fundamentally, 25%, 40% and 100% runoff. And as we think about serving our customers and clients, we're mindful -- very mindful of their needs, but we're also focused on maintaining those -- having deposits that are of the highest quality in terms of being able to use, to lend out to customers. So that means you've got to focus on the 25% and 40% or the more of -- the deposits that are much more operational in nature, the deposits that we know our corporate and FI clients are using to run their businesses. We're focused on growing those deposits and we're focused on helping them use those deposits to pay bills and to move their money around, to do FX, all the things you might think an individual does but just on the corporate side. Those are the types of the deposits we're focused on. We're not -- we're respectful of clients who want to give us other types of deposits, but we're having conversations about them, about the value of those and therefore what they should expect in terms of the pricing.
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Gerard Cassidy with RBC.
+
+--------------------------------------------------------------------------------
+Gerard S. Cassidy,  RBC Capital Markets, LLC, Research Division - Analyst    [46]
+--------------------------------------------------------------------------------
+
+          Brian, when you look out longer term, I mean, if you turn back the clock when the industry, before the financial crisis, typically earned 120 on assets -- or 130 basis points on assets, kind of a more normal interest rate environment, what do you see for the long -- and I know ROE is what you focus on, and we all do. But from an ROA standpoint, when everything's going right for Bank of America, your expenses are where you want them to be, the margins are where you want them to be, what kind of ROA do you think this company is capable of producing?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [47]
+--------------------------------------------------------------------------------
+
+          Well, I think, Gerard, just to focus, we've talked to you about getting at above 100 basis points, and then with the adjustments of sort of smoothing out the first quarter a little bit from the onetime or the annual expenses that occur in the first quarter, you're getting close to that. That is not a aspirational goal which we'll stop at. I mean, I think it'll improve if the rate structure continues to move up and the economy continues to grow, we'll get above that. But the first order of business is to get above -- to get to that so that we get the returns on tangible common equity and returns on equity where we want them to be. As you're thinking about that just more broadly, remember that we have, I don't know, a balance sheet of $2.3 trillion or so. And think about $500 billion basically being completely liquid assets. That is a far different cry than we were when our balance sheet sort of the high point was $2.7 trillion and we had -- probably had $200 billion or $100 billion to $200 billion of high-quality assets or whatever the moniker we'd use back then was. And that's going to knock around your yields on your balance sheet. And so we do focus on ROA in our company, we also -- because it basically is the thing that ultimately would drive ROE. But as equity builds, that ROE can be under pressure just from increases in equity. But if you think about it, the real driver of the yield on the balance sheet has more to do with the amount of assets you're carrying which are underleveraged for purposes of liquidity and safety and soundness.
+
+--------------------------------------------------------------------------------
+Gerard S. Cassidy,  RBC Capital Markets, LLC, Research Division - Analyst    [48]
+--------------------------------------------------------------------------------
+
+          Right. Okay. And speaking of the lever on the equity, can you remind us what the risk-weighted assets are now for the operational risk for you guys?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [49]
+--------------------------------------------------------------------------------
+
+          Sure. We have $500 billion in RWA for operational risk, which is -- if I can go on a little bit, which is 1/3 approximately of the RWA of the company under the advanced approach and more RWA than we have for our credit.
+
+--------------------------------------------------------------------------------
+Gerard S. Cassidy,  RBC Capital Markets, LLC, Research Division - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          Very good. And then coming back to the combined payout ratio that you guys are striving for, within that, what should we envision for -- once you get your capital levels to the point where you're very comfortable with, is the dividend payout ratio of 30% to 40% a reasonable expectation down the road when things more normalize?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [51]
+--------------------------------------------------------------------------------
+
+          A couple of things. One is our capital is more than sufficient. We're very comfortable with it, with the tangible common equity ratio, Gerard. Thinking about before the crisis of 7.9% and a CET1 of 11% with a minimum of 9.5%, we're more -- we have more capital than the company needs by the different measures, whether it's a traditional market-based measure or a regulatory measure. So we're completely comfortable with that. That leads us to return more capital. You should expect our dividend payout ratio will, for the bigger companies, I think they'll be more focus of keeping that to the 30% level that's been talked about in the various rules and regulations. And if you go back 3 or 4 or 5 years ago, I spoke to that at one of our industry conferences, I think if you look across time, that level of -- if you think about that level of payout against your earnings stream, there's very low probability that you'll have real danger in the dividend -- continuing that dividend even in tough times. So our goal is never -- to keep the dividend stable and then use the excess capital to buy the stock back at around book value. We think it's a great trade.
+
+--------------------------------------------------------------------------------
+Gerard S. Cassidy,  RBC Capital Markets, LLC, Research Division - Analyst    [52]
+--------------------------------------------------------------------------------
+
+          Got it. But something, Paul, just circling back to your comments about the FICC -- the strength in FICC, the client activity was strong, can you give us some color on the clients? Was it primarily investment clients or hedge -- or pension funds, hedge funds? What type of clients did you see that strength in the activity?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [53]
+--------------------------------------------------------------------------------
+
+          I think it was -- the only way to really classify it is really across the board. I think we have strength in all of those client sets. It was just a lot of good sales and trading activity driven by client interest in repositioning their investments, but also again, driven by (inaudible) of our clients. We just have a very broad and diverse product set in FICC, both from a product perspective and a geographic perspective. And that kind of footprint and that kind of diversity, when clients want to make changes, we're a natural call.
+
+--------------------------------------------------------------------------------
+Gerard S. Cassidy,  RBC Capital Markets, LLC, Research Division - Analyst    [54]
+--------------------------------------------------------------------------------
+
+          Brian, thank you for batting clean-up and not Lead-off. It made it a lot easier for all of us today.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [55]
+--------------------------------------------------------------------------------
+
+          Okay.
+
+--------------------------------------------------------------------------------
+Operator    [56]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Saul Martinez with UBS.
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS Investment Bank, Research Division - MD and Analyst    [57]
+--------------------------------------------------------------------------------
+
+          A couple of questions. First, can you comment on the sustainability, broadly, of your returns in your markets and banking businesses? 15% return on allocated equity in markets, 18% banking despite the fact that you increased your capital allocation there. Obviously, if you can sustain those kinds of returns, it goes a long way towards helping you hit your 12% ROTCE targets on a sustainable basis. So just can you comment broadly on how confident you are to -- in your ability to, say, hit sort of mid-teen returns in those businesses?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [58]
+--------------------------------------------------------------------------------
+
+          We have been getting, in Global Markets, a double-digit return now for a number of quarters. It's been in the 10-ish, 11% range for a number of quarters. So we feel like, in Global Markets, we've made a tremendous amount of progress in improving returns. In Global Banking -- and remember, this quarter where they did 15%. But this quarter, I think we had a very strong quarter in sales and trading. Our performance in Global Markets is going to be a direct result of client activity, as we say every quarter. So when client activity is lower, our results will be lower, but through a number of different quarters now with varying amounts of client activity, I think we've been able to get at 10% or more return on equity. So that's how I'd answer it from that perspective. In Global Banking, again, those returns are somewhat dependent on client activity in Investment Banking, but there, I think the Global Banking segment is less volatile with respect to returns tied to the Investment Banking fee pool in any given quarter. We have a diverse product set across treasury service, traditional corporate banking products and Investment Banking products. And then from a client perspective, we're the full spectrum: Small, medium-sized and large global companies. So there, I would expect us to be able to main those -- maintain that return level.
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS Investment Bank, Research Division - MD and Analyst    [59]
+--------------------------------------------------------------------------------
+
+          Okay, that's helpful. Yes?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [60]
+--------------------------------------------------------------------------------
+
+          The thing I'd add to that is if you think about what we did, we took Global Banking because we think that is an integrated business, whether it's corporate Investment Banking with both the corporate side and Investment Banking side or middle market banking, what we call Global Commercial Banking, again, with Investment Banking capital markets behind obviously less than GCIB. We split that out to show you that, that business -- many years ago, we broke Global Banking away from Global Markets to show that the [ distinctness ] in the business at Global Banking was more of an annuity stream driven by treasury services revenue, lending revenue and then Investment Banking fees, which ebb and flow based on client activity and the returns are fairly consistent, et cetera. The flip side was we also wanted to show -- I think doing this 5, 6 years ago when we first did it, and have been doing it at ever since. And we're were one of the few companies that does it. On the Global Markets side, you can see that there's actually more stability in that business than a lot of people thought. So if you look on the low end, we might make $600 million, $700 million after tax. On the high end, we made $1.3 billion this quarter, but you'll see this range. And if you look across years of quarters and look at the comparative quarters year-over-year because there's some seasonality, you'll see it's relatively stable. And so we've sort of hit that double-digit level in the worst of quarters during a year and then in the best of quarters, it will kick above it. That was, again, how Tom and the team -- Tom Montag and the team run the business. The stability we put in. And then most importantly was bringing the expense structure down dramatically 5 or 6 years ago, Tom and the team did by almost $1 billion in a quarter in operating expenses just in this markets business alone, and then maintaining it there and continuing to push it down while revenues have stabilized and come back up.
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS Investment Bank, Research Division - MD and Analyst    [61]
+--------------------------------------------------------------------------------
+
+          Yes, no. That's helpful. So I mean, obviously one of the things that's been helpful for returns in banking is a very benign credit environment. Commercial charge-offs were 10 basis points this quarter, it hasn't really moved much in recent quarters. But how do you -- how should we think about more of a sustainable level? And is there anything there that makes you think that you could start to see some sort of inflection or some sort of an uptick in terms of credit costs?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [62]
+--------------------------------------------------------------------------------
+
+          Are you referring to more sustainable on the net charge-off side?
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS Investment Bank, Research Division - MD and Analyst    [63]
+--------------------------------------------------------------------------------
+
+          Yes, exactly. On commercial.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [64]
+--------------------------------------------------------------------------------
+
+          I guess what I would -- how I would answer the question is we have been -- we changed our underwriting standards years ago. We've been focused on responsible growth now for a number of years. We've been sticking with that improved client selection, heightened credit standards. So the answer is we can't compare to a previous period in the company's history. We're just going to have to see how this develops. But we're very confident. We don't see anything today, as we look at what's going on in the marketplace, that would suggest that we're at an inflection point. It doesn't mean that I won't be talking to you about -- next quarter about having lived through an inflection point, but we're not seeing anything right now that would tell us that we should expect net charge-offs to rise in the near term. In the long term, there is some seasoning going on in the credit card portfolio that we expect and we've talked about before. But outside of that, we feel good about where our credit card quality is.
+
+--------------------------------------------------------------------------------
+Operator    [65]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Brian Kleinhanzl with KBW.
+
+--------------------------------------------------------------------------------
+Brian Kleinhanzl,  Keefe, Bruyette, & Woods, Inc., Research Division - Director    [66]
+--------------------------------------------------------------------------------
+
+          Great. Yes, I just had a quick question. I remember you saying that both the business -- or the commercial customers and consumer customers were optimistic still. But did you see a change in that optimism over the course of the quarter? I mean, did it end lower at the end of the quarter given what was going on with D.C. and everything else? Or was it fairly consistent?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [67]
+--------------------------------------------------------------------------------
+
+          I'd say -- I could say consistent. And if you looked at spending, I think it actually maintains its pace through the quarter. As an indicator of their behavior, March was a stronger month than the first 2 months of the quarter. Now you can get into day counts and movements around which weekends fall, but just we didn't see any fall-off in terms of their behavior in spending, which I think is a good indicator of how they're feeling.
+
+--------------------------------------------------------------------------------
+Operator    [68]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Matt O'Connor with Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matthew D. O'Connor,  Deutsche Bank AG, Research Division - MD in Equity Research    [69]
+--------------------------------------------------------------------------------
+
+          I just wanted to follow-up on the net interest income one more time. I mean, it feels like the 2Q expectation is a little bit less, certainly versus what I would have thought. And I guess I'm trying to figure out if it's just some conservatism on the deposit repricing assumption. You talk about 50%, but it's been really insignificant so far for the Fed hikes. So I'm trying to gauge, is it conservatism on that? Is it the fact that 10-year has obviously come in a fair amount? Or some combination of both, maybe?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [70]
+--------------------------------------------------------------------------------
+
+          So I'm not going to take you through the math again because the math is fairly self-explanatory, but you've -- there are a lot of assumptions, or I should -- I'll call them assumptions, but there's a lot of things that go into the modeling of NII. You hit upon one of them. Obviously, we could have deposit betas that are different than what we're expecting as we're doing our modeling. The 50 basis points, obviously, is for a full 100% shock. We're talking about a 25% shock. So it's reasonable to expect that we would be lower than 50% for that first 25%. I think the question is how should we be? And we're just going to have to wait and see. We're very focused on the competitive environment. We're focused on the needs and wants of our clients. And we're focused -- we're balancing all of that against what our shareholders would want us to do. So we're just going to have to see how it develops, but there's a lot of things that go into the modeling of expected NII.
+
+--------------------------------------------------------------------------------
+Matthew D. O'Connor,  Deutsche Bank AG, Research Division - MD in Equity Research    [71]
+--------------------------------------------------------------------------------
+
+          Okay, understood. And then just the impact of long-term rates. I mean, obviously, the comment you made on rate leverages for higher rates and your 75% lever on the short end, as we think about the decline here in long rates, if it holds, how [ frame ] kind of the drag on that. And I think it bleeds in over time, obviously, not all at once.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [72]
+--------------------------------------------------------------------------------
+
+          Yes. The sensitivity on the long end is a function of being able to reinvest as assets mature at higher or lower rates than the average we have now and what it does to the amortization of our premium on our securities portfolio. The latter is a bigger driver in the short term, the former is a bigger driver in the long term. If you think about the company right now, where long-term rates are, we've said this on other calls, we're kind of -- we used to be at equilibrium where an asset rolling off the balance sheet was being replaced by assets rolling on the balance sheet at roughly the same yield. I would say we're in a little bit more positive place right now where even where our rates are, having long-term rates have gone up here over the last 2 quarters, we're sort of in a position where an asset rolling off the balance sheet, on average, is being replaced by an asset coming on at slightly higher yield. So I don't know if that helps you.
+
+--------------------------------------------------------------------------------
+Matthew D. O'Connor,  Deutsche Bank AG, Research Division - MD in Equity Research    [73]
+--------------------------------------------------------------------------------
+
+          Yes, no. That's very clear and very helpful.
+
+--------------------------------------------------------------------------------
+Operator    [74]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Marty Mosby with Vining Sparks.
+
+--------------------------------------------------------------------------------
+Marlin Lacey Mosby,  Vining Sparks IBG, LP, Research Division - Director of Banking and Equity Strategies    [75]
+--------------------------------------------------------------------------------
+
+          Two technical issues on the kind of net interest margin, NII. When you look at the big benefit in net interest margin, it seems like you had several things, like the hedge ineffectiveness and leasing, that pushed the margin up. And even though you can have NII growth, your margin may even kind of just flatten out. Was there kind of a bias towards the margin just being a little bit higher, given some of those moving pieces this particular quarter?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [76]
+--------------------------------------------------------------------------------
+
+          Look, the bulk of the increase from Q4 to Q1, the $700 million, the bulk of it was due to rates. We just would highlight that there was meaningful improvement that was driven by the leasing seasonality. Think about that as roughly the kind of improvement we get with an extra day in a quarter. And then there was, I think, significant improvement driven by the lack of hedge ineffectiveness in the first quarter relative to what we experienced in the first quarter. But the bulk of it was driven by rates. And if you think about the rate impact, more than half of the rate impact was driven by the long end as opposed to the short end.
+
+--------------------------------------------------------------------------------
+Marlin Lacey Mosby,  Vining Sparks IBG, LP, Research Division - Director of Banking and Equity Strategies    [77]
+--------------------------------------------------------------------------------
+
+          And I was just focusing on the margin in the sense that just like it was rounded up because the things that are going to help next quarter are going to help NII, which may not help the margin. But then the second question was when you look at your transfer pricing mechanism, was curious because it doesn't seem like a lot of banks would have the benefit from rates showing up in corporate other. Is your mechanism, where it's still spreads some of that -- because that will matter on operating leverage for the business segments. So are the segments going to benefit as rates go up more than corporate? It does seem like it's spread out more than other banks.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [78]
+--------------------------------------------------------------------------------
+
+          I think over the longer -- in any one quarter, it could be a little bit lumpy on what -- how company overall benefits versus the segments. But I think over time, over multiple quarters, the segments will benefit. It's just basically a function of how residual flows back to the -- to our segments.
+
+--------------------------------------------------------------------------------
+Marlin Lacey Mosby,  Vining Sparks IBG, LP, Research Division - Director of Banking and Equity Strategies    [79]
+--------------------------------------------------------------------------------
+
+          It is. It just seems like you've got a good methodology to push it to the segments, which is helping operating leverage in each of those segments as you're getting that benefit
+
+--------------------------------------------------------------------------------
+Operator    [80]
+--------------------------------------------------------------------------------
+
+          And we'll take our next question from Andrew Lim with Societe Generale.
+
+--------------------------------------------------------------------------------
+Andrew Lim,  Societe Generale Cross Asset Research - Equity Analyst    [81]
+--------------------------------------------------------------------------------
+
+          Another NII question, actually. I'm just trying to understand the mechanics of how your guidance in 4Q for a $6 billion uplift in NII, a 400 basis point shock, has come down to about $3.3 billion there. If I understand correctly, the long end has increased, so that reduces your guidance going forward. Is that the way to think about it?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [82]
+--------------------------------------------------------------------------------
+
+          Yes. I think if you look at our disclosures, you'll see that the 100 basis point rate shock at the end of the year was basically the same as rates it is right now. You're referring to what we reported at the end of Q3 being 4-point-something. And that decline in benefit we experienced as rates rose, and that went into our run rate of NII that, as Brian mentioned earlier.
+
+--------------------------------------------------------------------------------
+Andrew Lim,  Societe Generale Cross Asset Research - Equity Analyst    [83]
+--------------------------------------------------------------------------------
+
+          What I've got difficulty understanding is why a past movement in your long rates should affect your future guidance going forward. So if I think about it hypothetically, let's say the yield curve did actually go up by 100 basis point shock in the fourth quarter, then your guidance going forward would actually be 0, based on the way you view it. Is that the way to think about it? Or am I missing it?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [84]
+--------------------------------------------------------------------------------
+
+          No, I think you have to go back. If you look -- you can follow up with Lee afterwards, but if we think about what we told you in the fourth quarter, from the third to the fourth quarter, I think you may be off a quarter. From the third to the fourth quarter, what we said is you basically capitalize into the earnings run rate that $2 billion difference, is now in the earnings run rate. And that's what you're actually seeing. And that's a benefit of the lift in rates, the special on the short-term side. And so that is relatively stable now because the -- that piece went through it. So Lee can follow up with you and take you through sort of the calculation. But it's because -- the good news is it showed up in earnings this quarter as we said it would.
+
+--------------------------------------------------------------------------------
+Andrew Lim,  Societe Generale Cross Asset Research - Equity Analyst    [85]
+--------------------------------------------------------------------------------
+
+          No, absolutely. I can see that. Just trying to see how that moves depending on the shape of the -- the shift in the curve.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [86]
+--------------------------------------------------------------------------------
+
+          Well, because the future investment rate on the long-term rates as it comes down, as the earlier caller talked about, affects our yields on our securities portfolio going forward as we reinvest $20 billion-plus a quarter. So let's -- I'll get Lee to call you afterwards, he can take you through that.
+
+--------------------------------------------------------------------------------
+Operator    [87]
+--------------------------------------------------------------------------------
+
+          And we have no further questions at this time. I'd like to turn it over to Mr. Moynihan for any closing remarks.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO and President    [88]
+--------------------------------------------------------------------------------
+
+          Well, thank you, all of you, for your time. Just to remind you, this is a quarter where we showed our responsible growth coming through. Revenue growth of 7%, flat expenses, 700 basis points of operating leverage across our franchise, good client growth in each of the business. And our asset quality remains strong. So we look forward to talking to you next quarter. Thank you for your time and attention.
+
+--------------------------------------------------------------------------------
+Operator    [89]
+--------------------------------------------------------------------------------
+
+          This conclude today's call. You may disconnect at any time and have a wonderful day.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
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exam/original-files/Problem_1_Sample/2017-Apr-27-AMZN.OQ-139668306179-Transcript.txt

@@ -0,0 +1,418 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2017 Amazon.com Inc Earnings Call
+04/27/2017 05:30 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian T. Olsavsky
+   Amazon.com, Inc. - CFO and SVP
+ * Darin Manney
+   Amazon.com, Inc. - Head of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Heath P. Terry
+   Goldman Sachs Group Inc., Research Division - MD
+ * Ronald V. Josey
+   JMP Securities LLC, Research Division - MD and Senior Research Analyst
+ * Stephen D. Ju
+   Credit Suisse AG, Research Division - Director
+ * Eric James Sheridan
+   UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst
+ * Gregory Scott Melich
+   Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst
+ * Jason Stuart Helfstein
+   Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst
+ * Daniel Salmon
+   BMO Capital Markets Equity Research - Media and Internet Analyst
+ * Justin Post
+   BofA Merrill Lynch, Research Division - MD
+ * Brian Thomas Nowak
+   Morgan Stanley, Research Division - Research Analyst
+ * Douglas Till Anmuth
+   JP Morgan Chase & Co, Research Division - MD
+ * Mark S. Mahaney
+   RBC Capital Markets, LLC, Research Division - MD and Analyst
+ * Colin Alan Sebastian
+   Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
+ * Mark Alan May
+   Citigroup Inc, Research Division - Director and Senior Analyst
+ * Scott W. Devitt
+   Stifel, Nicolaus & Company, Incorporated, Research Division - MD
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q1 2017 Financial Results Teleconference. (Operator Instructions) Today's call is being recorded. For opening remarks, I'll be turning the call over to the Director of Investor Relations, Darin Manney. Please go ahead.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Head of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q1 2017 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO.
+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. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2016.
+Our comments and responses to your questions reflect management's views as of today, April 27, 2017, 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 in our most recent annual report on Form 10-K and subsequent filings.
+During this call, we may 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.
+Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates; changes in global economic conditions and customer spending; world event; the rate of growth of the Internet, online commerce and cloud services; and the various factors detailed in our filings with the SEC. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements. It's not possible to accurately predict demand for our goods and services, and therefore our actual results could differ materially from our guidance.
+Before moving to Q&A, I would like to draw attention to a new accounting rule that we implemented in Q1. The new rule requires excess tax benefits from stock-based compensation to be presented as an operating activity in the consolidated statements of cash flows. We retrospectively adjusted our consolidated statements of cash flows to reclassify excess tax benefits from financing activities to operating activities. And as a result, you will see an increase in our free cash flow measures for prior periods.
+Additionally, beginning January 1, 2017, the excess tax benefit or deficiency for stock-based compensation is recognized as a component of tax expense rather than equity. This change resulted in a decrease to our tax expense for the quarter and a corresponding increase to our net income and earnings per share. Specific changes are presented in the footnotes to the consolidated statement of cash flows and related metrics provided in our press release. Further disclosure of the impact of the adoption of this accounting change can be found in our Form 10-Q.
+With that, we'll move to Q&A. Operator, please remind our listeners how to initiate a question.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) Our first question comes from Justin Post with Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch, Research Division - MD    [2]
+--------------------------------------------------------------------------------
+
+          Got it. Saw on the front pages of release you're really focused on India. Can you give us a progress update on how you're doing? Any thoughts on how far you're willing to take the investment levels there? And what are your thoughts on maybe when international margins can start to make progress?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [3]
+--------------------------------------------------------------------------------
+
+          Sure, Justin. Thank you. Yes, I think Jeff's comments were pretty dead on. The launch of Prime last year was a big turning point. We've increased Prime selection by 75% since launching that 9 months ago in India, also increased the fulfillment capacity for sellers by 26% this year. On the content side, we've announced 18 Indian Original TV series, and we're customizing the content. So it's a really vast selection of local and global movies and TV shows that are available to the Indian public. You'll also notice that the Fire TV Stick was -- the new version of it was launched in India with some important features there, such as the ability to search in Hindi and in English, free data usage for 3 months and also data monitoring, which is important there. So we're -- again, we continue to be encouraged by both the response from customers and sellers. As far as level of investment is concerned, it is certainly one of our important investment areas. We see a lot of potential for the country and our business there.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch, Research Division - MD    [4]
+--------------------------------------------------------------------------------
+
+          Any thoughts on how much this is impacting your international profitability?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [5]
+--------------------------------------------------------------------------------
+
+          Sure. I can't quantify it, but -- or break out specifically, but I will say it's a large factor as well as a couple other things in the international segment. So keep in mind that we launched Prime Video in the fourth quarter, and now we have that in over 200 countries and territories. We're spreading a lot of the Prime benefits that we've seen in North America to other countries. We just opened up AmazonFresh in Tokyo last weekend, but also Prime Now. You saw other things like our business -- B2B business just opened up in the U.K. We have Amazon devices. So there's a lot of moving parts here. The other big influence is the same trends are happening in international with respect to FBA growth and the fact that our Amazon fulfilled network or the units we shipped are growing at much faster clip than our paid unit growth. Last year, we said that was a 40% -- nearly 40% growth worldwide, so we're making the investments in warehouses, fulfillment capacity and delivery capacity to handle that. So there's a lot going on in international. We are very encouraged with the growth of the Prime program, and we're hopeful for the Prime Video that we launched in the fall.
+
+--------------------------------------------------------------------------------
+Operator    [6]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Mark Mahaney with RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark S. Mahaney,  RBC Capital Markets, LLC, Research Division - MD and Analyst    [7]
+--------------------------------------------------------------------------------
+
+          Okay. 2 questions. The North American operating margins seem to come down like 70 bps year-over-year, and I know it's not a big focus of you, the margins. I get that, but it's sort of a change. You've had margins be flat or up year-over-year for quite some time and now they dip down. Just could you explain that? And then secondly, on these -- on the Echo devices, the Echo family, Alexa devices that are coming out, could you comment at all about what kind of impact you're seeing in terms of increased wallet or per share within household? Are you seeing that have an impact in terms of Amazon customers more likely to spend more once they have these devices in particular categories like groceries or household products, Pantry, products that they're more likely to spend because they have these devices in their houses, in their kitchens, in their living rooms?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [8]
+--------------------------------------------------------------------------------
+
+          Sure, Mark. Let me start with the Echo question first. So yes, we're very encouraged by the customer response to the Echo products. Not only the Echo products, but the ability to use tablets -- our tablets now as Echo devices since we've spread the Alexa technology to many of those devices. And we're also happy with the success we've had with developers. There's over now over 12,000 Alexa skills. So we think that's all foundational. The monetization, as you might call it, is -- the theme of your questions, that's not our primary issue right now. It's about building great products and delighting customers. We think as engagement -- as we pick up engagement with the devices, it helps the engagement with Amazon as a whole. So whether someone is ordering off their Alexa device or whether they're going to their phone or going to their computer, it all has the same effect for us. So very, very pleased with the initial progress. We see a lot of momentum there, and we continue to invest. And that's one of the answers to your second question on North America operating margin. So if I step back, let me just talk generally about investment. So right now we're just seeing a lot of great opportunities before us, and we're continuing to ramp up the investments in pursuit of those opportunities. And the big picture is, again, as we've said, customers -- we want the things that customers love, can grow to be large, will have strong financial returns and they're durable and can last for decades. So in that category and some of the things that we are investing the most in are, as you say, the Echo and Alexa devices. We're doubling down on that investment, video content and marketing, not only in the U.S. but globally with the launch of our Prime Video in the fall. So we're building global scale in that business in both content and marketing. As I said earlier, we're expanding Prime benefits in the U.S. and also globally, things like Prime Music, Prime Now, AmazonFresh, all expanding globally. And we've launched Prime in India, China and Mexico. I know I'm drifting a bit from North America, but it's all part of the same theme. We also have this trend going on in our fulfillment networks where strong FBA growth and high growth in Amazon fulfilled units is resulting in a large increase in fulfillment capacity. We're also investing in new technologies, such as artificial intelligence, machine learning. You're starting to see some of that show up in things like Amazon Go, our beta store that we've developed in Seattle; drones. We use those technologies a lot in our internal businesses, and we're also developing services for AWS customers. So -- and that's -- of course, another area as AWS continues to grow and add services and features and doing so at an accelerating rate. So there's a long list and I can keep going, but I think the general theme is we're -- there's a lot of investment in front of us that we're optimistic about and we continue to ramp those investments. In North America, that manifests itself mostly in the device area, the content area and also the expansion of the fulfillment networks.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Brian Nowak with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Thomas Nowak,  Morgan Stanley, Research Division - Research Analyst    [10]
+--------------------------------------------------------------------------------
+
+          I have 2. Just the first one, Amazon always has a pretty big focus on efficiency. So I'd be curious to talk -- if you could talk about examples or areas where you've been able to iron out inefficiencies in the fulfillment process. And there's -- any still existing examples where you see low-hanging fruit to really improve fulfillment efficiency? And then just back to the point on investment, you didn't mention brick-and-mortar at all, yet there's been a lot of mention in the press about Amazon brick-and-mortar. I guess I'd be curious to hear how you think about the importance of an Amazon brick-and-mortar presence and how that fits into the long-term strategy.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [11]
+--------------------------------------------------------------------------------
+
+          Sure thing. So particularly as it pertains to our fulfillment center networks, I think the biggest areas of efficiency right now are in our Amazon robotics areas. That technology continues to improve, and we've -- we're now multiple generations down. We just launched a Amazon robotics fulfillment center in the Tokyo area recently. And so toward that last month, and it's just amazing to see the strides that the Amazon robotics has taken and the efficiency we're getting in our warehouse as a result. The other efficiencies we're seeing are network efficiencies, especially as we had things like sort centers. It's a collaboration and a movement between warehouses and sort centers and then to the end customer. The ability to have control through our sort centers has allowed us over the last few years to cut off our -- to extend our cut off times from 3 p.m., in most cases, till midnight. So greater control of our processes. If we do it cost-effectively, it can also have favorable benefits both for our warehouse flow and also for our customers and their ordering pattern. So there's a lot of efficiencies that are going on day-to-day around here. One of the benefits of rapid growth and -- is the ability to create leverage on purchases and a lot of the processes that we run. So your second question was on stores. Yes, yes, I think you're seeing the expansion of our bookstores. We have 6 bookstores right now, and we've announced another 6. The Amazon Go is in beta in Seattle. And while that's not large and it's only one site, we're excited about the potential there and the use of the technologies of computer vision, sensor fusion and deep learning. We think that has a lot of potential. Again, it's only one location. That's still in beta. But along with the bookstores, we also have -- you'll see us in pop-up stores and college pickup points. So for us, it's another way to reach the customer and test what resonates with them, and we're pleased with the results.
+
+--------------------------------------------------------------------------------
+Operator    [12]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Ron Josey with JMP Securities.
+
+--------------------------------------------------------------------------------
+Ronald V. Josey,  JMP Securities LLC, Research Division - MD and Senior Research Analyst    [13]
+--------------------------------------------------------------------------------
+
+          Brian, I think you mentioned accelerating growth within AWS on new products, and last year you added about 1,000. Can you just talk about maybe the plans for AWS and product growth going forward here in 2017 and the focus on innovation?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [14]
+--------------------------------------------------------------------------------
+
+          Sure. Yes, we haven't updated that number, but suffice to say, the innovation pace continues to accelerate. We are very proud of the launches in Q4: the Amazon Connect, which we think will provide customer service-like capability to customers; and Amazon Chime, which we also believe will resonate with customers. We've had a lot of adoption of our new services. We've got customers migrated more than 23,000 databases using the AWS data -- database migration service since that launched last year. And just generally, we continue to expand geographically. We've announced additional Availability Zones and regions worldwide. So again, we signed a number of big customers. I guess I would point out in the quarter Liberty Mutual, Snap and Live Nation, all starting relationships with us or expanding their current relationship. We're now over $14 billion run rate, but we're happy with the business and the team. And again, for us innovation is going to be key as we move forward.
+
+--------------------------------------------------------------------------------
+Operator    [15]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Dan Salmon with BMO Capital Markets.
+
+--------------------------------------------------------------------------------
+Daniel Salmon,  BMO Capital Markets Equity Research - Media and Internet Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Brian, a couple questions about your growing advertising business. We see more and more of it appearing on the site, and I was interested to hear a little bit more about how you expect that business to roll out internationally. I think it's largely U.S.-based today, but be curious to hear about that. And then second, I think it's fairly obvious what someone selling within the Amazon ecosystem would be interested in promoting on the platform. But maybe tell us a little bit about maybe over the long term, there are opportunities for sort of non-endemic advertisers within your platform.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [17]
+--------------------------------------------------------------------------------
+
+          Sure. Yes, we're -- it's pretty early in the days with advertising, but we're very pleased with the team we have and the results. Our goal is to help -- is to be helpful to consumers and enhance their shopping or their viewing experience with targeted recommendations, and we think a lot of the information we have and preferences of customers and recommendations help us do that for customers. We have -- Sponsored Products is off to a great start, and it's a very effective way for advertisers to reach those especially interested customers. While you're on the topic of advertising, I thought I'd point out that in other revenue -- advertising is in other revenue, as is co-branded credit card agreements and also some other advertising services. That decelerated from 99% to -- in Q4 to 58% in Q1, but the fluctuation and the volatility was essentially in the co-branded credit card agreements and the other services, which can fluctuate quarter-to-quarter based on contract terms and that's what happened. Advertising was -- remains strong and was consistent growth with Q4.
+
+--------------------------------------------------------------------------------
+Operator    [18]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Stephen Ju with Credit Suisse.
+
+--------------------------------------------------------------------------------
+Stephen D. Ju,  Credit Suisse AG, Research Division - Director    [19]
+--------------------------------------------------------------------------------
+
+          So you periodically disclosed usage growth for AWS, but it has been some time since we saw one. So we're wondering if you can update us in terms of where you are now. If not, I mean, should we think about the growth in your cash deployment as an indicator of the ongoing growth?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [20]
+--------------------------------------------------------------------------------
+
+          Yes, sorry, I don't have a usage number to share with you today. If it'll help, I will tell you that, again, we're now over $14 billion run rate. You clearly see our -- we break out very clearly our AWS segment revenue and operating income. And you'll also keep in mind that there's price decreases that are part of the business, and we're pretty public when we do those. And if you remember last call, I mentioned that we had 7 price increase -- or excuse me, price decreases that were timed for December 1. So about 1/3 of the impact of those was seen in Q4 and then, again, that's one element of the sequential operating margin. But in general, we're very happy with that team and the progress they're making. And we're deploying more capital, as you can see, to support the usage growth.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Douglas Anmuth with JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Till Anmuth,  JP Morgan Chase & Co, Research Division - MD    [22]
+--------------------------------------------------------------------------------
+
+          I just want to ask you about CapEx. It looks like CapEx, including leases, more than doubled year-over-year. So I know you listed kind of a long list of the many investment opportunities here, but can you just point out anything else in particular that drove the pretty substantial increase there?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [23]
+--------------------------------------------------------------------------------
+
+          Sure. Yes, CapEx, which is principally the fulfillment centers, was -- grew 51% year-over-year. As you'll remember, we added 26 warehouses last -- fulfillment centers last year, 23 in the second half of the year. Some of that cost of startup is before the startup. Some comes in a quarter afterwards. So there was some carryover from that. But generally, the biggest trend here is that the difference -- differential between Amazon fulfilled network unit growth and paid unit growth. So that nearly 40% growth in Amazon fulfilled units last year and the continuation of the strong growth higher than the paid unit growth that we see in 2017 is resulting in a lot of fulfillment center capacity. And the fulfillment centers, I will also say, with the robotics technology tend to be more capital intensive than prior versions of warehouses and then they're -- generally have much better operating efficiencies and variable costs following their start up. On the capital leases, as grew 45%. A good deal of that is tied to the AWS business. As I just mentioned, a lot of that's tied to unit -- excuse me -- usage growth. But I'll caution, CapEx can fluctuate quarter-to-quarter. And if you look back to last year, the trailing 12 months was only 7% growth from the quarters through Q1 of last year. So certainly, there was a bigger step up in 2016, now carrying into 2017.
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Mark May with Citi.
+
+--------------------------------------------------------------------------------
+Mark Alan May,  Citigroup Inc, Research Division - Director and Senior Analyst    [25]
+--------------------------------------------------------------------------------
+
+          I know that we talked about over the last couple quarters that part of the step up in CapEx was to catch up from the underinvestment in '15. Just curious if you'd say -- have you made a lot of progress in terms of catching up with some of the fulfillment needs that you saw necessary in the business at the beginning of last year? And then I know you just said that you're -- it still is early days in terms of advertising. But there's a perception out there that over the last year or so, that the company has sort of really begun to focus more on this business opportunity. Has something really changed at the business in the last year? And do you see advertising becoming a more meaningful part of the business over the near to midterm, I guess?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [26]
+--------------------------------------------------------------------------------
+
+          Sure. Let me start with advertising. So yes, I think scale is helping. We have great teams working on advertising for a while now. Our scale in number of customers, number of clicks, number of eyeballs and new content -- or excuse me, video content and other opportunities for advertising has really helped create some scale in that business. So we're very happy. I can't project it forward, but we're happy with the growth there. I think the Sponsored Products was a very inventive move for us, and I think that is having some really good impact on advertising growth. On your second point about fulfillment capacity, here's how I'd generally -- I'd generalize it. We -- in Q4 of 2015, we were pretty vocal, or pretty transparent anyway, that we ran out of space in Q4, especially due to some very strong demand for FBA space and services. Last year, we changed some of our incentives to -- and worked with FBA merchants to try and have their throughput to our FCs, particularly in Q4. That, combined with the step up in fulfillment centers that I mentioned, the 26 new ones, left us in a really good position. We had a very clean holiday, and we think it worked well for both customers, Amazon and also for sellers, especially for FBA sellers. So yes, that leaves us now continuing to grow internationally as well because we continue to see strong FBA adoption, and it's a big part of our business, and it's a big part of our value with the additional Prime eligible ASINs that FBA provides. So again, it's -- they're self-reinforcing, the FBA program and also our Prime program. Prime program attracts more people to Amazon, and they buy more, including FBA products. And conversely, more FBA products in our warehouses helps our in stock of things that people want to buy, Prime eligible in stock, and that helps reinforce the Prime program.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Heath Terry with Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath P. Terry,  Goldman Sachs Group Inc., Research Division - MD    [28]
+--------------------------------------------------------------------------------
+
+          Wondering if you could give us a sense of how we should think about the increase in unearned revenue. Obviously this quarter, the biggest increase that you've seen from at least from a dollar perspective. What does that say about the way customers are changing in the behavior in the AWS business? How should we think about the way that, that might be impacting pricing mix, near-term growth?
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Head of IR    [29]
+--------------------------------------------------------------------------------
+
+          Heath, this is Darin. Yes, on the deferred revenue balances, as we've said in the past, the primary drivers of that increase are both the activity that we're seeing with our AWS customers and the purchase of Reserved Instances and prepaid credits for their account as well as Prime member purchases. We're not breaking out the specific growth rates for Prime. But certainly, we like what we see in terms of the growth, and it's been consistent with what we've seen over the last quarter or so. Certainly, part of that increase in deferred balances is related to Reserved Instances as customers get more comfortable and begin to put more sustained workloads into the AWS services. Through buying RIs, they're able to get fairly significant discounts on their usage. And so we like that model, customers certainly like that model and collecting that through deferred revenue and then letting customers use that over time is very helpful.
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Colin Sebastian with Robert W. Baird.
+
+--------------------------------------------------------------------------------
+Colin Alan Sebastian,  Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst    [31]
+--------------------------------------------------------------------------------
+
+          Question on the transportation and logistics initiatives and, in particular, if you could share any of the facts or learnings thus far with air cargo. In particular, what kind of performance or cost efficiencies that you may be realizing or expect to realize from this effort.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [32]
+--------------------------------------------------------------------------------
+
+          Sure, Colin. As you pointed out, we're -- we've expanded our own fleet. We now have 18 planes in service for Amazon, and we've announced rights to lease up to 40 planes. So it's gone very well. The ability to control shipments within our network has gone up, and we think the cost is very good. So on that front, it's better control -- better capacity control and especially search capacity and also good costs. So we have great relationships with third-party carriers. We will continue to, and we value all of our partner relationships as we develop our own capability, particularly in intra-network. We're putting it to good use, as I mentioned before, with the sortation center example.
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Scott Devitt with Stifel.
+
+--------------------------------------------------------------------------------
+Scott W. Devitt,  Stifel, Nicolaus & Company, Incorporated, Research Division - MD    [34]
+--------------------------------------------------------------------------------
+
+          I was wondering if you could talk a little bit about where you are in terms of investment and capabilities in India at this point and how you think about that market longer term. And then secondly, also if you could just comment on the limitations and your willingness to invest more throughout LatAm, the way you have more recently in markets like China and India. And if I could, just finally, you've previously discussed satisfaction with the measurements of success for the video product in terms of consumer engagement and the effects on Prime. I was just wondering if you could comment on whether these metrics are continuing to improve as spending continues to rise on video and consumer awareness is seemingly growing as well.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [35]
+--------------------------------------------------------------------------------
+
+          Let me start with your middle question. I think it was about Latin America growth. Let me step back and talk about international growth in general. So it -- our approach varies by country. If you look historically, we've taken multiple approaches. So in China, we bought an existing business, Joyo.com, and built off that base. In India, we started from scratch and have built a lot of things ourselves. And it's always going to depend on the country, the dynamics in that country both for retail, for online and for foreign investment. But a real key factor in all of this generally is management bandwidth as well. So we pick our spots carefully. You'll see -- you heard in the quarter that we've announced the intention to buy Souq in the Middle East. Where does that fit into the strategy? Well, Souq is a pioneered e-commerce in the Middle East, and they're creating great shipping experience for the customers and their multiple countries and they're doing a great job. So we see this as an example where we can learn from them and also support their efforts with our Amazon technology and global resources. So we -- we are in Mexico, but we're not in other parts of Latin America. We're -- we have a business in Brazil, but other countries will take on a case-by-case basis, again, bounded by what our management bandwidth can support and prioritization versus other things. You obviously heard my long list of investments. All of those are pretty much gated by the need for people and software engineers and strong teams to approach them. So international expansion gets played off in the same prioritization that other efforts do.
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Jason Helfstein with Oppenheimer & Co.
+
+--------------------------------------------------------------------------------
+Jason Stuart Helfstein,  Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst    [37]
+--------------------------------------------------------------------------------
+
+          So is there -- just an accounting housekeeping, a way to think about stock-based comp. You guys aren't providing that by segment anymore, but the rates of growth kind of differed by the businesses. And so is there just a way to think about, a, will that be in the Q, or are you not disclosing anymore? And is there a way to think about would, I guess, the patterns be consistent with historical patterns by segment?
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Head of IR    [38]
+--------------------------------------------------------------------------------
+
+          Jason, this is Darin. We, a number of quarters back, started breaking out stock-based compensation by segment, and now we've collapsed that in our op income by segment. So it's definitely in there. We do provide some disclosure by P&L line item on a consolidated basis that helps you identify that stock-based compensation expense in total, and you'll see the trend analysis in the metrics at the back of the press release.
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Eric Sheridan with UBS.
+
+--------------------------------------------------------------------------------
+Eric James Sheridan,  UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst    [40]
+--------------------------------------------------------------------------------
+
+          Maybe I could take 2 away from the press release just to understand a little bit of the quarter-over-quarter cadence. The retail subscription services, that's a pretty big jump up in the growth rate year-on-year in Q1 versus Q4. I think that might be Prime memberships had come on to paid from trial, but just want to understand what maybe what some of the driver was of that quarter-over-quarter in terms of the growth rate. And net shipping costs actually grew at the slowest rate by our count in a couple years. It looks like you're starting to get some improvements there in terms of revenue over costs on the shipping line. I just wanted to know what that was in terms of what's driving that, and can we expect that to possibly continue.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [41]
+--------------------------------------------------------------------------------
+
+          Sure. Let me start with the retail subscription services revenue. So there's multiple things in that category, the largest is Prime membership fees, but also other subscription services like audiobooks, e-books, digital video, digital music and other subscription services. So you're right, there was an acceleration. Much like the comment I had on advertising and the other revenue category, the Prime membership growth rates for Q1 and Q4 last year are relatively consistent. So the volatility is in those other items. So I'm not quantifying the Prime membership or commenting on the growth rates other than to say it's been very strong and Q4 strength has continued into Q1. Your comment on shipping costs, yes, that is going to -- that was a lower unit volume as well. But generally, costs are going to be a combination of the tailwind -- the headwinds obviously are going to be FBA growth and shipping more products ourselves and this expansion of our Prime program and the demand for products from our Prime customers. And demand's been great. Again, there's over 50 million items that people can get delivered to their doorstep within 2 days or, in some cases, next day or same day. So it's going to be a big part of our cost structure, but it's an investment we work hard to reduce as far as rates and we're glad to spend it to support our Prime program.
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+
+          And our final question will come from Greg Melich with Evercore ISI.
+
+--------------------------------------------------------------------------------
+Gregory Scott Melich,  Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst    [43]
+--------------------------------------------------------------------------------
+
+          I have a follow-up and then a new question. The follow-up is would love an update. You talked about the fulfillment centers, but could you update us on where we are in terms of rolling out Prime Now facilities and sorting centers -- just a count? And if you feel that's an area to really ramp-up investment this year, or what you got last year is sort of what you need.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [44]
+--------------------------------------------------------------------------------
+
+          Sure. I'm sorry, you said Prime Now. And what was the other thing?
+
+--------------------------------------------------------------------------------
+Gregory Scott Melich,  Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst    [45]
+--------------------------------------------------------------------------------
+
+          And the sorting centers.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [46]
+--------------------------------------------------------------------------------
+
+          Sort centers, right. Well, I don't have updated numbers for you, but the Prime Now is available in more than 45 cities across 8 countries. The same day is available in 30 cities in the U.S. So that's a bit on the quantification of those. I can't tell you much more on sort centers.
+
+--------------------------------------------------------------------------------
+Gregory Scott Melich,  Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst    [47]
+--------------------------------------------------------------------------------
+
+          But when you think about building out the capacity, it sounds like last year you had that big surge in fulfillment centers. There isn't a similar surge about to happen this year on some of those other areas?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [48]
+--------------------------------------------------------------------------------
+
+          Yes, I can't project that. We're still growing that, and we're happy with the progress in Prime Now and the service that -- the value it creates for Prime customers. And as I said, we've expanded internationally, which is a big goal of ours as well. So we will continue to grow that. I can't quantify it for you right now. The other similar-like facility metric you might want is AmazonFresh is now in 21 metro areas in the U.S. as well as London and Tokyo.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Head of IR    [49]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us on our call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+professional transcriber.  While the Preliminary Transcript is highly 
+accurate, it has not been edited to ensure the entire transcription 
+represents a verbatim report of the call.
+
+EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
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+content of the call has been transcribed accurately and in full.
+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2017-Feb-01-FB.OQ-140831484304-Transcript.txt

@@ -0,0 +1,611 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2016 Facebook Inc Earnings Call
+02/01/2017 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah Crawford
+   Facebook Inc. - VP of IR
+ * Dave Wehner
+   Facebook Inc. - CFO
+ * Sheryl Sandberg
+   Facebook Inc. - COO
+ * Mark Zuckerberg
+   Facebook Inc. - CEO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Ken Sena
+   Evercore ISI - Analyst
+ * Heather Bellini
+   Goldman Sachs - Analyst
+ * Anthony DiClemente
+   Nomura Instinet - Analyst
+ * Brian Fitzgerald
+   Jefferies LLC - Analyst
+ * Scott Devitt
+   Stifel Nicolaus - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Peter Stabler
+   Wells Fargo Securities - Analyst
+ * Doug Anmuth
+   JPMorgan - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook fourth quarter and full year 2016 earnings call.
+(Operator Instructions)
+This call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon, and welcome to Facebook's fourth quarter and full year 2016 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO, Sheryl Sandberg, COO, and Dave Wehner, CFO.
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release, and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.
+During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now I'd like to turn the call over to Mark.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah, and thanks everyone for joining today. This was another good quarter, and a good end to 2016. Our community continues to grow, and now with nearly 1.9 billion people using Facebook every month, and more than 1.2 billion people using it every day. We've seen continued growth in engagement on our platform, and our ad business is doing well too. Total revenue grew by 51% year-over-year to $8.8 billion, and advertising revenue is up 53% to $8.6 billion.
+Facebook stands for connecting people, and creating a global community, [in] 2016, more people than ever made their voices heard. We saw billions of conversations about everything from important elections, to the Olympics, to breaking news stories around the world. And more people are taking advantage of new tools to connect and share on our family of apps, especially with video.
+2016 was also a year that reinforced the importance of connecting the world. Today is the five year anniversary of the day we filed to go public. In our letter to potential shareholders I wrote that, there's a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice, and to help transform society for the future. I believe that now more than ever, and as the largest global community, I see our responsibility as very important, and we'll continue to focus on doing everything we can to bring the world closer together.
+I want to give you an update on our progress over our 3, 5 and 10 year time horizon, with a particular focus on what we're going to be doing over the next few years. I said before that I see video as a mega trend, on the same order as mobile. That's why we're going to keep putting video first, across our family of apps, and making it easier for people to capture and share video in new ways. To make it easier to find and watch videos, we've added a tab at the bottom of the Facebook app, with top videos and recommendations. We've already rolled the tab out to everyone in the US, and we're planning to bring it to more countries soon.
+We're also improving live video as more people use it. New Year's Eve was our biggest live moment ever, with more people going live than at any other time since we launched the product. We're experimenting with live 360 video, audio-only live for people with slower connections, and live face masks and more camera effects. And we'll have more updates.
+Finally, we're looking for ways to grow the ecosystem of video content on Facebook. We want people to think of Facebook as a place for interesting and relevant video content, from professional creators as well as their friends. Last year, we started to invest in more original video content to help the seed ecosystem, and we're planning to do more in 2017.
+We're also focused on building a more informed community. We see Facebook as a community, and ourselves, our role is supporting that community. We don't write the news that you read, but we want to be a place where people can access information, have meaningful conversations, and this is a responsibility that we take very seriously.
+In the past, we've taken steps to reduce spam and click-bait, and now we're approaching misinformation and hoaxes the same way. In Q4, we started working with third-party fact checkers in the US to flag disputed stories, and make them less likely to appear in news. We made it easier to report and identify misinformation, and we're working to build stronger ties between Facebook and the news industry.
+Our primary goal here is to do the right thing for our community. If we can help people stay informed, and make Facebook a better place to understand what's going on in the world, then we think that's going to make our community stronger, and a more positive force for good for the world. So that's the three year update.
+Over the next five years, we're going to keep building ecosystems around our apps, that a lot of people are already using. Growth and engagement on Instagram has been strong. We announced in December, that Instagram now has over 600 million monthly actives, and recently passed 400 million daily active. Instagram Stories reached 150 million daily active, just five months after the launch. And we've added new features like Boomerang and Live into Stories, and I'm excited to see that continue to grow.
+Our messaging services are making good progress as well. In Q4, Messenger launched a new camera, a group video chat for up to 50 people, and games. 400 million people now use voice and video chat on Messenger every month.
+WhatsApp is growing quickly too. We recently reached 1.2 billion monthly active, and more than 50 billion messages are sent through WhatsApp every day. In the last quarter, we also added the ability to make video calls in the app.
+Over the next 10 years, we're going to continue to invest in these platforms and technologies that give more people a voice, and make sharing even more [immersive]. Through our efforts with internet.org, we have now connected more than 50 million people to the internet. And in November, our Connectivity Lab set a world record by transmitting 20 gigabits per second over 13 kilometers using the same amount of power that it takes to light a single light bulb.
+Ultimately, this technology is going to make it into the solar-powered planes that we're building to beam internet to parts of the world that aren't connected. On artificial intelligence, we developed a new technique called style transfer that uses AI to study a painting and then can take your photos and videos, and draw them in that style in real-time on your phone. And if you post on Facebook, looking for a place to eat or suggestions for where to go, we can now use AI to understand the text of your post, and understand what you're asking, and [surface] recommendations from the comment.
+We're still early in our 10 year plans for virtual reality, but we've made some good progress. In December, we shipped our touch controllers, and the community response has been very positive. Samsung announced that they've now shipped more than 5 million Gear VRs, and we're bringing more social experiences to VR with apps like Oculus Rift for Gear VR. We're going to keep making big investments in VR content, and I'm excited about what's coming in 2017, from new games to more immersive educational experience.
+As I said in our call last quarter, we're going to continue to invest in hire and aggressively, to help improve our product, but also to build the infrastructure that will help us grow in the future. A few weeks ago, I visited our newest data center in Fort Worth, Texas. It's going to be the biggest data center we built, powered by 100% renewable energy. And it's a great example of the investments that we're making to help us serve our community even better.
+So we've made some good progress, but we have a lot more to do to help bring the world together. I want to thank our community, our teams, our partners, and all you for being a part of this journey with us. Now here's Sheryl.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hi, everyone. We had a strong fourth quarter, capping off a great 2016. Q4 ad revenue grew 53%. Mobile ad revenue reached $7.2 billion, up [61]% year-over-year, and was approximately 84% of total ad revenue.
+Our growth this quarter was broad-based across all regions, marketer segments and verticals. We're really excited to announce today that [65] million businesses are using our free pages products, and 5 million are using Instagram business profiles. More and more of these businesses are becoming advertisers, with over 4 million advertising on Facebook, and over 500,000 on Instagram. As a result, our revenue base is becoming more diverse.
+In Q4, our top 100 advertisers represented less than a quarter of our ad revenue, which is a decline from Q4 last year. We continue to focus on our three priorities, capitalizing on the shift to mobile, growing the number of marketers using our ad products, and making our ads more relevant and effective.
+First, capitalizing on the shift to mobile. In Q4, we saw consumers use mobile for more of their holiday shopping. [Contour] found that mobile drove over $1 billion in total Cyber Monday sales for the first time ever.
+Marketers are increasingly seeing mobile as the opportunity it is. In 2016, we saw more marketers prioritizing mobile, and especially mobile video. People consume video differently on mobile, so the best marketers are optimizing their creative.
+For example, Hershey's used Facebook Live and video ads for the launch of their Cookie Layer Crunch. They optimized their video ads to grab attention in the few seconds, and used captions for people who were viewing without sound. Nielsen Brand effects measured an 11 point lift in brand awareness, and a 20 point lift in ad recall.
+We are helping more businesses connect with more people on mobile, both on Facebook and off. Last month, we announced that advertisers can reach over 1 billion people a month on the audience network.
+Our second priority is growing the number of marketers using our ad products. It's clear that businesses of all sizes are using our platforms to reach customers. Two weeks ago, I visited Holzconnection, a family-run furniture-maker in Berlin.
+When competition increased several years ago, the owner worried that he might have to close stores. His son joined the family business, and convinced his father to market on Facebook. Holzconnection didn't change anything about their traditional craft, just the way they reached customers.
+Since then, they've opened five new locations both domestic and internationally. We want to help more small businesses grow. So we invited companies including Holzonnection to participate in small business councils around the world.
+We continue to invest in making our free and paid products easier to use, expanding our online tutorials, and offering creative tools for businesses of all sizes. For example, the owners of Distinctive Gardens, a gardening center in Illinois, watched one of our online tutorials, and then used their mobile phone to shoot a holiday-themed video ad, sorry, a holiday themed video. They sold out their holiday inventory.
+Our third priority is making our ads more relevant and effective. Our goal is to drive value for our clients. As we grow the diversity of businesses on our platform, we've invested in building ad products that meet a broad set of objectives, from building brands, to moving product off shelves, online and in stores. To make our ad products as relevant and effective as possible, we're increasingly tailoring them by vertical.
+In 2016, we invested in dynamic ads, which allow advertisers to automatically promote products from their entire catalog. We expanded dynamic ads across Facebook, Instagram, and the audience network and tailored them for verticals like travel and retail. Dynamic ads for travel enables businesses to show ads based on dates and destinations people are interested in, while dynamic ads for retail show people the products available at nearby locations in real time.
+Last month we introduced dynamic ads for broad audiences to help businesses reach new customers based on their interest on Facebook and online behavior. We're going to continue to work on building effective ad products, improving the value they drive.
+We know that measurement is important to building advertiser trust. Last year, we discovered several metric issues, and while no billable metrics were affected, we took action to fix the errors, and reviewed all of our metrics. We also expanded our partnership with third-parties, given the important role they play in verification. We're going to continue to invest in measurement, including third-party partnerships in the upcoming year.
+We believe our strong 2016 is because of the value we drove for businesses on our platform. We're inspired by the entrepreneurs we work with, like the owners of Holzconnection and Distinctive Gardens, and we're grateful for the opportunity to help them reach customers, grow their businesses, and hire more people.
+With only a small fraction of the businesses on Facebook and Instagram advertising, we know we have a lot of opportunity and hard work ahead. In 2017, we'll stay focused on helping businesses of all sizes reach customers around the world and grow. Thanks. And now here's Dave.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. 2016 was another year of strong, profitable growth, and we continued to invest in building our business for the long-term. Full year 2016 revenue was $27.6 billion and grew 54%, or 56% on a constant currency basis, and we generated over $10 billion in GAAP net income.
+Let's start with our community metrics. In December, 1.23 billion people used Facebook on an average day, up 189 million or 18% compared to last year. 1.86 billion people used Facebook during the month of December, up 269 million or 17% compared to last year. In addition to our ongoing internet.org and Android product efforts, we benefited from an increase in third-party promotional free data plans in Asia and the rest of world.
+Mobile continues to drive our growth, with 1.15 billion people accessing Facebook on mobile on an average day in December, up 212 million or 23% compared to last year. Given that the vast majority of monthly and daily usage now occurs on mobile devices, my comments will focus on total MAU and DAU beginning next quarter, and we do not plan to include mobile and mobile-only usage breakdowns in our supplemental investor materials after this quarter.
+Turning now to the financials. My prepared remarks will focus on our GAAP results unless otherwise noted. As I have noted before, we focus on GAAP results because stock-based compensation plays an important role in how employees are compensated in our business and industry more broadly, and we view it as a real expense.
+Q4 total revenue was $8.8 billion, up 51%. Q4 ad revenue was $8.6 billion, up 53%, or 54% on a constant currency basis. Mobile ad revenue was $7.2 billion, up [61]% and represented approximately 84% of total ad revenue. Desktop ad revenue grew 22% despite a decline in desktop usage, helped by our efforts to limit the impact of ad blockers on advertisements served on personal computers.
+The same supply and demand factors we have discussed in the past continue to drive our mobile ads revenue. On the demand side, we continued to improve our targeting, measurement and ad formats to drive strong results for marketers. As Sheryl mentioned, these efforts are working for an increasingly broad set of advertisers.
+On the supply side, growth in users, time spent in ad load also contributed to our strong results. In Q4, the average price per ad increased 3%, and the total number of ad impressions served increased 49%, driven primarily by mobile feed ads on Facebook and Instagram.
+Payments and other fees revenue was $180 million, down 12%. Q4 total expenses were $4.2 billion, up 29%. We ended the year with approximately 17,000 employees, up 34% compared to last year, and an increase from the 31% growth rate last quarter. Q4 operating income was $4.6 billion, representing a 52% margin. Our tax rate was 21%.
+Note that our tax rate reflects our early adoption of a new accounting standard, ASU 2016-9. Under this standard, the tax benefit related to the difference between the vesting price and the grant price of our RSU is now reflected in our income tax provision, whereas previously it was reflected as an adjustment to equity. This is purely an accounting convention change, and does not change the cash taxes we pay. Excluding the impact of this new standard, our Q4 GAAP tax rate would have been approximately 26%, and in line with the guidance we provided on the Q3 call.
+Net income was $3.6 billion or $1.21 per share. Full year 2016 capital expenditures were approximately $4.5 billion, up 78%, as we continue to invest to support the rapid growth of the business around the world. Over the course of 2016, we expanded four of our existing data centers, and began construction of four new data centers.
+In 2016, we generated over $11.6 billion in free cash flow, and ended the year with $29.4 billion in cash and investments. Also note, that the new accounting standard changed how we present operating cash flow, and free cash flow, and the free cash flow calculation. In the past we treated the excess tax benefit as a financing cash flow item, and thus was not included in either cash flow metric.
+Adoption of this standard also resulted in a retrospective adjustment to certain 2016 quarterly financial line items. For more detail on these adjustments, please refer to the supplemental earnings slide available on our investor website.
+Turning now to the outlook. First, on revenue, the outlook is unchanged. Consistent with my comments on the Q3 call, we continue to expect that our ad revenue growth rate will come down meaningfully in 2017. The factors driving this expectation remain the same. We also expect that our full year 2017 payments and other fees revenue will decline, compared to full year 2016.
+Second, on expenses. Consistent with what I said last quarter, we expect that 2017 will be an aggressive investment year. We saw hiring growth accelerate in Q4, and we plan to accelerate hiring further in 2017 from the 34% growth rate. In addition to headcount, we expect to increase investments in R&D, content, sales and marketing, and other areas as we execute on our near-, medium- and long-term priorities.
+We expect that full year 2017 total GAAP expenses will grow 40% to 50% compared to the full year 2016. We anticipate that full year 2017 share-based compensation expenses will be in the range of $3.9 billion to $4.1 billion, approximately $1.3 billion of which is related to acquisitions, most notably WhatsApp. We also expect full year 2017 amortization expenses to be approximately $700 million to $800 million.
+Accordingly, on a non-GAAP basis, we would expect total expenses to grow approximately 47% to 57% compared to the full year 2016. We anticipate our expense growth rates will increase over the course of the year. We expect our full year 2017 capital expenditures will be in the range of $7 billion to $7.5 billion, as we fund the expansion of data center capacity, and office facilities to support the continued rapid growth of our business.
+Turning now to tax. At current stock prices, we expect that our full year 2017 GAAP and non-GAAP tax rates will be 1 to 2 percentage points lower than our respective 2016 tax rates. Let me note two additional factors with the new standard. First, our tax rate will vary based on stock price. And secondly, we anticipate the tax rate will start lower in Q1, and then trend up throughout the year.
+Before wrapping up, as a reminder, in the fourth quarter our Board of Directors authorized a $6 billion stock repurchase program beginning in 2017, with no fixed expiration date. Our main priority is to invest aggressively to grow the business, while maintaining a strong cash position. At this time, the Company's strong balance sheet and financial performance puts us in a position to make opportunistic repurchases of our common stock from time to time, to help offset the dilution incurred through equity issuance.
+To conclude, 2016 was a strong year for Facebook in terms of community growth, engagement, product innovation and the growth of our advertising business. We believe we have significant opportunities ahead of us as we invest in our mission to make the world more open and connected. With that, operator, let's open up the call for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions)
+Your first question comes from the line of Doug Anmuth from JPMorgan.
+
+--------------------------------------------------------------------------------
+Doug Anmuth,  JPMorgan - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. Mark, it's been a couple quarters that you've talked about video first. Can you just talk about the strategic importance of longer form content? And then, also how do you think about that, in terms of distribution platforms both on the Facebook Mobile app, and then through other distribution formats as well? Thanks.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [3]
+--------------------------------------------------------------------------------
+
+          We're focusing more on shorter form content to start. So the thesis that we have now, is that there are different parts of short-term content. There is the type of content that people produce socially for friends. There's promotional content that businesses and celebrities and folks will produce.
+But there's also a whole class of premium content, that the creators need to get paid a good amount, in order to support the creation of that content. And we need to be able to support that with a business model which we're working on through ads to fund that. So the biggest change that I think that we're going to see, on the consumption and news feed, and in the tab over the next year or two, is going to be much more video inventory and content coming in, as we work through and make that business model start to really click for a lot of folks.
+Over the longer term, I think as that works, people will experiment with longer forms of video as well, and all kinds of different things. But that I think is the primary focus for the foreseeable future.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Yes, Doug, I think you asked about platforms. I mean, we've always been focused on a variety of getting our services on a variety of platforms, but the main focus is obviously on mobile.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Brian Nowak from Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. I have two. The first one, Mark, is on Instagram, 400 million daily active users. Curious to be, [interesting] how you think about the core use of Instagram now, and how it differs from core Facebook? And how do you think about that evolving over time, and the monetization of Instagram evolving over time?
+And then, the second one, just to go back to Doug's question on the content. I know, Dave, you mentioned content spend as being part of the investment. Should we think about the content investment being more driven on rev share, or do you see yourselves going out and writing, and doing licensing deals? Thanks so much.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+
+          I can start on that latter question. Our goal really is to kick start an ecosystem of partner content in the video tab, for example, and our model is really oriented towards revenue share with creators. We are funding some seed content to get the ecosystem going, but the focus is on rev share. And then, I think your question was on, how the core use case between Facebook and Instagram differs?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [8]
+--------------------------------------------------------------------------------
+
+          Yes, I can take that one. There are a number of differences. I think a lot of this comes down to the graphs and the community that you have, and the different places. Instagram is a follow model, right? So it's -- they're not all bidirectional friendships. A larger portion of the content is public content.
+More of the content is visual, where Facebook has a mix of text and news and links, and visual content like photos and videos. Instagram creates a pure experience, that's focused on photos and videos. So all of those good and subtle decisions that Kevin has made over the years, add up to creating a different kind of community that, what we're finding -- and that's great -- is that it's really complementary to what people are doing on Facebook.
+And some of what we found is that, as we encourage people to use both Facebook and Instagram, engagement on both can increase. So that is great. And that I think speaks to how you can build these different kinds of communities, with different connections, in a way that really is creating new value in people's lives.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Eric Sheridan from UBS.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [10]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. Maybe two, sticking on the same theme as what Doug and Brian just talked about. Sheryl, for you, would love to get a sense of how you think about some of the opportunities and challenges sitting ahead of the business now, on monetizing all of the video that's being consumed on Facebook?
+And then maybe, Dave, for you, when we think about the P&L impacts of both monetizing video and investing in video, is there anything we should be thinking about, or you want to call out, in terms of gross versus net on either the revenue side or the revenue share side, that could be leading to mix shift to incremental revenue growth, but possibly lower margin revenue coming into the business? Thanks so much.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [11]
+--------------------------------------------------------------------------------
+
+          On the video ad opportunity, we're seeing consumer video exploding on our platform, as Mark has talked about, and that really creates the opportunity for video ads in the feed. And a lot of this happens within the current news feed product. People post videos, people consume news feed stories. Those stories include video stories from consumers, and then we have an opportunity to serve ads. As consumer video has grown in news feed, it's given us that opportunity for video ads, because the format of the ads fit the format of what consumers are doing. And we're seeing a lot of great examples of people using ads in the feed across Instagram and news feed.
+In terms of monetizing some of our newer attempts at products and news feeds such as ad breaks, those are really in early experimental stages. And for now, we're really focused primarily on our core business, our core ad products of which video is one.
+One of the things that's really important in this, is helping marketers understand that they need to optimize those video ads. That an ad that works really well 30 seconds in other platforms, in more traditional platforms, can work on ours, but the ones that are optimized, and use our targeting really perform better. And we're working hard with advertisers to help them see that.
+So to share one example, Motorola working with Ogilvy and [Modomento] launched the Moto Z phone. And they did awareness boosting before they launched, targeting Android users, and Verizon subscribers, and they optimized their video for the Facebook and Instagram mobile feed. And then, after they launched, they did purchasing ads, and retargeted people who had viewed those initial ads. That's just a great example of someone using video ads, optimizing a format, but also using the pretty unique targeting we can offer to drive sales.
+They measured that they had over 3.5% lift in sales, driven by the Facebook and Instagram video ads. And so, we're pretty excited about the opportunity we have in our current business, and we're going to work client by client, to get the video format of those ads right, get the targeting to be as good and as deep as it can be, and make sure we're measuring all the way through to sales.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [12]
+--------------------------------------------------------------------------------
+
+          And Eric, you were asking about content, and where that's going to get picked up in the P&L. There's no real simple answer in that. I would say, in general, where we're going to be rev sharing with creators, that's going to be picked up in cost of revenue. So that's probably the simplest answer.
+But as we do arrangements to get the ecosystem going, some of that could get picked up in the sales and marketing. And then, we have content as well that's getting picked up in R&D for the efforts we're making with Oculus. So you're seeing some of those get spread across several different lines in the P&L. So it's not going to be a clean, one spot where you're going to find it.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [13]
+--------------------------------------------------------------------------------
+
+          Great. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of John Blackledge from Cowen.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [15]
+--------------------------------------------------------------------------------
+
+          Great. Thanks. Just a couple questions. With the strategic shift to video, how do you view the state of the digital flash mobile video measurement? Any call out on improvements being done industry-wide, and within Facebook? And then, just on video search, could you just comment on improvements in video search capabilities for users? Thank you.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [16]
+--------------------------------------------------------------------------------
+
+          Sheryl, do you want to take the question on video measurement, and how that's evolving?
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [17]
+--------------------------------------------------------------------------------
+
+          Yes. So new platforms demand new measurement. And so people are measuring all kinds of different things, from viewability, to how many people see the ad, to how long they run the ad. We're focused on all of these metrics, and working hard with third-parties, and with our advertiser to get those metrics right.
+We really believe that at the end of the day, what matters the most is, all the way through the sale. What matters the most is the [AB] test, that these people saw ads on Facebook and Instagram, these people didn't, and here's the sales lift. And all the other metrics, although important and we're working hard, are proxy metrics. And those metrics are going through a platform shift that we need to work on.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [18]
+--------------------------------------------------------------------------------
+
+          And then Mark.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [19]
+--------------------------------------------------------------------------------
+
+          And for video search, search is a big priority, and the thing that we're working on across all of the different verticals, not just video, but also all the posts on Facebook, all of the content that people are selling in marketplace, the groups that people are joining and sharing, and all the news content. And it's an area that we've been working on for a while. It's growing steadily, and doing well, and we hope to have more updates on that soon.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Mark May from Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. I think the first one might be directed at Sheryl. Your reported pricing metric, I realize there's typically been noise in that. I think it's up 3% year-on-year.
+First of all, is that sort of representative for general pricing changes in the marketplace, and do you think that there's still room for upside in pricing? And if so, where are some of the key areas that you -- where you see that coming from?
+And then, another question on video. As you've begun to push more video content to users within the Facebook app itself, are you witnessing any meaningful changes in engagement time spent, with a typical Facebook app user? Thank you.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [22]
+--------------------------------------------------------------------------------
+
+          Mark, it's Dave. I can take those, on the metrics. From the price volume perspective, yes, the price per ad increased modestly 3%.
+There's lots of different underlying metrics, but the overall kind of reported metric is really, continues to be driven by the mix shift away from right-hand column ads, which are lower price and lower value. And then, obviously impression growth is driven by the user's time spent in ad load.
+In terms of the opportunities for price, it's really just continuing to focus on making our ads better targeted, more relevant, improving all the different ways in which we can drive better outcomes for our advertisers, and sort of meeting them with the results that they care about, and delivering those results. We think there continues to be great opportunities to do that, and how the supply demand dynamics play out, will kind of impact the overall direction of price. And it's going to depend obviously, also on regional mixes too, because some regions are -- have obviously lower prices.
+I think the other question was on video. Video is one of the big drivers of engagement growth on Facebook. It's also helpful on Instagram, where we're also seeing the benefit of ranking changes. So we continue to see good engagement, and time spent growth across the Facebook family, and on just Facebook, and video is a part of that story. So it's an important part of that story.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Justin Post from Bank of America Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Great. A couple things. First, we know a lot of political activity, obviously in Q4. Did that contribute anything abnormally to revenues or users?
+Second question, and I know you'll be getting a lot of this over the next two or three months, but just any difference on trends, millennials on the platform, versus other cohorts or groups, just thinking about how those are trending versus the other groups? And then finally, I think we've seen some ads on Messenger being tested in certain regions of the world. Any commentary on that would be helpful? Thank you.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [25]
+--------------------------------------------------------------------------------
+
+          Yes, I'll take a few of those. So on elections, we run a very large and diversified business. So there are these events that are obviously, big like the US elections, the World Cup, Super Bowl, but there are enough of these all around the world, that no one event is that big for our business. Even last quarter, political spending, even within the US alone, was not a top 10 vertical for us.
+When you think about ads in Messenger, we right now are really focused on consumer growth and engagement, because we know that over time that creates a monetization opportunity. We're seeing a lot of organic connections between businesses and consumers. We're now, per month at 1 billion messages sent between people and businesses, and we think that's very promising for our ability for people to use this platform, to make those connections that will ultimately drive the business opportunities.
+We're in the very early stages, some of those ads you're seeing are [exploring] how to build more of these connections. But right now, we're going to remain focused on the user experience, and the experimentation we're doing.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [26]
+--------------------------------------------------------------------------------
+
+          Yes, Justin, just adding to the question on elections, I'd also point out that our reported daily active and monthly active numbers reflect usage in December. So even for the US, that doesn't really pick up the election period, just because the way that we tabulates those results.
+On millennials, we were really pleased. This was a fantastic quarter for overall growth of the Facebook community, our strongest absolute MAU and DAU additions year-over-year since being a public Company. So we're really pleased with that. So within that context, we're not breaking out specific cohorts. But we remain a great place for advertisers to reach millennials, and Instagram is obviously another great place to reach millennials. And we continue to build our products to serve a wide variety of audiences, including millennials as well.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Mark Mahaney from RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          David, I think you just talked about this, a pretty material increase in MAUs. Can I ask two questions? The Asia area MAU growth in particular, I think it was something like 44 million sequentially, that's the biggest that I think you've ever had. So could you just talk about, was there some particular markets, some particular region there that added to it?
+And then, since we're talking Asia, can you just comment, Mark, on China? And how you think about it, long-term as a market opportunity, and your level of optimism that Facebook can have a material presence in that market in 5 to 10 years? Thank you.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [29]
+--------------------------------------------------------------------------------
+
+          Sure. So Mark, Asia benefits probably more than any other region, around the sort of three factors that I called out in my prepared remarks. And those are internet.org efforts, Android product improvements that we've continued to make a big area like Android, our Facebook Light platform on Android has been a great grower for us.
+But then particularly, in the fourth quarter, wanted to call out that we've seen an increase in third-party promotional free data plans in places like India. So that clearly, is having an impact in APAC, and India was our strongest growth market. So that would be something that I would say, was a little bit more unique this past quarter.
+
+--------------------------------------------------------------------------------
+Operator    [30]
+--------------------------------------------------------------------------------
+
+          Your next question -- (multiple speakers)
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          The China question.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [32]
+--------------------------------------------------------------------------------
+
+          Yes, sorry. Mark's going to take China question.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [33]
+--------------------------------------------------------------------------------
+
+          Sure. So as I've said a number of times before, our mission is to connect everyone in the world. And it's hard to do that over the long-term, if we don't find a way to serve the more than 1 billion people who live in China. So that's certainly a thing that we're going to look out -- at over the long-term. And the specific time horizon that you mentioned, I think it's really hard to predict how this will play out, or what we will end up doing.
+But one of the big things that we need to think about here is, of course, we're only going to do this in a way, that we're comfortable with over the long-term. So obviously, something that we're going to continue engaging in, and thinking about, how to move forward on. And long-term, it's very important, but no news at all in the near-term.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Heather Bellini from Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heather Bellini,  Goldman Sachs - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          Great. Thank you for taking the questions. I had two. I was just wondering, Mark, you mentioned -- similar to how you referenced Facebook and Instagram being complementary, how do you think about WhatsApp and Messenger? And I'm wondering if there's different paths to monetization over time for each of these?
+And then, my second question, I guess, might be for any of you, just you, Dave, have mentioned expectations for slower growth in ad load on core Facebook in the second half of this year. How should we think about the potential for ad load growth on Instagram? Thank you.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [36]
+--------------------------------------------------------------------------------
+
+          I'll take Messenger and WhatsApp, then you can take ad load. So yes, is the basic answer that Messenger and WhatsApp serve somewhat different utilities for people. WhatsApp really takes the place of SMS in a lot of the markets where it operates.
+The graph is based on phone numbers. You're as likely to text your barber, or somebody that you're going to transact with, you would have a phone number with, as you would be a friend. Whereas on Facebook Messenger, the graph is your friends. And you're more likely to say, wish an acquaintance happy birthday on Facebook Messenger than on WhatsApp, where you might not have their phone number in the first place. So you can think about some overlap in the core use case, as you might message your close friends and family on either.
+But what we found in general, is that if you look at some of the markets that are strongest for both of them, they could each grow in those markets. And as messaging has become more affordable and more reliable for people, the volumes of messaging have just gone through the roof, in terms of what people want to do.
+Looking at -- my understanding from looking at a bunch of analytics is that the peak of global SMS reached somewhere in the low 20 billion messages per day. And we already have many times more than that, three times or more than that, across WhatsApp and Messenger. And of course, there are other messaging products in the world, besides these as well. So we're pretty confident that this is going to keep on growing.
+I do think to your point that the monetization paths are going to be somewhat different, reflecting the difference in product philosophy. So Messenger is much more focused on being an expressive and rich environment, that has lots of different types of content. Kind of more like Facebook to the Instagram example that we used before, whereas WhatsApp I think is a much more utilitarian experience, with a much more stark UI, where there's just not as much emphasis on having a lot of different ways to engage.
+So we did the experiment that you asked about before, around ads in Messenger and different ways that businesses can interact. And there is a lot of flexibility on how we can explore there, which is why I think you'll see some more of that on the Messenger side, than on the WhatsApp side in the near-term. But giving businesses the opportunity to connect in WhatsApp, and reach the people that they want, and eventually have increasingly, hopefully transactional interactions, I think will be a really useful thing on that platform as well.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [37]
+--------------------------------------------------------------------------------
+
+          Heather, it's Dave. Just on Instagram versus Facebook and ad load, clearly the biggest driver of our business is core Facebook, just in terms of sheer size, and even sheer contribution to growth. Instagram is growing quicker on a percentage basis, but it's much smaller.
+The ad load opportunities are higher on Instagram, because Instagram is at a lower ad load than Facebook. So there is an opportunity for us to continue to grow ad load on Instagram probably beyond -- in a longer time frame than there is on Facebook, because of that disparity in terms of where they are today.
+But given the scale of Facebook and the importance driving overall revenue, that's why I continue to express what our expectations are for advertising growth in 2017, and the reduction in the growth rate that we expect, given the potential to grow ad load on Facebook, that we expect come down in 2017.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Peter Stabler from Wells Fargo Securities.
+
+--------------------------------------------------------------------------------
+Peter Stabler,  Wells Fargo Securities - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Thanks very much. Two for Sheryl, if I could. First of all, Sheryl, when it comes to measurement, I'm curious if you could comment on what appear to be the really successful efforts you've had in linking on Facebook ad exposure to both offline and online sales of your customers.
+And I guess, if we think across, maybe your 1,000 largest clients, any chance you could give us a sense of what percentage are utilizing this level of kind of advanced measurement, in terms of measuring actual sales lift, and share gains? And then, secondly, just wondering if there's any color around the pretty recent roll out of buy buttons on Instagram? Thank you very much.
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [40]
+--------------------------------------------------------------------------------
+
+          Yes. So when you think on measurement, your question gets to the heart of the matter, which is there's a lot of conversations on what we measure. And when you see platform shifts, as you are in the ad market for more traditional forms of media, to display, to now mobile, we're seeing those metrics change. And there's obviously, a lot of conversation, and a lot of concern out there about what we're measuring.
+We think the answer to all of this, is to remember that what really matters is going all the way through, from the ad itself to the sale, whether that sale is online or offline. And we are working hard, to work on the data in a privacy-protected way to be able to do that. And we're making progress across verticals, across our large customers. I don't have the percentage of exactly how many customers are working on this type of measurement with us.
+It's certainly growing. It's certainly something we're working on vertical by vertical. But it has really important impacts, not just in their ability to serve the right ad, to the right person, at the right time, but also their ability to optimize their ad for our format. That once they understand what's really moving their products off shelves, online and off, that's where we get to the real work we need to do, to optimize the ad, and really work on the targeting.
+And so, I remain very optimistic. We have a lot of hard work to do, to get to all of our ad campaigns having that kind of measurement. That's going to take a long time. But the more we can do it, even in studies with each client, the better our ads get.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          Your next question -- (multiple speakers)
+
+--------------------------------------------------------------------------------
+Sheryl Sandberg,  Facebook Inc. - COO    [42]
+--------------------------------------------------------------------------------
+
+          Oh, buy button. Yes, sorry, just to address the buy button. The core of our business is really connecting people with what they care about. And so, we're looking at getting the right message, the right time.
+We've worked hard on product ads that get to products. So you've seen us work on dynamic ads, carousel ads, estimated store visits, things that help our ads business sell products. You are seeing us take other steps, like a buy button, like the marketplace launch, which are really aimed at improving some of the experiences we think people are trying to have, and already having in organic ways on Facebook. But the core of our focus is, still very much focused on ads, and how we can do ads at the product level.
+
+--------------------------------------------------------------------------------
+Operator    [43]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Ken Sena from Evercore ISI.
+
+--------------------------------------------------------------------------------
+Ken Sena,  Evercore ISI - Analyst    [44]
+--------------------------------------------------------------------------------
+
+          Thanks. Just on the OpEx for 2017, you mentioned R&D content, sales, marketing. As we think about R&D, and also the talent shortages that are in data science and engineering, not to mention the potentially, it getting worse around immigration, et cetera. How should we think about that potentially factoring in, as we look out through 2017, and maybe a little bit further out?
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [45]
+--------------------------------------------------------------------------------
+
+          Sure, Ken. I mean, we obviously are focused on hiring top engineering talent. It's key to our 2017 goals, and executing on our 3, 5 and 10 year road map, the one that Mark outlined. One thing that we're optimistic about is, our ability to hire technical talent outside of the Bay area, as well as in the Bay area. And that's because we built up engineering locations in key areas like Seattle, London, New York, Boston, Tel Aviv.
+So we've got other markets in which we can recruit, and grow engineering and other technical teams. And that's really different from where we were a couple years ago. So that's an important part of the infrastructure that we put in place in the last two years that we're pleased with.
+
+--------------------------------------------------------------------------------
+Operator    [46]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Brian Fitzgerald from Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Fitzgerald,  Jefferies LLC - Analyst    [47]
+--------------------------------------------------------------------------------
+
+          Thanks. Mark, on AI maybe, you mentioned improved recommendations, and we've interacted with chat bots on Messenger. Maybe curious overall, how you see artificial intelligence and machine learning processes impacting your business over time?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [48]
+--------------------------------------------------------------------------------
+
+          Well, I think AI is going to be great for the experience that people have in our community. So there are a few types of systems here that we're working on, around understanding content. One is around visual content, and the other is about language.
+So for visual content, we want to be able to look at a photo, and understand what's in it, right? And whether that's something that you're going to be interested in, right? And similarly, we went to be able to look at a video, and watch it, and understand whether that's something that you're going to be interested in. And you can imagine that, today we consider putting things in your news feed that you're connected to in some way, right? That are from a friend, or a page that you're following, or that one of your friends liked.
+But there's no reason that we shouldn't be able to match you up, with any of the millions of pieces of content that you might be interested in, that get shared on Facebook every day, except for the fact that we don't have the AI technology to know what those are about, and if they match your interest today. So but a combination of being able to understand the texts that people message, read the articles that people would want to look at, watch the videos, look at the photos, are going to be great too.
+Another area where I'm really excited about this, is our ability to keep the community safe, right? So there's an increasing focus on objectionable content, right, and a lot of unfortunate things, right, that people share on Facebook. And it's a minority of the content, but I'm really focused on making sure that our Company gets faster at taking the bad stuff down.
+And we can do better with people. But ultimately the best thing we can do is build AI systems that can watch a video, and understand that it's going to be problematic, and violate the policies of our community, and that people aren't going to want to see it. And then, just not show it to people, before bad experiences happen -- and things like violence get spread through -- violent content gets spread through the network. So I think it's -- both going to be -- AI is both going to be great on showing people content -- that's really good, and helping us enforce the community standards that we have, to make sure that everyone has a good and fair experience.
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Scott Devitt from Stifel.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Stifel Nicolaus - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          Hi, thanks. I had two questions for Mark. Wondering, Mark, if you could talk a bit more about the new video tab, just early engagement trends, user feedback? And really just how the product works in terms of categorization of content, user preference targeting, and maybe how the content flows into the tab, versus being in the news feed, and to the extent that there's duplication there?
+And then separately, VR and AR continues to be in the 10 year vision for the business. Mark, was wondering if you could provide some detail on what you think the friction points are, that are keeping that from being on a more accelerated commercialization path? Thank you.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [51]
+--------------------------------------------------------------------------------
+
+          So I'll take video first, and then I can talk about VR as well. So for the video tab, the goal that we have for the product experience, is to make it so that when people want to watch videos, where they want to keep up to date on what's going on with their favorite show, or what's going on with a public figure that they want to follow, that they can come to Facebook, and go to a place, knowing that that's going to show them all the content that they're interested in.
+So that's a pretty different intent, than how people come to Facebook today. Today for the most part, people pull Facebook out when they have a few minutes, when they want to catch up, and see what's going on in the world, with their friends and in the news, and everything that's going on. So that's very different from saying, hey, I want to watch video content now. And that's what I think we're going to unlock with this tab.
+So all of the content that is on Facebook is eligible to go in the tab. I mean, we're showing video content, not all the rest of it. But there isn't a concrete difference between what can be a news feed, and what could be here. It's just that the experience is designed to deliver on that promise of, you want to watch videos, you want to keep up with the content that you watch episodically, week over week. This is going to be the place where you go to do that.
+I do think that it's going to get a lot stronger, once the business model really starts to click here, right, because a lot of the best episodic content is professionally created. And those folks needed to make a good amount of money in order to support their business model. So having mid-roll ads, we're committed to doing this in a way, that's very good on the user experience.
+But that is going to enable the kind of content that I think is going to take this to the next level. The early trends are good, but I think this is really going to be an area, that is proportional to the amount of quality content that is in the system, and the business model is really going to be the thing that enables that.
+
+--------------------------------------------------------------------------------
+Operator    [52]
+--------------------------------------------------------------------------------
+
+          Your next -- (multiple speakers)
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [53]
+--------------------------------------------------------------------------------
+
+          All right, sorry, I forgot about that for a second. All right, so VR and AR, what can accelerate that? I think that there are parts of this that are on a good trajectory, and parts where we're a little behind where we would want to be.
+I think, Samsung shipping 5 million Gear VRs -- I mean, that's their product, not ours, but we build technology that powers it. I think that's quite a good result, right, and one that we're very happy with, and just shows how strong of a company Samsung is, at being able to build these products, and sell them through into the world.
+On the side of the products that we built, Rift and Touch were both a little delayed. That was obviously somewhat of a disappointment. And if you want to accelerate development, obviously we need to get our products in the market at a good pace.
+But in terms of the content development, I actually think that's coming at a reasonable clip. Early on, there is this issue which is that if you're a [AAA] game developer, until there's a certain volume of units in the field, you're not going to be able to make enough money to fund your game development, just based off of people buying your content. So that's why we're investing so much capital in content, to seed the ecosystem, and solve this chicken and egg problem of, you need the content in order to create the ecosystem.
+But I don't think that there is really a strategy to pull this in from 10 years to 5, I just think it's going to be a 10 year thing. I mean, the analogy that I always use is, the first smartphone came out in -- sorry, 2003, right, the Blackberry and Palm Trio, and it took 10 years to get to 1 billion units. And I don't know, if there was something that folks could have done to make that happen fast, but I think that was pretty good.
+And if we can be on a similar trajectory, of anywhere near 10 years for VR and AR, then I would feel very good about that. And I feel like we're making the right bets now to plant the seeds for that. But I would ask for the patience of the investor community in doing that, because we're going to invest a lot in this, and it's not going to return, or be really profitable for us for quite a while.
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook Inc. - VP of IR    [54]
+--------------------------------------------------------------------------------
+
+          Operator, we have time for one last question.
+
+--------------------------------------------------------------------------------
+Operator    [55]
+--------------------------------------------------------------------------------
+
+          Your last question comes from the line of Anthony DiClemente from Nomura Instinet.
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Instinet - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          Thanks a lot for fitting me in. A couple for Mark. Mark, just on the theme of video, given the strong cash position that Facebook has, the cash on the balance sheet, the free cash flow generation of the Company, are there any possible acquisitions out there, that you think would or could super-charge your growth in the video space, in the original content space, given this evolution?
+And maybe, along those lines, what do you think about live sports in terms of the video use case? Is that working on Facebook? You've experimented, you experimented with NBA games on Facebook outside the US, NBA D-League on Facebook. So just wanted to get your thoughts on how those have gone? Thanks a lot.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [57]
+--------------------------------------------------------------------------------
+
+          So Anthony, I can just take the first part of that at least, which is look, our focus was on kick-starting the ecosystem here, for the video tab that Mark talked about. We're looking at a wide range of content, and we're really working towards a revenue share model with creators. We're certainly going to be seeding content to get the ecosystem going, but that's not about doing big deals. So we'll -- we're certainly looking at a variety of different types of content to look at.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook Inc. - CEO    [58]
+--------------------------------------------------------------------------------
+
+          I think you got it.
+
+--------------------------------------------------------------------------------
+Dave Wehner,  Facebook Inc. - CFO    [59]
+--------------------------------------------------------------------------------
+
+          Great.
+
+--------------------------------------------------------------------------------
+Deborah Crawford,  Facebook Inc. - VP of IR    [60]
+--------------------------------------------------------------------------------
+
+          Great. Super. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again.
+
+--------------------------------------------------------------------------------
+Operator    [61]
+--------------------------------------------------------------------------------
+
+          Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2017-Feb-02-AMZN.OQ-139452463844-Transcript.txt

@@ -0,0 +1,458 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2016 Amazon.com Inc Earnings Call
+02/02/2017 05:30 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Olsavsky
+   Amazon.com Inc. - CFO
+ * Darin Manney
+   Amazon.com Inc. - Director of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Anthony DiClemente
+   Nomura Instinet - Analyst
+ * Scott Devitt
+   Stifel Nicolaus - Analyst
+ * Ben Schachter
+   Macquarie Research - Analyst
+ * Douglas Anmuth
+   JPMorgan - Analyst
+ * Justin Post
+   BofA Merrill Lynch - Analyst
+ * Jason Helfstein
+   Oppenheimer & Co. - Analyst
+ * John Blackledge
+   Cowen and Company - Analyst
+ * Heath Terry
+   Goldman Sachs - Analyst
+ * Colin Sebastian
+   Robert W. Baird & Company, Inc. - Analyst
+ * Eric Sheridan
+   UBS - Analyst
+ * Mark Mahaney
+   RBC Capital Markets - Analyst
+ * Brian Nowak
+   Morgan Stanley - Analyst
+ * Mark May
+   Citigroup - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to the Amazon.com Q4 2016 financial results teleconference.
+(Operator Instructions)
+Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Darin Manney. Please go ahead.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com Inc. - Director of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello and welcome to our Q4 2016 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO.
+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. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2015.
+Our comments and responses to your questions reflect management's views as of today, February 2, 2017 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 and subsequent filings.
+During this call, we may 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.
+Our guidance incorporates the order trends that we have seen to date, and what we believe today to be appropriate assumptions. Our results are inherently unpredictable, and may be materially affected by many factors. Including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the internet, online commerce and cloud services, and the various factors detailed in our filings with the SEC.
+Our guidance also assumes, among other things, that we don't conclude additional business acquisitions, investments, restructurings or legal settlements. It is not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance.
+And just briefly before we move to questions, I would like to address our Form 10-K that we will be filing with the SEC. We received a comment letter from the SEC's Division of Corporate Finance regarding our 2015 Form 10-K, and have subsequently been engaged with the SEC staff regarding our disclosures.
+We will be revising the disclosures of net, product and service sales in our Form 10-K. As a result, we expect to file our 2016 Form 10-K later than we typically have, but before the SEC's due date of March 1. These changes relate to our entity-wide disclosures and do not impact the financial results that we report for the Company or our segments.
+With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions)
+John Blackledge, Cowen.
+
+--------------------------------------------------------------------------------
+John Blackledge,  Cowen and Company - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Great, thanks for the question. So the first quarter GAAP operating income guide essentially implies negative incremental margins at the low, mid and high end of guidance. So just wondering if you can frame in order of possible the investment areas that are driving the negative incremental margins, and then just generally how should we think about the margin profile in 2017? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Thank you, John. First, let me talk about revenue just to get that out there as well.
+We are guiding to 17% to 25% growth on an FX-neutral basis. That includes approximately -- on top of that is approximately 250 basis points or $730 million of FX negative impact, which brings the non-FX adjusted range down to 14% to 23%.
+I will also point out we that had the Leap Year comp from last year. Last year, the extra day of Leap Year was worth 150 basis points to us in our Q1 revenue. This year that reverses, so we have 150 basis point headwind to growth and it's been factored into our guidance range.
+But your question was on bottom line. So yes, what you are seeing, John, is the continuation of the step-up investment that we saw in the second half of last year. I talked about in prior calls about the fulfillment center step up.
+We had 26 warehouses we added last year, 23 of them were in the second half of the year. Digital content, digital video content, end marketing stepped up quite a bit in the second half of the year.
+We continue to invest heavily in those two areas. We also have investments in other Prime benefits from Prime Now to Amazon Fresh, and of course we're continuing to invest in Alexa in our Echo devices. And finally I'd point out India which continues to be a rather large investment for us.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+          Scott Devitt, Stifel.
+
+--------------------------------------------------------------------------------
+Scott Devitt,  Stifel Nicolaus - Analyst    [5]
+--------------------------------------------------------------------------------
+
+          Hello, thank you. The question is on video. I was wondering if you could just give any quantification in terms of the magnitude of video spend in 2017, as well as the lumpiness from an expensing standpoint quarterly?
+And then separately as it relates to just the video service. From a positioning standpoint in the market, how do you think about the unique aspects of the product that Amazon has relative to others in the market in terms of is the aggregation tools that are being provided now where some of the value is being perceived longer term?
+Is it the uniqueness of the content or is it other things? If you could provide a little bit of color on that, that would be helpful. Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [6]
+--------------------------------------------------------------------------------
+
+          Well ultimately, I will step back and say one of the main things we look at on Prime Video is customer usage patterns. And in 2016, we had a doubling of Prime hours for video, music and reading. So we are happy with the engagement that customers have.
+We're also happy with the -- especially on the studio side, the people we have been able to work with. Some of the most talented people in the entertainment industry. And our customers have responded really well to the shows that we have created. We have garnered awards of course, but mainly what we were focused on is good content that is attractive to customers.
+I will also point out that we rolled out the global Prime Video offer in the second half of last -- in Q4, and what we see there is again original content is a fixed cost expense. The more we can amortize it over a large base, the better off we will be. But more importantly, we have great content that we want to share with people outside of our primary retail countries and this takes us to over 200 more countries.
+So we are very happy with the results in video. Yes, the investment did step up in the second half of last year, including marketing and that will continue in 2017 and likely beyond.
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+          Ben Schachter, Macquarie.
+
+--------------------------------------------------------------------------------
+Ben Schachter,  Macquarie Research - Analyst    [8]
+--------------------------------------------------------------------------------
+
+          Can you discuss what you're doing to help merchants in China sell and ship directly to consumers in the US and other developed economies, and how the business has been evolving over time? Thanks.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com Inc. - Director of IR    [9]
+--------------------------------------------------------------------------------
+
+          Hello, Ben. This is Darin. We are very pleased with our FBA offering, and that's really helpful to sellers around the world. Certainly, our international sellers have access to more and more customers through that offering, and that doesn't exclude sellers in China as well.
+The offering in China that we have for consumers is also a great trusted customer engagement. We have a very strong and trusted venue for Chinese customers to access international brands there, as we continue to focus on great offerings through the Amazon global store which offers great brands from outside of China to customers. And so there is a mix of things going on in China, and we're happy with what we are seeing in both of those.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          Justin Post, Bank of America/Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch - Analyst    [11]
+--------------------------------------------------------------------------------
+
+          Thank you. A follow up on India and China. I know you are investing a lot, I'd love to hear how much but you probably won't tell us.
+But can you tell us why you think the market is worth investment, and what really attracts you to the market as you think out longer term? And then China, can you give us any updates there on how financial performance is doing, and if you have changed your strategy and if anything has gotten better there this year? Thank you
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [12]
+--------------------------------------------------------------------------------
+
+          Let me start with India. So it's still very early. We continue to say that, but we're very encouraged with what we have created with customers and sellers alike in India over the last few years.
+We continue to develop new functionality for that country, whether it's delivery, whether it's seller features. We rolled out Prime last summer, if you'll remember, and we recently launched Prime Video there.
+So we've had success with Prime in every country we've been in, we don't expect India to be any different. We will continue to build our business there, and continue to do a great job for both customers and sellers. We are bullish on India longer term, and it's early but we like the initial engagement we are seeing and the response again from both customers and sellers.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com Inc. - Director of IR    [13]
+--------------------------------------------------------------------------------
+
+          And this is Darin. On China, like I said, we are very pleased with our offering in China. Our strategy there has been one of bringing a trusted and authentic product to customers in China, both domestically and from international offers.
+So we will continue to focus on the global store there. As you may know, we've launched the Prime program that's focused around the availability of international goods in China, and we are pleased with what we are seeing there.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+          Heath Terry, Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath Terry,  Goldman Sachs - Analyst    [15]
+--------------------------------------------------------------------------------
+
+          Great. Two primary questions. Can you give us a sense of what the best way to think about the impact that the shift to third-party? And within that the growth in FBA is having on these sequential growth rates?
+To the extent that there is 150 basis point impact from Leap Year on a year-over-year basis, is there a way to quantify the impact that that shift to third party is having on the growth rate for the first quarter or for what you have reported in the fourth? And then on the AWS side of the business, with the price cut in November can you give us some sense of what impact the price cut had on the deceleration in growth compared to the impact that presumably it had in driving incremental volume to the platform?
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [16]
+--------------------------------------------------------------------------------
+
+          Let me start with that second question first. So more basically on AWS, very happy with the response from customers. We feel we've got a very broad base of customers from startups, to small medium businesses, to large enterprises, to the public sector, and we are continuing to see strong growth across all those sectors.
+The business is now a $14 billion annualized -- running at a $14 billion run rate. You are right that we had seven price cuts in Q4 essentially timed for December 1, so about a third of the impact was seen in Q4. But that's going to be constant in this business.
+We have been pretty clear that this business is all about creating new functionality for customers, giving price cuts, and then working on the operating efficiency. So very pleased with Q4 and the pace of the business.
+The new services and features last year were over 1,000 versus 700 or so in 2015. So we continue to innovate on behalf of customers. We are working with some very large customers in each industry.
+You have seen probably press releases on companies like Capital One, Workday, salesforce and others. So again, widespread usage and new customer adoption which is great.
+Your second question on FBA, I can't break out the year-over-year difference there. What I will say the impact of FBA on our business is, and first that's -- one of the things that we look at is how well are we attracting new FBA sellers. Because again, FBA reinforces Prime, Prime reinforces FBA. It's a good flywheel.
+We added active sellers in FBA grew 70% year over year in 2016. So we are very happy with the continued adoption of FBA and what that does to Prime eligible selection for Prime members.
+The other data point I will give you that affects our cost structure is our Amazon fulfilled units, which is the combination of retail plus FBA, grew nearly 40% last year. That compares to our paid unit growth of 24% in Q4. I'm giving you Q4 and a full-year number, but they are similar in relative proportion.
+The fulfillment center expenses and a lot of our shipping costs are tied to the increase in that FBA percentage, and that growth of Amazon fulfilled units. So that is certainly a factor that we consider a positive from a customer standpoint, and it's one from a cost standpoint that we certainly continue to work on every day. But I think that's the most I can give you on FBA at this point.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Colin Sebastian, Robert W. Baird.
+
+--------------------------------------------------------------------------------
+Colin Sebastian,  Robert W. Baird & Company, Inc. - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Thanks very much. Maybe as a quick follow up on the quarter, we have heard from other e-commerce companies and retailers about a higher degree of promotional activity during Q4. So I wonder if there was any conscious decision on your part to pull back from some of the more aggressive discounting?
+And then my other question is whether you can shed any more light on the motivation to build out the air cargo hub in Cincinnati, understanding the need to support the growth of the core retail business? But also if this gives you more of an opportunity to build out direct connections to suppliers, for example, or longer-term offer excess capacity or logistics as a service? Thank you very much.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+          Sure, Colin. On your first question, holidays are always a very promotional period, so we don't see -- I can't really comment on the year-over-year differential in promotional activity to us. We are always looking to not be beat on price. We want to offer the best options to customers, and we saw a lot of great response from customers this holiday season. I think we'd be a very trusted holiday partner, particularly as you get closer to the holiday.
+So on the promotion side, we don't consider it a huge factor either way. It's pretty much a cost of doing business 12 months a year for us.
+Sorry, the second question was on the hub in Cincinnati or Kentucky. Yes, that is -- I saw the announcement on that, that is a partnership we have to build out a facility at the Hebron, Kentucky airport. We think it will create thousands of jobs over time.
+What it does for us is it this gives us a base for future growth. It's all about supplementing our existing capacity, both our Partners and ourselves, and essentially building capacity that can handle this top line growth and also the growth in AFN, or Amazon fulfilled network units which as I just mentioned is even higher than our paid unit growth.
+So same as some of the investments you saw in airplanes last year or partnerships with companies that do air cargo, this is about supplying our need for our customers and our sellers. We value the partnership with the external providers as well, and I think we're all dealing with the problem of having lots of incremental volume year over year.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+          Mark May, Citi.
+
+--------------------------------------------------------------------------------
+Mark May,  Citigroup - Analyst    [21]
+--------------------------------------------------------------------------------
+
+          Thank you. Just a question on paid unit growth. For the last several quarters here it's been accelerating on a year-on-year basis, and I think this quarter 24% was below the 26% that you reported in Q4 of 2015. Just curious what had been driving the acceleration over the past few quarters, and what may be changed this quarter?
+And then in terms of the Q1 revenue guidance, wondering if you could provide a little bit of color in terms of the impact that maybe the recent AWS price adjustments are having on your Q1 guidance? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [22]
+--------------------------------------------------------------------------------
+
+          Let me start with the second one. We factored it in, and obviously into the numbers I gave through guidance the timing of it was again closer to December 1. So there will be a incremental differential in Q1 on those price cuts, but this is something that we again have quite frequently and I don't think it's a large factor in Q1.
+The bigger one is more mechanical that Leap Day comp I would say. And if you are looking on a non-FX adjusted basis, the foreign exchange exposure which I mentioned was $730 million or 250 basis points expected in this guidance.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com Inc. - Director of IR    [23]
+--------------------------------------------------------------------------------
+
+          Hello, Mark. This is Darin. On that unit growth, we're very happy with the 24% unit growth that we saw in Q4, like you mentioned. Our unit growth has been strong, it's primarily attributable to our Prime program and the customers and members that enjoy that program.
+As Brian mentioned, that 28% is only part of the story. Our Amazon fulfilled units, the amount going through our fulfillment centers which essentially includes our first-party retail and our FBA sales, grew nearly 40% over 2016. So we are very pleased with those results, and happy with the fundamentals of the business from that perspective.
+Customers continue to respond very well to the low prices, the vast selection, which is helped by the FBA sellers, and the strong convenience that we can offer through free two-day shipping and the multitude of other faster shipping options. Such as same day, next day, and in some cases with Prime Now the 1 to 2 hour delivery. Prime membership and selection continues to drive growth, and you'll see that in our unit growth numbers.
+
+--------------------------------------------------------------------------------
+Operator    [24]
+--------------------------------------------------------------------------------
+
+          Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Anmuth,  JPMorgan - Analyst    [25]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question. A lot of talk obviously about border tax. I was hoping that you could give us some of your initial thoughts there and how you might think about some of the key considerations around a potential border tax.
+And then secondly, can you talk a little bit about fulfillment centers? You mentioned the 26 fulfillment center build out in 2016. Any color that you can give us in terms of how you're thinking about that for 2017? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [26]
+--------------------------------------------------------------------------------
+
+          On the first one, we have a long-standing practice of not commenting on regulatory or tax matters. So I am not going to comment on any proposed issues out there. We certainly keep an eye on external issues and weigh in when we think it's going to impact our business.
+But the -- sorry, your second question was on FCs. We will continue to invest in FCs. The comparable I will give you is that I won't forecast 2017, but the 20% growth in square footage that we saw in 2015 was followed by 30% square footage increase in 2016 that generally went to service that 40% growth in units in AFN units.
+It also included some of the additional logistics delivery stations and all too, so it's not all FC capacity that's square footage. But I would say that we're going to continue to invest in fulfillment centers as long as our AFN growth rate maintains high, and we certainly want to keep that high and growing.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          Mark Mahaney, RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Mahaney,  RBC Capital Markets - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Thanks, two questions please. First, any comment on customer growth qualitatively how that trended throughout the year, accelerated, consistent, decelerated? And then would you be willing to give any commentary on the engagement impact you're seeing from all of these Echo devices that are getting into households?
+Are you seeing people shop more? Are they engaging more with other parts of Amazon? Just any impact on what people with these Echo devices do that's different than Amazon customers that don't have them? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [29]
+--------------------------------------------------------------------------------
+
+          Let me start with the Echo. I don't think I'm going to answer your exact question there on quantifying the retail sales through Echo devices. It's still very early days on that, so that's not material.
+But the engagement is just like any other Prime benefit or investment that we have. We do look at engagement, and we like the engagement of customers who have Echos. But let me step back and give some highlights on that, Alexa and Echo together.
+As we mentioned in our press release, the unit sales of Echos grew nine times 9x year over year during the holiday period. So great customer adoption. We are really glad to see that, and that creates a great base of Echo and Alexa fans out there.
+We've added 4,000 skills to Alexa since I last spoke to you in October, and we are working with a lot of major companies as they add abilities for our customer base to use the Alexa or the Echo to reach them. Tens of thousands of developers are building new skills for Alexa, so the skills addition should continue. And just as importantly, tens of thousands of developers are also using the Alexa voice service to help integrate Alexa into their products which then creates a great network effect.
+We're doing that ourselves. If you've seen in the quarter, we added Alexa capabilities to our tablets and Fire TV devices, making them better. So it's a great part of the flywheel in that Echo and Alexa make the devices better, and it builds the engagement, not only with Echo and Alexa but also with Amazon.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com Inc. - Director of IR    [30]
+--------------------------------------------------------------------------------
+
+          Hello, Mark. This is Darin. On the customer account, no absolute number to give this quarter. As you know, back in Q1 we gave an active customer account that exceeded $300 million. I can see it's still growing, and we're pleased with the number there.
+What we do like is the engagement with Prime. We continue to add Prime members, and similar to the flywheel that Brian was just mentioning the FBA selection helps us with engaging customers, and in particular the Prime program. So we are very pleased with our customer engagement this year.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          Brian Nowak, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Nowak,  Morgan Stanley - Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions, I have two. The first one is on the last mile on the Logistics build. Can you help us at all on what you are seeing in some of these markets, like the UK where you have more of the last mile build out done on your own? Is there anything you're seeing about Prime behavior?
+What are the advantages and even the challenges you are facing as you're building out a last mile? And secondly, on the brick-and-mortar stores, any learnings and strategically just talk to the strategic advantage of having a bigger Amazon storefront? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [33]
+--------------------------------------------------------------------------------
+
+          Let me start with your first question. So as you point out, we have had Amazon Logistics deliveries in the UK for more years than some of our other countries, and what we see is it gives us control of the shipment for a lot longer. We can shift order cutoff times out, and time is valuable to us because again we can avoid split shipments, we can avoid other costs of acceleration.
+So having control later in the process is very valuable to us, especially as we're working across multiple nodes in a network. But I have driven with drivers in downtown London, and it's a very interesting experience. I think it's a great value to our customers.
+It's interesting to see the route density that we see in high cities or in some cities, and the challenges and the upside of that. But I would say essentially in a nutshell, our logistics deliveries allow us to have better control of the end delivery in markets where we use it. The challenge is always going to be cost, and as we get better at this and get economies of scale we lower those costs over time. So that's essentially my overview of Amazon Logistics.
+Sorry, your second question was on the stores. You probably noticed we opened the Amazon Go store in Seattle in the fourth quarter. We think that is very interesting.
+It's only one store at this time, but it's using some of the same technologies you would see in self-driving cars, computer vision, sensor, fusion, deep learning. So it's a great accomplishment by that team. It's in beta right now and we like the promise of that.
+Probably more advanced and further along are the Amazon Bookstores. We have three physical stores Seattle, San Diego and Portland right now. We see adding five more this year. So we are still in that phase where we are testing and learning and getting better, even on the bookstore.
+I would say there's other things that are physical in nature, the pop-up stores and college pickup points that we learn from as well, and think creates a great value particularly at the college pickup points. So not much projection beyond where we are today, except for the fact that we will be adding more bookstores.
+But we test, we innovate. We think the bookstores, for instance, are a really great way for customers to engage with our devices and see them, touch them and play with them and become fans. So we see a lot of value in that as well.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Jason Helfstein, Oppenheimer.
+
+--------------------------------------------------------------------------------
+Jason Helfstein,  Oppenheimer & Co. - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          Thanks, two questions. As we think about investment in the first quarter in 2017, any color how to think about domestic versus international? You did give some comments about India, but any other color or how to think about it.
+And then on AWS, you announced both new products at re:Invent at the low end and at the high end. Any commentary on if that impacted the types of customers who you have been adding on AWS with those new products? Thank you.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [36]
+--------------------------------------------------------------------------------
+
+          I can't give an exact split of the investments by geography, but I would say most of the fulfillment expansion was in North America last year, most of those 26 warehouses we talked about. We see that being more balanced over time, and being more global as we move forward.
+Video content is with the new global program. Global Prime Video is becoming more global with the launch in India as well, and of course we had Prime Video in some of our existing countries prior to that. So that is going more global, and will be more balanced as you see devices rollout to other countries same thing.
+So I would say over time, it will become more balanced and probably what you have seen in the short run tended to be more North America focused. But I can't give you a great split of -- I'm not giving you absolutes anyway, so I can't give you a great split of the two.
+And I will also say that not all of our investments are on the consumer side. AWS continues to expand their global footprint. Last year, we added regions in the UK and Canada, we now have 42 availability zones in 16 geographic regions and will continue to grow that business globally. And India again, we've mentioned, but that is obviously an international investment.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com Inc. - Director of IR    [37]
+--------------------------------------------------------------------------------
+
+          On the customer split, we serve, in AWS, we serve millions of active customers along the spectrum of large enterprise companies, as well as small startups and the public company or public environment as well. The multitude of launches that we had in re:Invent was great for all sizes of customers really, both large and small.
+Both companies just getting there start with AWS, but also companies that have been engaged with AWS for many years. So we're really happy about the engagement of re:Invent and the participation in that conference, as well as the engagement of the new services that we have launched in Q4 and all of 2016 really.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+          Eric Sheridan, UBS.
+
+--------------------------------------------------------------------------------
+Eric Sheridan,  UBS - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Thanks for taking the question, maybe two if I can ask. One, the other North America revenue line in our view has a lot of advertising revenue in it, and that line continues to show a lot of momentum, come in better than expected. Can you talk holistically short, medium, long term about how you think you are approaching an advertising business across your broad properties?
+What that might become longer term, and how that might impact the P&L? And then one housekeeping item, anything to call out as an impact from demonetization efforts India in either Q4 or Q1? Thanks so much.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [40]
+--------------------------------------------------------------------------------
+
+          Yes, I will take the advertising question. Yes, it's very early in the advertising space, but what our goals there are to be helpful to customers and enhance their shopping and viewing experiences. Mostly with targeted recommendations. We think that is a good strategy rather than invasive things that take away from the shopping experience.
+I would sponsored products is off to a great start. They're finding a very effective way for advertisers to reach interested customers.
+We also on Video have not added much in the way of advertising yet. There is some pre-roll as we call it, but for the most part we like to the progression. We are balancing customer experience with advertising at all times, and we like the team that's working on it.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com Inc. - Director of IR    [41]
+--------------------------------------------------------------------------------
+
+          And on other revenue, I just want to call out. There's a number of things going into that particular line. These things include revenue from our co-branded credit card arrangements and certain advertising, particularly display advertising.
+We have other types of advertising that spread out throughout the P&L, whether that's a shared marketing investment from our vendors which goes into contra COGS and lowers the cost of sales or its related to other seller advertising which is generally within the EGM and media categories. I would say other revenue incorporates a number of things, not just advertising. And on India demonetization, nothing particular to call out today on that.
+
+--------------------------------------------------------------------------------
+Operator    [42]
+--------------------------------------------------------------------------------
+
+          Anthony DiClemente, Nomura Instinet.
+
+--------------------------------------------------------------------------------
+Anthony DiClemente,  Nomura Instinet - Analyst    [43]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions. It's about Prime Video, you said you were pleased with the hours of engagement. My question is do you think that the hours of video stream need to accelerate from here to get to an adequate return on the invested capital in video, or are you happy with those returns with the current levels of engagement?
+And then relatedly on Prime Video, could you just talk about your ambitions to potentially extend the video offering beyond on demand and into possibly a virtual cable bundle? And then finally, just a question of do you need to aggressively partner with distributors, whether they be cable distributors or hardware device companies, in order to get better distribution of the Amazon Prime Instant Video app and content to your customers? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Olsavsky,  Amazon.com Inc. - CFO    [44]
+--------------------------------------------------------------------------------
+
+          I can't add too much or won't add too much on the last two questions, but I will say on -- you're talking about the levels of engagement now that we are seeing versus what would be the long-term model over time. We're certainly spending ahead of the value of the engagement right now. But it's a good sign that it's building, an important step was that global Prime program that we launched in the fall, excuse me, in Q4.
+As I said, it's very much a fixed expense game, especially with original content. The fixed amount can go up or down, but the ability to amortize it over large population is what we are looking for. So we see a double benefit of the global Prime Video program, again, both to amortize the investment in original content but also to show that original content to more and more people.
+Because we think it's done really well. We think it's won a lot of awards, and we have worked with some great talented people. It's our ability to scale that and to amortize it over a much larger customer base, which will help us in the future.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com Inc. - Director of IR    [45]
+--------------------------------------------------------------------------------
+
+          Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon.com, and look forward to talking to you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
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exam/original-files/Problem_1_Sample/2017-Jan-13-BAC.N-137706007374-Transcript.txt

@@ -0,0 +1,950 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q4 2016 Bank of America Corp Earnings Call
+01/13/2017 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Moynihan
+   Bank of America Corporation - Chairman, President and CEO
+ * Lee McEntire
+   Bank of America Corporation - SVP, IR
+ * Paul Donofrio
+   Bank of America Corporation - CFO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Steven Chubak
+   Instinet - Analyst
+ * Matt Burnell
+   Wells Fargo - Analyst
+ * Gerard Cassidy
+   RBC - Analyst
+ * John McDonald
+   Bernstein - Analyst
+ * Paul Miller
+   FBR Capital Markets - Analyst
+ * Mike Mayo
+   CLSA - Analyst
+ * Eric Wasserstrom
+   Guggenheim - Analyst
+ * Jim Mitchell
+   Buckingham Research - Analyst
+ * Nancy Bush
+   NAB Research - Analyst
+ * Glenn Schorr
+   Evercore ISI - Analyst
+ * Matt O'Connor
+   Deutsche Bank - Analyst
+ * Betsy Graseck
+   Morgan Stanley - Analyst
+ * Marty Mosby
+   Vining Sparks - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone and welcome to the Bank of America earnings announcement call. (Operator Instructions). Please note this call is being recorded. It is now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP, IR    [2]
+--------------------------------------------------------------------------------
+
+          Good morning. Thanks to everybody for joining us. I know it's a busy morning for all of you for the fourth-quarter 2016 results. Hopefully, everybody has had a chance to review the earnings release documents that are available on our website. Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. For further information on those, please refer to our earnings release documents, our website or SEC filings. With that, let me turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Brian?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [3]
+--------------------------------------------------------------------------------
+
+          Good morning. Thank you, Lee and thank all of you for joining us to review our results today. Results this year in the fourth quarter complete a solid year of execution and driving our responsible growth strategy. We produced earnings of $17.9 billion in 2016. That is a 13% growth over 2015. In a year in which we had a series of unexpected and sizable events around the world and a rough start in the capital markets, we were able to achieve 1% growth in revenue against the backdrop of a slow growth US economy.
+Important, we focused on driving what we could control -- cost, production and risk. So how did we do on all that? We lowered our cost, improved productivity with a result in reduction of expenses by almost 5% compared to 2015. That's nearly $3 billion in expense reductions continuing a long-term trend. From the peak in 2011 of $77 billion, expenses are now down $22 billion or 29%. And the reductions coupled with the revenue growth drove 6% in operating leverage.
+An improving economy, a relentless focus on client selection and growth through responsible lending combined to result in a historical low charge-off rate of 39 basis points for our Company this quarter. We also returned more capital to shareholders through higher dividends and more share repurchases during 2016. As you may have seen in the news release this morning, we announced an additional $1.8 billion expansion to our share buyback program. So adding the $1.8 billion to the $2.5 billion left, that brings us to $4.3 billion for the first six months of 2017.
+Our repurchase resulted in a 2% reduction in share count at the end of 2016, which added to the earnings growth to produce a 15% growth in earnings per share. For the year, our return on tangible common equity was 9.5% while return on assets was 82 basis points and the efficiency ratio improved from 70% to 66%.
+From a balance sheet perspective, let me mention a few things that are noteworthy as the items continue to grow with the business while optimizing the balance sheet at the same time. Our average deposits grew $64 billion or 5% compared to fourth quarter of 2015. Our average loans grew $22 billion, or 3%, as the lending segments outgrew the legacy runoff and Paul will show you that later on.
+On regulatory capital, we ended the year at 10.8% on a fully phased in CET1 advanced basis. Importantly, after reviewing our year-end calculation and through the hard work of our teams, we are pleased to report that our method 2 GSIB capital ratio requirement has dropped 50 basis points, so our total 2019 CET1 requirement is now 9.5% instead of 10%.
+Turning to slide 3, on these charts, you can see that each business segment played a role in driving our earnings growth in 2016. The businesses are producing good efficiency ratios and returns above the firm's cost of capital. And on this page, you can see that each business is driving hard to create operating leverage in the upper right-hand corner.
+Consumer Banking, our biggest earning business, continued its strong performance through its transformation; produced more than $7 billion in after-tax earnings, growing 8%. Our Global Wealth and Investment Management business improved its earnings 8% as well, earning $2.8 billion. Our Global Banking business serving our commercial customers continues to produce strong revenue and generated $5.7 billion of earnings. And lastly, but not leastly, our Global Markets business earned $3.8 billion, the most it's earned in the past five years with a rebound in sales and trading revenue and strong expense discipline on the part of the team.
+As you know, and you can see from the slides Paul will walk through later, our business has important leadership positions across the board in the industry and we believe that they have room to grow their marketshares by focusing on deepening relationships with their existing customers, as well as winning customers from the competition.
+Turning to slide 4, let me cover a few highlights on the fourth quarter before I turn it over to Paul. Reported earnings of $4.7 billion after tax of $0.40 per diluted share, an EPS improvement of 48% from the year-ago quarter on a reported basis. We had a couple pennies of net benefit this quarter from resolution of some tax matters that were partially offset by the combination of smaller charges for revenue for debt hedge ineffectiveness, additions to our UK card PPI reserves to be prepared for sale and DBA. This improvement in year-over-year results was driven by expense reductions as we lowered costs by 6% from fourth quarter 2015 to fourth quarter 2016. Revenue from the fourth quarter 2015 to the fourth quarter of 2016 was up 2% on a reported basis. Note that this quarter had lower levels of noncore gains from equity, debt and asset sales than in past years. So it is effectively more core earnings. Provision expense was modestly lower in the aggregate from fourth quarter 2015. Our responsible growth strategy resulted in a 23% improvement in net charge-offs and we also had a lower amount of net reserves released from last year's fourth quarter.
+So overall, I am pleased with the results. The Company has produced another quarter of solid results with strong operating leverage. We reported year-over-year earnings growth in every quarter 2016 with expenses declining in every quarter and revenue growing in three out of four. Our focus on operating leverage, expense management and operating excellence continues. The fourth quarter of 2016 represents the 20th successive quarter of year-over-year non-litigation expenses going down.
+The expense reduction has been an important ability to grow earnings without the benefit of significant rate increases, but now we see rate increases in the fourth quarter of 2016, the latter part of the quarter, on both the long end and the short end. As these rate increases were late in the quarter, they didn't benefit the fourth quarter NII number that significantly, but we look forward to first quarter 2017 when we expect NII to increase, all things remaining equal, by approximately $600 million per quarter despite having two less days in that first quarter. And with loan and deposit growth, we'd expect NII to continue to improve from there throughout 2017 and beyond. And Paul will take you through these numbers in a minute.
+This dynamic bodes well as we expect growth in earnings from productivity improvements will now get the added benefits of rate increases. This quarter, investors have asked a lot of questions that they usually ask, but importantly questions about the incoming new Presidential administration. Their questions have ranged from corporate tax reform and what do we think about that, regulatory changes, economic growth and the impacts of these things and interest rate changes.
+The optimism for positive change here at Bank of America and among our customers is palpable and has driven bank stock prices higher. We will have to see how these topics play out, but that we are optimistic. But, in the interim, we will continue to operate the Company by controlling and driving what we can. We are going to drive responsible growth. In prior calls, I answered the questions you asked about the fundamentals. First, can we continue to stay this disciplined on risk? Yes, we are making progress growing our loans, growing our deposits, growing our market business and keeping the risk in check in all areas and our credit is among the best it has ever been in history.
+Can we get earnings growth in a low rate environment? Yes, the answer is yes; you are seeing our earnings growth even without a significant rise in rates and now we look forward to those rises in rates. And the question is can you keep driving expenses lower? Again, the 20th consecutive quarter of year-over-year lower operating expenses and we have room to move them lower even as we continue healthy investment across all our businesses. And can we continue to drive our returns up above our cost of capital and you are seeing that happen.
+So while we are very optimistic about the future, optimistic about new policies which could spur growth, we, at Bank of America, will continue to drive what we can control and that's a culture of what we have and we will keep doing that. With that, I will turn it over to Paul for the fourth quarter results. Paul?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Brian. Good morning, everybody. Since Brian covered the income statement highlights, I'm going to start with the balance sheet on page 5. Overall, the end-of-period assets declined $8 billion from Q3 as solid loan growth across our business segments was more than offset by lower levels of trading assets in our Global Markets business. On an ending basis, loans grew $10.9 billion from Q3 2016. This includes adding back $9.2 billion in UK card balances that were moved from loans and leases to assets of businesses held for sale pursuant to the announcement of the sale of our UK card business. Loans on a reported basis showed growth of $1.7 billion as a result of that movement. We expect to close the sale around the middle of the year subject to regulatory approvals.
+On the funding side, deposits rose $28 billion from Q3, or 9% on an annualized basis. At the same time, long-term debt fell by $8.3 billion driven by hedge and FX valuations. Global Markets trading liabilities declined in tandem with Global Markets assets. Lastly, common equity declined $3.2 billion compared to Q3 as additions from earnings were offset by a decline in AOCI and capital returned to shareholders. AOCI declined by $5.6 billion. Driving the decline was a $4.7 billion reduction in the value of AFS securities held in our investment portfolio, which reduced in value as long-term rates rose significantly during the quarter. Reflecting this, global liquidity sources declined a bit in the quarter, ending the year just below $0.5 trillion. However, we remain well compliant with fully phased-in US LCR requirements.
+We returned a total of $2.1 billion to common shareholders through a combination of dividends and share repurchases in the quarter.. Return of capital, plus the decline in AOCI, drove a 1% decline relative to Q3 2016 intangible book value per share to $16.95. However, it's up $1.33, or 9% from Q4 2015.
+Turning to regulatory metrics and focusing on the advanced approach, our CET1 transition ratio under Basel III ended the quarter at 11%. On a fully phased-in basis compared to Q3 2016, the CET1 ratio decreased 12 basis points to 10.8% and remains well above our new 2019 requirement of 9.5%. CET1 capital declined $3 billion to $163 billion driven by the negative OCI valuations. Benefit (inaudible) ratio was a $12 billion decline in RWA driven by lower exposures in our Global Markets business partially offset by loan growth. We also provided our capital metrics under the standardized approach, which remained relevant for CCAR comparison. Here, our CET1 ratio is higher at 11.5%. Supplementary leverage ratios were both the parent and the bank continue to exceed US regulatory minimums that take effect in 2018.
+Turning to slide 6, on an average basis, total loans were up $22 billion, or 3% from Q4 2015. Versus Q3 2016, we saw a pickup in growth driven by holiday spending on credit cards and some late quarter growth in commercial activity. Looking at loans by business segment and in all other, year-over-year, loans in all other were down $26 billion driven by continued runoff of first and second lien mortgages while loans in our business segments were up $48 billion or 6%.
+Consumer Banking led with 8% growth. We continue to see growth in residential real estate. As the pipeline from Q3 2016 flowed through, vehicle lending was solid, home equity paydowns and runoff continued to outpace originations. In Wealth Management, we saw year-over-year growth of 7% driven by residential real estate. Global Banking loans were up 6% year-over-year and on the bottom right chart, note the $64 billion in year-over-year growth in average deposits that Brian mentioned.
+Turning to asset quality on slide 7, one can see clear evidence of our responsible growth strategy. Credit quality metrics remain strong, perhaps best symbolized by our net charge-off ratio, which hit a record low of 39 basis points this quarter. Our strong credit quality metrics are a manifestation of our overall risk management, which has been transformed since 2008 and we expect our performance to bode well as we move through economic cycles.
+Total net charge-offs of $880 million improved slightly from Q3 and are down $264 million from Q4 2015. Provision expense of $774 million declined $76 million from Q3 and $36 million from Q4 2015. A net reserve release in the quarter of $106 million was slightly higher than Q3 2016 as we released $75 million of energy reserves given improvement in asset quality and current stability in energy prices.
+The Q4 2016 total net reserve release was roughly a third the amount released in Q4 2015 as consumer real estate releases continue to moderate lower. Our allowance to loan ratio this quarter was 1.26% with a current coverage level 3 times our annual net charge-offs.
+On slide 8, we break out credit quality metrics for both our consumer and commercial portfolios. As you can see, charge-offs improved in both periods with consumer real estate driving consumer improvement and reduced energy losses driving commercial improvement. We saw improvement in most of our other credit metrics.
+Turning quickly to slide 9, net interest income on a GAAP non-FTE basis was $10.3 billion, $10.5 billion on an FTE basis. Compared to Q4 2015, NII this quarter was relatively stable after adding back the $612 million charge we incurred last year when we called some TruPS securities. Compared to Q3 2016, NII was up $91 million. NII benefited in the quarter from solid loan and deposit growth. We also saw some modest benefit in NII from higher interest rates. Partially offsetting these benefits was market-based hedge ineffectiveness totaling $169 million related to the accounting for our long-term debt and associated swaps where we have swapped interest payments from fixed to floating. This ineffectiveness is recorded in NII and will revert to zero over the remaining life of the debt. It is just a timing issue caused by accounting rules.
+While I'm not likely to give specific NII guidance in most quarters, the move in Q1 2017 is expected to be significant, so we wanted to provide some near-term perspective. As you think about Q1 2017 versus Q4 2016, the benefit from the absence of negative market-related ineffectiveness will be offset by two less days in the quarter, so you can effectively take this quarter's NII as a starting point.
+Now assuming interest rates remain at current levels and we see modest loan and deposit growth, we believe we will earn approximately $600 million in additional NII in Q1, primarily driven by the Q4 rate increases in both the long and short end. From there, we would expect continued growth in 2017 assuming modest loan and deposit growth and stable short and long-term interest rates. With respect to asset sensitivity as of 12/31, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3.4 billion over the subsequent 12 months.
+Turning to slide 10, non-interest expense was $13.2 billion. That's an improvement of more than $800 million or 6% from Q4 2015 and as you can see, the reductions are across the Company in virtually all line items of expense. Our productivity projects and efforts to simplify how we get our work done and how we deliver for our clients are driving these reductions.
+Q4 litigation expense was $246 million, which is fairly consistent with Q3 2016, but lower than the $400 million recorded in Q4 2015. Our employee base declined 2% from Q4 2015. However, we continue to invest in growth by adding primary sales associates across Consumer, across Wealth Management and across Global Banking. As a reminder, in Q1, similar to past years, we expect to incur roughly $1.3 billion for retirement-eligible incentives and seasonally elevated payroll tax expense. Additionally, if we were to see a normal seasonal rebound in capital markets-based activity, we would most likely see an associated increase in expense.
+Turning to the business segments and starting with Consumer Banking on slide 11, this business is generating above-average deposit growth, solid loan growth, improving customer satisfaction and strong growth in earnings. Consumer Banking earned $1.9 billion and produced a 22% return on allocated capital this quarter. I would note that pre-tax, pre-provision earnings rose more than $400 million or 12%. 7% expense and 5% NII improvement were both notable and enough to more than offset higher provision expense and prior-year divestiture gains. Revenue was up 1% compared to Q4 2015 as NII growth was partially offset by the absence of approximately $100 million of divestiture gains in Q4 2015 as we sold the last of our larger, non-core affiliate portfolios in that quarter.
+Credit quality remains good and provision was higher primarily as a result of reserve releases in the year-ago quarter. Consumer continued to lower expenses and the efficiency ratio dropped nearly 500 basis points to 53% from Q4 2015 with good pricing discipline, rate paid on the deposits remained a steady 4 basis points and the operating cost of deposits was also steady at 160 basis points.
+Turning to slide 12 and looking at key trends, first, in the upper left, the stats are a reminder of our strong competitive position. Looking a little closer at the revenue drivers compared to Q4 2015, while we report NII and noninterest revenue separately, it's important to emphasize again that our strategy is to focus on relationship deepening and growing total revenue while improving operating leverage through expense discipline. Our relationship deepening is improving NII and balance growth while holding the fee line flat as we reward customers for doing more business with us.
+We believe the overall result is more satisfied customers whose balances are more sticky over time. We continue to see strong client enrollment in our preferred rewards programs. For the year, we enrolled 1.2 million clients in preferred rewards and that's up 42% from 2015. We are seeing a 99% retention rate for customers enrolled in preferred reward. Average deposits continue their strong growth, up $54 billion, or 10% year-over-year, outpacing the industry.
+With respect to card, spending levels and new issuances were strong; however, the industry trend of increasing reward costs continues to mitigate our overall card revenue growth. By the way, this makes it even more important to hold down acquisition costs for the use of our branch network to source and fulfill customer demand. I would also emphasize that our underwriting standards in card result in a relatively higher quality new card customers that, on the one hand, have higher spending habits, but, on the other hand, receive more rewards.
+Turning to expenses, in the upper right, they declined 7% in Q4 2015 despite higher FDIC assessment charges between the two periods. Digitalization and other productivity improvements continue to help us drive down costs in our delivery network. Focusing on client balances on the left, in addition to deposit growth, client brokerage assets at $145 billion are up 18% versus Q4 2015 on strong account flows and market valuations. We also increased the number of Merrill Edge accounts by 11% versus Q4 2015. We now have more than 1.7 million households that leverage our financial solution advisors and self-directed investing platforms.
+Moving across the bottom of the page, note that the average loans are up 8% from Q4 2015 on strong mortgage and vehicle lending growth. Loan growth reflected total consumer real estate production of $22 billion, up 29% from Q4 2015 and 7% higher than Q3 2016 as the prior quarter's pipeline came through. We retained about three quarters of first mortgage production on the balance sheet this quarter. As you might imagine, the sudden rise in long-term rates caused a noticeable decline in applications to refinance, driving the overall mortgage pipeline down 43% from the end of Q3. Auto lending was up 15% from Q4 2015 with average book FICO scores remaining well above 750 and net losses of 35 basis points.
+On US consumer card, average balances grew from Q3 aided by seasonal holiday spending. And spending on our credit cards adjusted for divestitures was up 10% compared to Q4 2015.
+Okay, turning to slide 13. We remain an established leader in digital banking. With improvements like our Spanish app and contactless sign-in, we continue to see momentum in digital banking adoption. Mobile banking continues to transform how our customers bank and we expect to introduce our artificial intelligence application, Erica, this year. She will add to both the functionality and excitement around digital banking. Importantly, as adoption rises, particularly around transaction processing and self-service, we expect to see efficiency and customer satisfaction improve.
+I won't go through all the details on this slide, but mobile devices now represent 19% of all deposit transactions and represent the volume of more than 880 financial centers. Sales on digital devices continue to grow and now represent 20% of total sales. While these trends are important, and continue to transform how consumers interact with us, I would remind you that we still have nearly a million people a day walking into our financial centers across US. Many of these customers still use our branches to transact, but many also use the branch as a financial destination where they can learn more about products and services, work face-to-face with a specialized professional and generally improve their financial lives.
+Turning to slide 14, Global Wealth & Investment Management produced earnings of $634 million, which is up modestly from Q4 2015 on solid operating leverage. The business continues to undergo meaningful change as firms and clients adapt to the new fiduciary rules and other market dynamics. We remain well-positioned with market-leading brands and a wide range of investment service options ranging from fully advised to self-directed with guided investing for those who want something in between. We also have strong margins and returns, as well as resources to help us manage through market dynamics and customer trends.
+Year-over-year noninterest income declined $104 million as higher asset management fees were more than offset by lower transactional revenue. A 4% decline year-over-year in expenses drove a 170 basis point improvement in operating leverage from Q4 2015. The decline was driven by the expiration of the amortization of advisor retention rewards that were put in place at the time of the Merrill Lynch merger. Other declines were the result of work across many categories of expense more than offsetting higher litigation and FDIC costs compared to last year.
+Moving to slide 15, we continue to see overall solid client engagement. Client balances climbed to $2.5 trillion driven by market values, solid long-term AUM flows and continued loan and deposit growth. $19 billion of long-term AUM flows include clients transferring assets from AUM, clients transferring assets to AUM from IRA brokerage. Average deposits of $257 billion were up 2% from Q4 2015. Average loans of $146 billion were up 7% year-over-year. Growth remained concentrated in consumer real estate.
+Turning to slide 16, Global Banking (inaudible) $1.6 billion, which was up 11% year-over-year. Global Banking continues to drive loan growth within its risk and client frameworks, continued stabilization in oil prices and improvement in exposures drove provision expense lower in Q4 2016. Investment banking fees were down 4% from Q4 2015 as strong debt underwriting activity was more than offset by lower advisory and equity issuance fees. Expenses decreased from Q4 2015 despite the addition of new commercial and business bankers and increased FDIC costs. The efficiency ratio improved to 45% in Q4. Return on allocated capital increased to 17% despite adding a couple billion dollars of allocated capital this year.
+Looking at trends on slide 17 and comparing Q4 last year, relative to Q3 2016, we saw a pickup in lending with average loans on a year-over-year basis up $19 billion, or 6%. Growth was broad-based across large corporates and middle-market borrowers and it was diversified across industries. Average deposits increased from Q4 2015, up $6 billion or 2% from both new and existing clients.
+Switching to Global Markets on slide 18, the business had another solid quarter. Given our broad product and geographic footprint, we were well-positioned to help clients address volatility around the elections and central bank policy uncertainty both in the US and abroad. We continue to invest in and enjoy leadership positions across a broad range of products. This business is another great example of our focus on improving operating leverage. Revenue grew 8% excluding net DVA while expenses declined 10%. Global Markets earned $658 million and returned 7% on allocated capital in what is typically the most seasonally challenged quarter of the year.
+For the year, the return on allocated capital was 10% as sales and trading revenue ex-DVA grew 5% while expense declined. It is worth noting that we achieved these results with a stable balance sheet, lower VAR and 7% fewer people. Continued expense discipline drove cost 10% lower year-over-year led by reductions in operating and support costs.
+Moving to trends on slide 19 and focusing on the components of our sales and trading performance, sales and trading revenue of $2.9 billion, excluding DVA, was up 11% from Q4 2015 driven by FICC. In terms of revenue, while we experienced a normal seasonal decline versus Q3, this Q4 was our second best fourth quarter in five years. Excluding net DVA and versus Q4 2015, FICC sales and trading of $2 billion increased 12%. Mortgages showed particular strength among the credit products as investors sought yield. It was a challenging market for municipals. With the exception of rates, we saw an improvement in trading of macro products, equity sales and trading was solid at $948 million, up 7% versus Q4 2015. Flows were strong in the second half of the quarter driven by changing investor sentiment after the US elections, which drove a favorable environment for derivatives as clients repositioned across industries. We were able to help many clients who were underweight equities leading up to the election add exposure.
+On slide 20, we show all other, which reported a net loss of $95 million. This quarter includes a $132 million charge to add to our PPI reserve. You will also note that this quarter includes no debt security gains. Equity investment income was only $56 million and there was little to no gains from asset sales. Given the increase in rates and our progress with respect to reducing non-core assets, this quarter's results are more reflective of future trends with respect to these two line items. All others Q4 2016 loss includes a net benefit from some tax matters of roughly $500 million, which reduced our tax rate in the quarter to 22%. Excluding those matters, the effective tax rate would have been about 31%. I would expect a similar tax rate of 31% for the average for 2017, excluding unusual items.
+Okay, let me editorialize a little bit as I finish here. We reported solid results this quarter that capped a year filled with improvement. These results show that our strategy of responsible growth is working. One can see responsible growth in our deposit growth while maintaining good pricing discipline. You can see it in the reduction in our expenses even as we continue to invest in the future of the franchise. And you can see it in the deepening of relationships with our customers and clients. Our focus on responsible growth is helping us return more capital to shareholders and today's announcement of an increase in our share repurchase authorization is another example of that.
+Responsible growth has also driven the transformation of our risk profile, which is evident in our credit risk metrics and something we believe will differentiate us through future economic cycles. And responsible growth is driving operating leverage, which is visible in each of our lines of business. Lastly, responsible growth has put us in a solid position to benefit in 2017 from higher interest rates. With that, I will open it up to Q&A.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions). John McDonald, Bernstein.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Hi, good morning. Paul, I was wondering if you could give us a little more split on some of the drivers of the net interest income increase that you are expecting to occur between the fourth and first quarter, the $600 million. How much of that is driven by the Fed hike we saw on the short end and how much of it might be the long end in rates versus loan growth?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Sure. Maybe the simplest way to answer that question would be to take you back to 9/30 when the interest sensitivity on the long end was $2.1 billion. We saw a 75 basis point increase in long end rates since then, so 75 basis points times $2.1 billion is $1.6 billion. At that time, the short-end sensitivity was $3.3 billion. We saw 25% of 1%, 25 basis points, so 3.3 times 25%, that's another $600 million. So together, that's $2.4 billion that you can see just in the change in the interest sensitivity. If you divide that by four, you get your $600 million.
+Again, I would emphasize that we see NII growing from there as we move through 2017 assuming again we have modest loan growth, modest deposit growth and a stable short and long-term interest rate environment.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [4]
+--------------------------------------------------------------------------------
+
+          Okay. And then the reason the 5.3 future sensitivity has now moved to 3.4 is you've rolled $2 billion into your base case outlook?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Yes, conceptually, we've captured the decline in sensitivity -- we are going to capture the decline in sensitivity that you've just experienced in our NII over the next 12 months. You can see that under the calculation I just did for you.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Yes, okay, got it. That's helpful. And then a question for Brian on capital return and CCAR. Some of the other banks have used the de minimis exception to top off their 2016 CCAR authorizations. That leaves Bank of America standing out quite a bit on the low end of payouts versus peers. So I'm kind of wondering -- two questions -- one, how do you guys think about that de minimis -- you did well in 2016. Any reason that Bank of America couldn't think about the de minimis top-off? Are there restrictions on that or could you do that at some point this year on the de minimis?
+And then second, as you move into 2017, what are your goals to get your capital distributions closer to peer payouts and why wouldn't you be able to do that? Thanks.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [7]
+--------------------------------------------------------------------------------
+
+          Yes, John. So this morning, as part of our release, we announced that we got approval for a de minimis of $1.8 billion to add to the $2.5 billion we have for the first half of this year to bring the repurchase volume to $4.3 billion for the first half here. So we applied for that obviously in December and got the approval and our Board has approved it and that went out with the release this morning.
+In terms of next year, we will see what the scenarios are with all the caveats, but you've seen us constantly move our numbers up and we will continue to do that. Our cushions and stuff are strong on the earnings. The most important thing for us was to make sure the earnings power of the Company kept coming back and now with $17 billion of earnings, we feel confident we ought to be able to push forward.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [8]
+--------------------------------------------------------------------------------
+
+          And John, that $1.8 billion was the full 1%.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [9]
+--------------------------------------------------------------------------------
+
+          Great. And that will take you through -- just as a reminder, Paul, that will take you through the end of this CCAR period, right?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [10]
+--------------------------------------------------------------------------------
+
+          Right.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [11]
+--------------------------------------------------------------------------------
+
+          Right, the first two quarters all in the first half here.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [12]
+--------------------------------------------------------------------------------
+
+          Great, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          Jim Mitchell, Buckingham Research.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [14]
+--------------------------------------------------------------------------------
+
+          Hey, good morning. Maybe I'll just follow up on the NII question a little bit. Does that guidance that you provided include the sale of the UK card business and what's the impact from that?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [15]
+--------------------------------------------------------------------------------
+
+          Yes, the guidance includes the sale of the UK card business, but just to be clear, that's not going to close until probably mid this year. So that NII will be with us until it closes.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Sure. So when we think about going forward, what kind of deposit betas are you assuming in that $600 million per quarter and how do we think about the next rate hike? Say we get one in June, which seems to be consensus, do you still expect to have very low deposit betas there?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [17]
+--------------------------------------------------------------------------------
+
+          Yes, so, again, if you go back to 9/30, I think we told you we were using deposit betas in our modeling on interest-bearing deposits in the high 40s. And we said, hey, the first few rate hikes is going to be less and the later rate hikes, it's going to be more and that's what we are experiencing. So if you looked at our deposit betas right now, you would probably see it inching into the 50s. It's definitely moving up as we get more short-term rate hikes.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          And you think that can continue into the third, the next rate hike?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [19]
+--------------------------------------------------------------------------------
+
+          Well, again -- we will see what happens here. We had a rate hike a year ago and I think a number of people would have said that we would have had a pass-through, and I don't think there was a significant pass-through in the industry. We just had a rate hike in December and we are going to see how much pass-through we actually had. From a modeling perspective, in that guidance I gave you, from a modeling perspective, the pass-through rate on the next 100 basis points would be in the 50s. And again, it would be the same story. Less in the beginning, more at the end.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [20]
+--------------------------------------------------------------------------------
+
+          Yes, understood. Okay, that's very helpful. Thanks.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          Glenn Schorr, Evercore ISI.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          Hello there. Two quickies. One on card, one on mortgage. On cards, you had some pretty good growth and we're seeing really big growth at some of the other big banks and some of the economics of the business are being given way to support that growth. I'm just curious on how you are balancing that of customer growth versus giving up some of the economics to capture that growth.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [23]
+--------------------------------------------------------------------------------
+
+          Well, I think the way to think about it, Glenn, overall is that we are doing on a customer basis. So when we -- Paul gave you the statistics earlier for the preferred rewards enrollments and things like that, so we are driving -- our priorities are to get our card used by our core customers and reward them for that who have other deeper relationships with the Company. So in a broad sense, we are getting paid through the NII line, as well as any other relationship they have, as well as the card income fee line that you see on deposit balances and other things, plus obviously the card balances.
+We've been pleased that we now have gotten through all the sales when you think about this quarter versus last year and so active accounts are moving up I think 2% or 3% or so. Year-over-year the active accounts are up, which shows the strategy is working. So while we make that investment you're talking about and that is part of the competitive dynamics, we feel good about the balances growing, so we are getting more NII from it, but importantly with our customers these are the best customers we have and so we're seeing their other aspects of relationship grow.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [24]
+--------------------------------------------------------------------------------
+
+          And again, strong risk-adjusted margins in that business, stable for us above 9%, charge-offs look great and as Brian said, we are standing at the higher end of the market.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [25]
+--------------------------------------------------------------------------------
+
+          I guess the super ROA and ROE support it anyway for the overall Company. And then the question on mortgage was production was good, but the pipeline fell a lot. Obviously a function of what happened in rate, but can you help us think about what to expect say next year if say rates go up along the forward yield curve? How do you model that? How can you manage the expense along the way?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [26]
+--------------------------------------------------------------------------------
+
+          Well, I think if you look at the page that showed the quarterly production in the Consumer section there, you can see I think it was three quarters -- last three quarters all over $20 billion in home mortgage loans and home equity loans. What you wouldn't know from the outside is, during the last year, we made a series of major changes in that business. We've consolidated internal platforms so we have one group, a fellow named Steve Boland who does a terrific job for us, delivering the product across all the businesses whether it's US trust, Merrill Lynch or the consumer business.
+In addition, we brought in servicing from third parties of our customers and we continue to do that. So even in a year where we've made tremendous transformations, you saw [$320 billion] plus. And so our view -- the team would tell me that the pipeline will be down because refinances are down and therefore expect less, but I think my view is that they should be able to continue to grow marketshare frankly because of the capacity that they were able to develop this year given those changes and still produce flow.
+That being said, it's a rate-sensitive product. So we've told you to think about the mortgage banking line as $300 million odd. It was a little higher this quarter just because of some of the dynamics, so it's a relatively modest line, but the production will be strong.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [27]
+--------------------------------------------------------------------------------
+
+          Okay, thanks very much.
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+          Steven Chubak, Instinet.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Instinet - Analyst    [29]
+--------------------------------------------------------------------------------
+
+          Hi, good morning. So Paul, I wanted to start off with a question on the FICC business. The revenues have been remarkably resilient over the last couple of years really helped by some of the factors that you cited, whether it be strong risk discipline, balance sheet management and the reduction in VAR. But as we look ahead, what we've been hearing from a lot of folks is growing optimism around the FICC business in the coming year and what I'm wondering is whether your strong risk discipline actually precludes you from participating in a significant recovery if that materializes to the same extent as some of your peers.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [30]
+--------------------------------------------------------------------------------
+
+          Look, we feel, as you point out, look, we feel really great about that business. It is performing very well. I would note the operating leverage we are getting, I would note, as you said, our discipline on risk and the reduction of VAR. So we have no complaints. We have a diversified product set that has a global geographic footprint. We have scale in every major market around the world and when you look at Global Banking and Global Markets together, I would argue that only three companies in the world can deliver what we can deliver for our clients and customers in every major market around the world.
+So there is tremendous opportunity there. We are not going to look exactly like every competitor every quarter. We have often said that when things are great, we might not be as high, but when things aren't so good, we are not going to be as low. So we feel great about it, but we think there's lots of opportunity and we would expect continued performance in that business.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Instinet - Analyst    [31]
+--------------------------------------------------------------------------------
+
+          Got it. And switching over to just the capital side for a moment, you highlighted the progress you made in reducing the GSIB surcharge to 2.5. I'm wondering, as you think about how you're going to allocate capital across the different businesses, whether that positions you to reduce your firmwide targets and maybe more specifically how are you thinking about your spot capital requirement today for the firm overall?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [32]
+--------------------------------------------------------------------------------
+
+          Well, I'm not sure I understand the question. In terms of -- so let's just talk about it a bit. In terms of the allocation of capital, that's a process we go through once a year. We look at a number of different metrics, advanced approach, standardized approach, SLR. We look at internal models, economic capital and we arrive at what we think is the right amount of capital to give to our businesses based upon their business operations and risk. Remember, we've got $500 billion of operational risk capital that was assigned to us by the regulators. From my perspective, personal perspective, most of that is for businesses that we're no longer in, products that we no longer sell, risk that we no longer take. So a big chunk of that sits in all other and wouldn't really be appropriate to push it from a segment standpoint out to the businesses because they are not really using that risk capital.
+So is that what you are looking for or was there some other element of that question that I missed?
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Instinet - Analyst    [33]
+--------------------------------------------------------------------------------
+
+          Well, I think the tricky part there and admittedly, it's a complex topic is thinking about how much capital you need to get through the CCAR process unscathed or maybe under the new SEB framework, like what's the minimum capital requirement that you would need over which the remainder is considered to be excess and can be returned to shareholders over time?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [34]
+--------------------------------------------------------------------------------
+
+          Look, we've made a lot of progress on CCAR. We've made -- the progress you are really seeing in the Company is lots of technical things we've done to be much better in CCAR in terms of improving how we do it, involving everybody in the Company, the qualitative aspects of it. I think from a quantitative standpoint, we've always looked like we've had enough capital. I think if you look at our stress losses relative to competitors, you can see responsible growth coming out in the Fed's models, not our models.
+So I think we feel really good quantitatively. I think we feel really good qualitatively. If you look at the stress capital buffer, that's not going to impact capital for us. We are probably -- we'd have to see how it all -- the rules -- this was a speech, so we don't really know what all the rules are going to say, but my guess is our stress capital buffer is below the minimum that would be required. So we feel like we are in a good position for CCAR 2017. We don't know what the scenario is yet. We don't know what the rules are, so there's a lot still changing, but we feel really good about the progress we've made and certainly our cushion from a quantitative standpoint.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Instinet - Analyst    [35]
+--------------------------------------------------------------------------------
+
+          All right. Thanks for taking my questions.
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+          Betsy Graseck, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [37]
+--------------------------------------------------------------------------------
+
+          Hi, good morning. A couple of questions. One is on just the balance sheet and as you think about your cash duration, just the profile that you have today in a rising rate environment over time. Do you expect to stay more static where you are today or any changes that we should be anticipating?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [38]
+--------------------------------------------------------------------------------
+
+          I don't think you should anticipate any changes. We haven't changed since rates started rising. We feel good about the way we are. We are very focused on (inaudible) our balance sheet deposits come in. That's what really drives the size of the balance sheet, deposits come in and the question is, within our risk framework, can we put those deposits to work with our customers and clients around the world. If we can, we put it to work within our risk framework. If we can't, it goes into some other place, either cash or the investment portfolio.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Okay, and then on --.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [40]
+--------------------------------------------------------------------------------
+
+          We are always balancing liquidity, earnings and capital, but we are not really sitting there every quarter figuring out what the most optimum duration is for us.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [41]
+--------------------------------------------------------------------------------
+
+          And then just from the cash perspective, the LCR, could you just give us a little color as to where you stand there?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [42]
+--------------------------------------------------------------------------------
+
+          We are in very good shape.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [43]
+--------------------------------------------------------------------------------
+
+          So I hear you on that and it sounds like, okay, we have some excess cash and I guess that's part of the reason I asked the question. Is there any interest in moving some of that cash into [that]?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [44]
+--------------------------------------------------------------------------------
+
+          Yes, but LCR isn't just cash. LCR includes highly -- lots of different securities go into the LCR calculation.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [45]
+--------------------------------------------------------------------------------
+
+          Sure, no, I get that.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [46]
+--------------------------------------------------------------------------------
+
+          Betsy, to make it simple, the excess of cash coming in over loan growth goes half into mortgage-backed securities and half into treasuries at this point and the duration of what we do on the treasuries will be a little bit based on where we think rates are going and stuff like that. But it's driven -- just it goes into those two things because we have -- once we fund the loan balances, that's where it goes.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [47]
+--------------------------------------------------------------------------------
+
+          We are not trying to hold more cash than we need.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [48]
+--------------------------------------------------------------------------------
+
+          Yes, that's good to hear. Other question was just on the improvement in the minimum capital ratio and the RWA reduction that drove that. Could you just give us a little more color on the drivers there and do you feel like you are optimized now for what you want to take in terms of risk relative to total size balance sheet?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [49]
+--------------------------------------------------------------------------------
+
+          Yes, sure. So as I think Brian mentioned and I mentioned, we took the GSIB buffer down 50 basis points. It's at 9.5%, again compared to 10.8% on a fully phased-in basis. So that's 130 basis points of cushion at this point. We got there through things like reducing derivative notionals through riskless trade compressions. We got there by lowering level three assets, as well as overall optimization as the rules became a little bit more clear. So we've been working at this for some time. You've asked on other calls, I think other people have asked, we haven't really wanted to declare where we were, but now we've got to the end of the year. This is when the calculation really matters so we thought it was important to disclose that progress.
+I would also say that Global Markets, it's going to be up and down in any given quarter. The ending balances in the third quarter were up. They were a little bit less than the end of the fourth quarter just on client activity.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          Right. Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [51]
+--------------------------------------------------------------------------------
+
+          Marty Mosby, Vining Sparks.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [52]
+--------------------------------------------------------------------------------
+
+          Thank you. When you think about rate sensitivity and deposit betas, you get back to really deposit flows. We continue to see increases in deposit balances and until we see any pressure of those balances being deployed back into the economy, there really shouldn't be much impact on pricing. What is -- you are looking at the core deposit balances and what are the flows you are seeing and where is the growth coming from and are you seeing any pressure in the sense of thinking of those balances being deployed back into the economy?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [53]
+--------------------------------------------------------------------------------
+
+          Well, Marty, we saw $50 billion odd of deposit growth year-over-year. Consumer business was the lion's share of that. To give you a sense, fourth quarter 2015 to fourth quarter 2016, checking balance in the Consumer business grew 12%. So the growth is strong and as you said, we expect to maintain pricing discipline in the Company. Obviously those are not interest-bearing, but on the interest-bearing side and you have seen that so far as the first rate move happened last year.
+In terms of deploying the economy, we made $20 billion more loans and we will continue to drive the economy and if we can't, we'll invest in mortgage-backed securities and things like that. So we are able to fund easily all the loan demand that we think is responsible to take on. In the fourth quarter, we saw loan growth and our commercial business picked up draws online stated at a high level and loan growth in the middle-market business was strong in the fourth quarter and we are looking for more of that in our small business. So you are exactly right. We are deploying it in the economy. There is not a lot of -- they are growing faster than loans and we believe that we can price with discipline.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [54]
+--------------------------------------------------------------------------------
+
+          And then just two unusual things out there. The hedge ineffectiveness, can you give us the actual dollar amount? It looks like the day count will typically impact you about $150 million to (technical difficulty) and then other fee income looks artificially low. If you could just give us some color on that line item as well.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [55]
+--------------------------------------------------------------------------------
+
+          Sure. So the hedge ineffectiveness was $168 million in the quarter, a negative obviously. And in terms of the other -- you are talking about the other income line, so --.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [56]
+--------------------------------------------------------------------------------
+
+          Other fee income.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [57]
+--------------------------------------------------------------------------------
+
+          The other fee income. So that last quarter -- let me give you a sense. Last quarter, we had I think some -- that line is going to bounce around a little bit. Let me start with that. But the last quarter, we had some positive impacts in that line from loans related to our FEO portfolio. This quarter, it was negatively impacted by the UK PPI provision. That was $132 million and that's non-tax-deductible. So if you adjust for those two items, we would be around $300 million and I would say that's probably a good base for you to think about if you are modeling.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [58]
+--------------------------------------------------------------------------------
+
+          Perfect. We were right in that range, so that got us right back to the normal level. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [59]
+--------------------------------------------------------------------------------
+
+          Mike Mayo, CLSA.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [60]
+--------------------------------------------------------------------------------
+
+          Hi, so there's certainly a lot of positives on this call, whether it's deposits, loans, expenses, etc. But the end result is still a single digit return on equity or return on tangible common equity. And I know you want it to be higher. I know it's improved, but it's still below your peers today of 13% and below your target of 10%. So can you give us a target metric for ROTCE for 2017 or when do you think you get to that double-digit range where some of your peers are?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [61]
+--------------------------------------------------------------------------------
+
+          So thank you, Mike, for noticing the improvement because we feel really good about all the progress we've made. As you point out, earnings are up year-over-year on 15% and that's on a very significant earning base of $18 billion. We need to get our capital down. We are returning more capital to shareholders. That's going to help. We need to continue to grow. So we feel really good about the progress that we have made.
+Our return on assets metric is tracking in the right direction. Our return on tangible common equity metric is tracking in the right direction. So we will just have to wait and see. I think we get there even without a rate rise eventually, but certainly a rate rise is going to help.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [62]
+--------------------------------------------------------------------------------
+
+          As a follow-up, I know I ask this each year, but you just said wait and see and that's kind of been the answer. It just seems like, from an investor standpoint, you get a free pass. Like you will get to the double-digit ROTCE when you get there and as investors, we're just going to have to wait and see. It would be nice to have that metric or more color or -- or anything else you can give along those lines.
+And maybe just for some more of that color, the efficiency ratio, I get it, you've gotten better, but it's still not where I think you want to be. It's 66% and your peers today that report it are under 60% for last year. What else can you do with efficiency, which might help improve that ROTCE to the double-digit range?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [63]
+--------------------------------------------------------------------------------
+
+          Mike, a couple things. One is, if you look across the last three quarters, the return on tangible common equity was 10.5%, 10.28% and 9.92% and you have a fourth-quarter seasonal decline in trading. So it will pick back up in the first quarter and we look forward to that going back up. And on the efficiency, we've set the goal for $53 billion in expenses and with the rate increases, we will continue to drive that down and if you look through the year-over-year, it was down from 70 into 66 and the last couple of quarters have grown sub 65, around 65 and we will continue to move from there.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [64]
+--------------------------------------------------------------------------------
+
+          You've come a long way with branches from 6,000 down to 4,600. Where do you think you ultimately could take that branch count and why all of a sudden are you reducing the level of ATMs?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [65]
+--------------------------------------------------------------------------------
+
+          Well, the ATMs are coming down largely because, as you reduce branches, there's one or two and then third-party ATMs in places that aren't very efficient, so they will continue to wind down. So I wouldn't necessarily focus on that as being a separate question as we build them out. But if you think about -- on the branch, we're down -- for the year, we had 179 that closed, but we also renovated 205, put out 34 new ones. So we are continuing to invest; yet there is a steady downdraft in the total branch count. So we ended the year at 4,500, almost 4,579 so we will continue to work that count down again based on how the customer flows go. These are critical to serve the customers and so we end up as larger branches and smaller branches that are being folded in and we will continue to do that.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [66]
+--------------------------------------------------------------------------------
+
+          I think as you think about that number, Mike, focus on the active mobile users because that's going to be the interplay here. Active mobile users are up 16% year-over-year. On a big base, we grew active mobile users more than we grew in 2015 and deposit transactions are now 19% -- mobile deposit transactions are now 19% of all deposit transactions. That's the equivalent of 880 financial centers.
+So on the one hand, that says maybe you can optimize a little more, but, on the other hand, as I said in the lead-in, we still have a million people, almost a million people coming into the branch every day and they need that channel, they need it to transact, some of them, but a lot of them come in for advice and we want them to do that. So we need a certain footprint of financial centers.
+I think Brian alluded to the fact that we are adding financial centers all around the country, in certain markets around the country. So it's going to ebb and flow.
+
+--------------------------------------------------------------------------------
+Mike Mayo,  CLSA - Analyst    [67]
+--------------------------------------------------------------------------------
+
+          All right, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [68]
+--------------------------------------------------------------------------------
+
+          Matt Burnell, Wells Fargo.
+
+--------------------------------------------------------------------------------
+Matt Burnell,  Wells Fargo - Analyst    [69]
+--------------------------------------------------------------------------------
+
+          Good morning. Thanks for taking my question. Brian, maybe a question for you. I noticed on slide 19 of the breakout of the Global Markets revenue mix, 40% of the revenue in the past year coming from outside the US and Canada. As we look towards what appears to be a potentially more volatile market condition in Europe relative to the Brexit negotiations, which are set to start early in 2017, how are you thinking about that and what the effect could be on your sales and trading revenue in 2017?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [70]
+--------------------------------------------------------------------------------
+
+          I think there was volatility this year around it just on the announced vote and things like earlier in the year. That was one of the events that I referenced. The nice thing is the balance in this business when you think about it. So it's balanced by product, it's balanced by geography. So when one thing goes -- if something else is going [well], we pick it up. So I'm not overly worried about -- we've got to get Brexit right as our Company and the industry and everything and there's a lot of discussion about that, but in terms of an impact on the trading revenue on a given day, it will ebb and flow and we will get through it. But the good news is, is the United States strengthens in the first part of the year. We have seen a good normal first quarter developing and we've seen customer activity strong, all of which bodes well. So we will get through it.
+
+--------------------------------------------------------------------------------
+Matt Burnell,  Wells Fargo - Analyst    [71]
+--------------------------------------------------------------------------------
+
+          Okay. And then if I can just follow up on your earlier comments about the post-election positive sentiment. Can you give a little more color as to what your borrowers and what your corporate clients are saying in terms of what their demand -- the increase in their demand could be or are they holding back a little bit waiting to see what comes out of the Beltway over the next six to nine months??
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [72]
+--------------------------------------------------------------------------------
+
+          What I'd reflect on is that, as you came through the summer into the fall through the election, you saw -- both on the consumer side and on the commercial side, you saw increasing optimism. On the consumer side, you saw a bit of an acceleration and spending coming into the fall. So just if you think about the middle-market business, as I said earlier, the revolver utilization is on the high end of where it has been the past several years at 40% plus and that group, which is our middle-market business, our commercial real estate business, etc., added about $4 billion worth of loans in quarter four. So all that really relates to greater business confidence. So I think we feel very good where business is staying and you get the same reports from the small business side.
+So as I go out and visit these clients, they are very optimistic. They think policies will be supportive of growth in their businesses and they are facing all the things that we face. Can they find the good employees, can they find the final demand, but I think overall the optimism is very strong. And we are seeing it translate into some loan balances. I think it still will play out into early next year.
+
+--------------------------------------------------------------------------------
+Matt Burnell,  Wells Fargo - Analyst    [73]
+--------------------------------------------------------------------------------
+
+          Okay, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [74]
+--------------------------------------------------------------------------------
+
+          Eric Wasserstrom, Guggenheim.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim - Analyst    [75]
+--------------------------------------------------------------------------------
+
+          Thanks. Two quick questions please. One is on the -- can you just perhaps update us on your outlook for auto credit? It's been an issue that's been a bit of a battleground, particularly on the mid and low FICO range and I know that's not where you are concentrated, but I'd love to get your perspective there.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [76]
+--------------------------------------------------------------------------------
+
+          So we've got marketshare of around 3.5% and we are originating in prime and super prime with average FICO scores at 771 and debt to income ratio is at all-time lows. And I know this isn't necessarily completely responsive to your question, but credit statistics here are phenomenal. I think in the quarter, our net charge-off ratio was 19 basis points. So we are able to grow that. We did grow it in the quarter well and we are able to grow it within our risk tolerance.
+Now the fourth quarter was a great quarter in auto. I think we have all seen the numbers and we are expecting that growth to continue. Assuming a modestly improving economy, we are expecting that growth to continue in the first and second quarter. I guess as guidance I would give you auto growth in mid to low single digits. By the way, I've just been corrected here. Our net charge-off ratio in the fourth quarter was 35 basis points, not 19, but still well, well within our risk tolerance for that product.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim - Analyst    [77]
+--------------------------------------------------------------------------------
+
+          And does the potential decline in collateral values present any particular concern to you guys?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [78]
+--------------------------------------------------------------------------------
+
+          It presents a concern and you watch it carefully, but where we keep our business, how we view this business is it's a very high credit quality business. It hasn't affected us, as Paul just said, but we see it in the industry and it's obviously a concern, but there's always some seasonality to those recoveries and those statistics reported, but overall with our high -- our FICOs are 770-ish range, so it's not really -- it doesn't really affect us.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim - Analyst    [79]
+--------------------------------------------------------------------------------
+
+          And just one quick follow-up on capital return. I just want to make sure I understand all the dynamics. It seems like there's two trends that are coinciding. One, of course, is the continued increase in targeted payout ratio as a percent of your earnings and then, of course, there is the expansion in earnings themselves. Is that the right way to think about it? Is there any other dynamic to consider?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [80]
+--------------------------------------------------------------------------------
+
+          You have it right.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [81]
+--------------------------------------------------------------------------------
+
+          You have it right. Well, actually the only thing I would add is the process itself in terms of the scenarios and things like that, but we've had plenty of cushion, so unless they change grammatically, you've got it right.
+
+--------------------------------------------------------------------------------
+Eric Wasserstrom,  Guggenheim - Analyst    [82]
+--------------------------------------------------------------------------------
+
+          Great. Thanks very much.
+
+--------------------------------------------------------------------------------
+Operator    [83]
+--------------------------------------------------------------------------------
+
+          Paul Miller, FBR Capital Markets.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [84]
+--------------------------------------------------------------------------------
+
+          Thank you very much and good quarter, guys. Talking about mortgage banking a little bit, you talked about that you did about $22 billion originations in the quarter. And correct me if I'm wrong, Brian, but did you mention that you portfolioed three quarters of that onto the portfolio? And if you did, what was the breakout between jumbos, just a rough estimate between jumbos and regular conforming or were they all jumbos?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [85]
+--------------------------------------------------------------------------------
+
+          Yes, so we balance sheet, I think to be precise, 78% this quarter and we generally balance sheet all of the jumbos. So then the question is, for conforming, how much do we do. I don't really have that in front of me. We are starting to do more conforming, but we are certainly not doing all of it. Maybe a good guess would be around half.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [86]
+--------------------------------------------------------------------------------
+
+          Okay.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [87]
+--------------------------------------------------------------------------------
+
+          Hey, Paul, just to think about that a second, that credit quality as mortgages is so strong that frankly it's not worth getting the guarantees and things like that. We have the liquidity to fund them and it's obviously jumbos, but even on the conforming, the credit quality of ours is at the top end and I think the charge-off ratio was 3 basis points in the fourth quarter. So economic gets better at keeping the pace for the guarantee.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [88]
+--------------------------------------------------------------------------------
+
+          We are seeing a lot more people portfolio before -- what you just said because the guarantees are so expensive. Is the PHH, is that all now consolidated down into your operations? The PHH stuff from Merrill Lynch that you brought over?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [89]
+--------------------------------------------------------------------------------
+
+          Yes, it's finished up and we're still working through the last part of the conversion, but it's basically in-house.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [90]
+--------------------------------------------------------------------------------
+
+          Hey, guys, thank you very much.
+
+--------------------------------------------------------------------------------
+Operator    [91]
+--------------------------------------------------------------------------------
+
+          Matt O'Connor, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [92]
+--------------------------------------------------------------------------------
+
+          Good morning. Sorry if I missed it, but did you guys comment on the $53 billion expense target that you put out there? I think it's exiting 2018 is what you said.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [93]
+--------------------------------------------------------------------------------
+
+          It's still good.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [94]
+--------------------------------------------------------------------------------
+
+          Okay, so even if revenue is better than expected, but it's rate-driven, that's not going to impact expenses materially?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [95]
+--------------------------------------------------------------------------------
+
+          It's still good and we still target that and you are exactly right. Rate increases will go to the bottom line.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [96]
+--------------------------------------------------------------------------------
+
+          Okay. And then separately credit quality overall was very good. The charge-offs and non-performers. You did flag I think it's the nonguaranteed consumer early delinquencies. I think it was about 15% Q2 and a little bit year-over-year. Just anything to flag there, especially given how quality the consumer book is?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [97]
+--------------------------------------------------------------------------------
+
+          That was the transfer of servicing that we just talked about on the previous question.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [98]
+--------------------------------------------------------------------------------
+
+          Oh, I apologize about that. Okay.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [99]
+--------------------------------------------------------------------------------
+
+          It's a good question, but we transferred servicing at the end of the quarter. When you transfer servicing, you've got to redo all the bill pay and that's just a result of not getting all those bill pays done over the quarter. By now, we are probably 90% of the way through that problem. It's just a timing issue.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [100]
+--------------------------------------------------------------------------------
+
+          Okay. Then ex that impact, I assume the early stage delinquencies -- what would the early stage delinquencies look like?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [101]
+--------------------------------------------------------------------------------
+
+          I think 30 plus day in mortgage was actually down $40 million I think.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [102]
+--------------------------------------------------------------------------------
+
+          Absent that.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [103]
+--------------------------------------------------------------------------------
+
+          Absent that issue.
+
+--------------------------------------------------------------------------------
+Paul Miller,  FBR Capital Markets - Analyst    [104]
+--------------------------------------------------------------------------------
+
+          Okay, all right, that makes sense. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [105]
+--------------------------------------------------------------------------------
+
+          Nancy Bush, NAB Research.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [106]
+--------------------------------------------------------------------------------
+
+          Good morning. Brian, could you just talk a little bit about your deposit marketshare? You are up the street or around the corner from a company that showed us this morning that they are getting a lot of churn in their deposit base. So are you able to track whether you are benefiting from that?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [107]
+--------------------------------------------------------------------------------
+
+          I don't think we have specific guidance on that. Our marketshare -- we are growing our deposits faster than the market, therefore your marketshare is growing. Where it's coming from exactly, Nancy, just for historical perspective, because you've been around this Company, this industry for a long time, I had them check something, but from 2007 to today, effectively, the deposits per branch have doubled and the checking account numbers are basically flattish and up maybe a percent or something like that. So think about the dynamics of that in terms of profitability. So we feel very good about the growth in deposits year-over-year, 12% in checking and 10% overall. So it's coming from somewhere. I just don't know where exactly.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [108]
+--------------------------------------------------------------------------------
+
+          Can you just give us an idea of -- where are you gaining more marketshare through digital, mobile? Are you gaining more through people still coming in the branch?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [109]
+--------------------------------------------------------------------------------
+
+          The answer would be yes because --.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [110]
+--------------------------------------------------------------------------------
+
+          All of the above?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [111]
+--------------------------------------------------------------------------------
+
+          Think about it, I think Paul said earlier that mobile sales are 20%-ish, but that means 80% are not mobile, therefore they are coming through other call centers and branches. So it's an integrated business system and [Tong] and [Dean] and the team working there have done a great job of optimizing that if you look at the chart and watch the cost per deposit continues to work its way down while there's growth and then additional salespeople. So it's coming. The year-over-year rise in mobile sales is actually faster obviously, but it's still only 20% of the contribution.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [112]
+--------------------------------------------------------------------------------
+
+          The other thing interesting, by the way, we are using -- a statistic I really like is we have digital appointments. So people come into the branch, but they don't just walk in now. They are coming in for an appointment that they've made over their smartphone. So that really helps us from an efficiency standpoint as well. If we can get people to do that, it's better for them and it's better for us.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [113]
+--------------------------------------------------------------------------------
+
+          Okay. My follow-up question is this. We have experienced or we experienced on November 8 a sea change in the thinking about bank regulation going forward. And everybody that I've talked to seems to think, even if there are not significant changes in what's on the books, that there will be, quote, a lighter touch in regulation. And I guess I would ask if you are thinking in those terms and if so, do you think that that will have an impact on your expense numbers, number of people you need to add in compliance, etc. etc. ongoing?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [114]
+--------------------------------------------------------------------------------
+
+          I think if you think about it, there are a couple of dimensions. Obviously that dimension is well spoken about out there. You saw yesterday I think the House passed a couple cost benefit analysis type requirements for the SEC and the commodities things. So I think there will be a body of work that will go on to balance, let's make sure we understand the pluses and minuses of a lot of this stuff.
+But, in reality, if you think about our Company, we have maintained -- we invest a lot of talent and capabilities in people, in compliance and risk in 2010, 2011 and 2012 and it's been relatively flat, but the Company has shrunk around it, so it's become a higher percentage, but it's not -- we are able to now start to optimize that and make it better and so I think if we get that, that's terrific. That will help us even do more potentially, but even if we don't, there's optimization to come now that we've crested -- all the different things that have gone on in the industry.
+So first it was the work of just collecting the bad mortgage and stuff went up, but now you are optimizing more the way we manage risk in a systems environment and stuff like that. So I look forward -- that's what helps us give confidence for the future path on costs overall.
+
+--------------------------------------------------------------------------------
+Nancy Bush,  NAB Research - Analyst    [115]
+--------------------------------------------------------------------------------
+
+          All right, thank you.
+
+--------------------------------------------------------------------------------
+Operator    [116]
+--------------------------------------------------------------------------------
+
+          Gerard Cassidy, RBC.
+
+--------------------------------------------------------------------------------
+Gerard Cassidy,  RBC - Analyst    [117]
+--------------------------------------------------------------------------------
+
+          I've got a question for Paul. You made a comment about that the end of the quarter you saw some commercial activity. I know Brian referenced already some pickup in middle markets and commercial real estate, but can you give any further color of that commercial activity that you saw in the lending side at the end of the quarter?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [118]
+--------------------------------------------------------------------------------
+
+          Yes, sure. That's a little earnings prep talking to our head of our middle markets business, our GCB business and our small business banking. They are telling me that they are definitely seeing more interest from CEOs to have meetings. A lot of engagement around 2017 and what the environment might be. Things are feeling a lot more optimistic to those bankers and it's not just talk. Late in the quarter, we actually did see an increase in loan balances that was I wouldn't call it a spike, but there was definitely an acceleration late in the quarter, particularly in middle market and to a lesser extent in business banking.
+
+--------------------------------------------------------------------------------
+Gerard Cassidy,  RBC - Analyst    [119]
+--------------------------------------------------------------------------------
+
+          Great. And another question actually, Paul, obviously the banking industry has to live by a number of regulations that are dictated by the regulators on capital, liquidity, etc. Coming back to that operational risk capital number you gave us for businesses that you have exited and no longer are operating in, is that an opinion that the Fed has just laid upon all the banks or is that actually in statutes where to change it would require a lot of work versus if it's just the Fed wants to do that to make it extra conservative, maybe a new change in the Fed could maybe give you guys some relief there?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [120]
+--------------------------------------------------------------------------------
+
+          Yes, so we have $500 billion of operational RWA. I think our closest competitor has 400 and then I think Citi is probably at 3 something. So we were given more by the regulators based upon the history of the bank, the acquisitions we did and the losses that were historical. But, as you know, we've exited a lot of those products. Bank of America never had a risk profile. It was more the companies that we acquired. So it's a little bit arbitrary. There are models out there for calculating operational risk capital. Those models, they are the subject of a lot of debate if you follow the Basel committee process.
+So we are focused on trying to get that number down, but it's going to take a little while and we are going to need more clarity from the regulators on how they want to calculate a company's operational risk capital, but that's something that would be very helpful to us if new models were approved that were a little bit more rational in terms of looking at historical losses versus the current operations of a company.
+
+--------------------------------------------------------------------------------
+Gerard Cassidy,  RBC - Analyst    [121]
+--------------------------------------------------------------------------------
+
+          And then just finally I think in your K you put your DTA from last year. It might have been around $25 billion for the deferred tax asset. Do you have an estimate yet for where it will stand at the end of 2016?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [122]
+--------------------------------------------------------------------------------
+
+          Yes, I do. The total DTA -- guys, keep me honest here -- but I think will be $19 billion, but let me give you the number that matters probably if you are thinking about the future. We are not here sitting, predicting any tax change, but what really matters, if there is US tax change in the US, is I will use 2015. In 2015, we had over $20 billion of US profits, pretax profits. That's an important number. And then the other number that's important is, at year-end, our DTAs that would be repriced if the tax rate changed equaled approximately $7 billion.
+
+--------------------------------------------------------------------------------
+Gerard Cassidy,  RBC - Analyst    [123]
+--------------------------------------------------------------------------------
+
+          Thank you very much.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President and CEO    [124]
+--------------------------------------------------------------------------------
+
+          So that was the last question. Let me close by closing up 2016. We had a 13% increase in net income for the year, 15% EPS. We had a good operating leverage with 1% revenue growth and 5% expense growth and we announced today that we increased our stock repurchase program another $1.8 billion. So that closes off a good year.
+As we look forward to 2017, we will just continue to do what we told you we are doing -- focus on responsible growth and we look forward to the benefits of a faster growing economy potentially and increasing rate. So thank you for your time and we look forward to next time.
+
+--------------------------------------------------------------------------------
+Operator    [125]
+--------------------------------------------------------------------------------
+
+          This will conclude today's program. Thanks for your participation. You may now disconnect. Have a great weekend.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2017-Jul-18-BAC.N-138882471971-Transcript.txt

@@ -0,0 +1,824 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2017 Bank of America Corp Earnings Call
+07/18/2017 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian Moynihan
+   Bank of America Corporation - Chairman, President & CEO
+ * Lee McEntire
+   Bank of America Corporation - SVP of IR
+ * Paul Donofrio
+   Bank of America Corporation - CFO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Gerard Cassidy
+   RBC Capital Markets - Analyst
+ * Steven Chubak
+   Nomura Securities - Analyst
+ * Brian Kleinhanzl
+   KBW - Analyst
+ * John McDonald
+   Bernstein - Analyst
+ * Glenn Schorr
+   Evercore ISI - Analyst
+ * Saul Martinez
+   UBS - Analyst
+ * Ken Usdin
+   Jefferies LLC - Analyst
+ * Matt O'Connor
+   Deutsche Bank - Analyst
+ * Jim Mitchell
+   Buckingham Research - Analyst
+ * Betsy Graseck
+   Morgan Stanley - Analyst
+ * Marty Mosby
+   Vining Sparks - Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, everyone, and welcome to today's Bank of America 2017 second-quarter earnings announcement. (Operator Instructions). It is now my pleasure to turn today's program over to Mr. Lee McEntire. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Good morning. Thanks for joining us this morning to discuss the second-quarter 2017 results. Hopefully everybody has had a chance to review the earnings release documents that are available on the Bank of America website.
+Before I turn the call over to Brian and Paul let me remind you that we may make some forward-looking statements. For further information on those, please refer to either our earnings release documents, our website or our SEC filings.
+With that I am pleased to turn it over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Over to you, Brian.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [3]
+--------------------------------------------------------------------------------
+
+          Good morning and thank you for joining us for our second-quarter results. This quarter represents another solid example of driving responsible growth here at Bank of America, where staying the course and executing against our responsible growth mantra has allowed us to market share and grow revenue.
+That mantra drives the way we manage our cost effectively while at the same time making continuing large investments in people and technology for the long-term value of this franchise. That mantra allows us to manage risk well whether its credit, market, operational or reputational risk. That mantra also drives an appropriate pace of growth in a modest GDP environment while holding credit costs down.
+All this has resulted in significant operating leverage leading to strong earnings growth and supports our plan to deliver more capital back to shareholders. Through the first six months of 2017, we have more than doubled the amount of net share repurchases and dividends to shareholders compared to the first half of 2016.
+As a reminder, with successful CCAR results behind us, we announced plans on June 28 to deliver $17 billion in capital back to shareholders over the next 12 months through higher dividends and net share repurchases. For the quarter we produced net income of $5.3 billion after tax, growing 10% compared to last year's second quarter. Now that was driven by continued strong operating leverage across the franchise.
+Our efficiency ratio touched 60% this quarter. In addition to the net income improvement, a 2% reduction in diluted shares resulted in a 12% improvement in diluted EPS. Year-over-year net interest income improvement of nearly $900 million drove revenue growth proving the value of this deposit rich franchise. We continue to also make progress on our returns and our return on tangible common equity moved above 11% for the first time despite increasing capital levels.
+As we look at the next slide on first-half line of business results, I'm going to let Paul talk about the details of the quarter in a minute, but I wanted to highlight basically two things. First, the momentum the businesses have comparing the first half of this year versus the first half of last year. And second, to focus a bit on our consumer business as it reached $2 billion in after-tax earnings this quarter.
+So as a broad statement, each business segment grew earnings and capital and it had its reported returns well above our cost capital. Consumer Banking produced $3.9 billion in after-tax earnings for the first half of the year, growing 14% from 2016. This was achieved with good revenue improvement in controlling costs and driving operating leverage while maintaining great credit quality.
+Our Global Wealth & Investment Management business recorded first-half earnings of $1.6 billion, up 9% year over year with a 27% profit margin. Both of these are records for this business. Our GWIM business has seen assets under management flows of $57 billion for the first six months of the year. This is strong performance considering the industry is navigating many changes both from the customer side and the regulatory side.
+While we have been growing and having strong margins we've been investing. The Merrill Lynch One platform, our Merrill Edge platform and other many investments are providing great transparency for clients allowing us to lower our cost.
+Our Global Banking business serving commercial customers in commercial lending and treasury services and investment banking has produced first-half profits of $3.5 billion after-tax. Earnings are up 36% from last year with strong operating leverage on an operating basis and lower credit costs. And even though this is our most efficient business at 43%, we continue to make investments in both technology and people.
+This quarter, for example -- this year we have rolled out our cash pro customer interface for mobile devices making that -- cash management services more convenient for our clients. And over the last few years we have embarked to increase our local market coverage by just simply hiring more bankers. We have hired nearly 400 bankers over the last couple years and we continue to hire more and we will hire 200 more by the end of next year.
+And finally, when you look at our Global Markets business, it earned $2.1 billion in the first half and generated 12% return on its capital. We grew our sales and trading revenue, excluding DVA, in the first half of 2017 versus the first half of the prior year, in this case 2016 -- for the first time in five years the first half grew faster than the previous year's first half. This growth combined with continued expense discipline drove that improvement.
+So in general, all our businesses continue to improve. And now I want to focus a second on our consumer business and you can see that on slide 4. So given the $2 billion in earnings milestone, I want to talk about and focus on the multi-year effort this business has gone through.
+This change really began around 2009 when we had more than 6,000 financial centers, 100,000 associates and about one-third less deposits. And at the time we had some digital banking capabilities but nothing near what we have now. The team has worked hard over an extended period to produce the results you see today.
+Not only have they significantly reduced headcount, we've done that while adding more and more sales and relationship teammates. We have not only reduced financial centers but we invested and refurbished many and added others in markets we didn't previously serve. And we've continuously invested heavily in technology to drive innovation to keep up with customer behavior changes. And all during this our customer experience continues to improve.
+As you go to slide 4 you can see some of the trended results just for the last four years. In 2014, due to all the changes that you're all familiar with, the revenue had declined in this business because of regulatory changes and to focusing more on our direct business to our consumers as opposed to some of the indirect businesses.
+As you can see also from the crisis forward, we had focused on underwriting prime and super prime customers. And you can see that in the change in total net charge-offs that occurred prior to 2014 and remains in good stead over the last four years. At the same time, while those credit costs have come down, our risk-adjusted revenue has been improving.
+Also you can see our expenses on the lower right hand side continue to drive tremendous operating leverage leading to that net income growth. Today's business operates at a 52% efficiency ratio and, with continuing to drive the customer behavior changes, continued investments for further cost improvements, we expect that to go lower.
+Continuing on slide 5, you can see some of the other changes in the business that have enabled us to make this change happen. How do we make this happen? We do it by optimizing and driving technology enhancements for our customers, for our teammates and ultimately for the benefit of you, our shareholders.
+This sustained level of investments is also validated by the top-tier rankings by third parties, whether it is in digital banking or mortgage banking fulfillment operations of Merrill Edge, and we continue to enhance these offerings. This quarter we launched new capabilities for car shopping and financing those cars through mobile and added new person-to-person features through our partnership with Zelle. We have also rolled out small business capabilities to respond faster to the needs of the small businesses we serve across America.
+We can't emphasize enough the positive impacts all these investments, especially mobile and digital, have made in our improvement as mobile banking users you can see have grown to 23 million at the end of the second quarter. Rapid adoption in digital is shown in the charts you can see on the interactions in the lower part of the page. This quarter we broke through the 1 billion interactions digitally with our customers. That is 1 billion in a single quarter.
+When you look at deposit transactions you can see that 21% of all the deposits are made through mobile devices today. That's equivalent of what 1,000 financial centers does. That's important for client satisfaction, but it's also important because those cost 1/10 of what it costs to do it over the counter.
+Once customer got used to transacting we're now using devices in a broader sense. You can see in the quarter 370,000 appointments were set up on a mobile device to come to the branch. When they come to the financial center we are in better shape to serve them because we know what they are coming for we know what they need. In addition, sales on digital devices are up to 22% of all our account and loan sales.
+So then we switch to the payment side. Payment volumes have been increasing over this time period, but electronification of those payments shows increased adoption of mobile banking and other digital payment methods. You can see in the lower part of the page on the left-hand side while payments have grown 4% overall, digital has grown at an 8% pace while non-digital is relatively flat.
+Our latest push that we made a lot of discussion about with all of you has been person-to-person. This is an important payment stream that we are driving. It's already sizable, but it still only accounts for 3% of the total payments in our consumer business this quarter. It's still in early adoption but P2P customers sent $18 billion in payments through our platform in quarter two. This is up 20% year over year.
+So people focus on all the digital activity, but at the same time we have 800,000 customers a day come into our financial centers. These financial centers serve those customers well, not only helping them transact when they need to, but more importantly to help answer their financial needs and by serving them with the products and capabilities that we have with a face-to-face specialized professional.
+We will continue to invest in that branch structure and it's all in the run rate you see today. We have now built or refurbished 290 centers over the past 12 months and expect to have completed more than 1,500 by the year-end 2019. In addition, we have upgraded all our ATMs or plan to upgrade all ATMs and will finish that by the end of 2019 as well. That's 16,000 new ATMs over three or four years. All that has led to customer satisfaction levels which have reached the highest level in our history.
+So at the end of the day our consumer business is an sample of driving responsible growth, growing with no excuses, doing it [in] the right way [with] the customer, doing it [while] managing risk well, and importantly doing it on a sustainable and best basis, investing in the future while producing great returns in the current. With that I want to turn it over to Paul for some more details about the quarter.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Brian. Good morning, everybody. I am starting on slide 6. As Brian said, we earned $5.3 billion or $0.46 per diluted share with EPS increasing 12% versus Q2 2016. Revenue of $22.8 billion in 7% higher than Q2 2016 and expenses of $13.7 billion was 2% higher than Q2 2016.
+The quarter included a few noteworthy items. First, we completed the sale of our UK consumer card business during the quarter resulting in a small after-tax gain. The transaction added roughly 12 basis points to our advanced CET1 ratio through both additions to CET1 and reductions in RWA.
+A pretax gain of roughly $800 million recorded in All Other reflects a number of factors ,including a premium on credit card receivables sold and the monetization of goodwill. It also reflects the recognition in other income of currency hedging gains and transaction losses from currency fluctuations that were previously recorded in OCI.
+Lastly, we recorded tax expense associated with the currency hedging gains which drove our effective tax rate higher in Q2. After-tax the gain added about $100 million to earnings. The sale completes the transformation of our consumer credit card business from a multi-country multi-brand business to a single brand business serving core retail customers in the United States. As usual we also note DVA for you; this quarter net DVA was a negative $159 million which was similar to Q2 2016.
+We also recorded a couple of charges in expense that are worth mentioning. The first is a $300 million impairment charge related to a few data centers we are in the process of selling. The second is severance costs which were approximately $100 million higher than Q2 2016. Provision expense was $726 million compared to $976 million in Q2 2016 as net charge-offs of $908 million improved versus Q1 and year over year. And as Brian mentioned, ROA and ROTC approached our financial targets, improving both on a year-over-year basis and on a linked-quarter basis.
+Turning to the balance sheet on slide 7, overall end of period assets increased a modest $7 billion from Q1 despite the sale of assets totaling $11 billion associated with the UK card business. We increased assets associated with our trading business as we continue to invest in our clients, particularly in our equities business. These increases in assets were offset by a decline in cash driven by seasonal deposit outflows associated with tax payments and a shift from deposits to AUM and brokerage in our Wealth Management business.
+When looking at deposits on the year-over-year basis, they are up $47 billion 4% from Q2 2016 driven entirely by our Consumer Banking business. Loans on an end of period basis were up $11 million from Q1 as broad-based growth across consumer and commercial loans was modestly offset by the runoff of legacy noncore loans. It's worth noting that this loan growth excludes UK card. These card loans were moved from assets of business held for sale when we announced the transaction in Q4 2016.
+On the liability side, long-term debt increased $2.5 billion during the quarter to $224 billion (corrected by company after the call) as we increased issuance to meet TLAC requirements. Given our progress in the first half towards the requirements, we currently expect to issue less debt in the second half of 2017 as compared to the first half. Global liquidity sources were $514 billion (corrected by company after the call) this quarter and we remain compliant with fully phased in US LCR requirements.
+The asset composition of our global liquidity sources is materially the same as high quality liquid assets as defined under the US LCR rule. However, HQLA for the purposes of calculating LCR are reported not at their fair market value, but at a lower value which incorporates regulatory haircuts and exclusion of excess liquidity held in certain subsidiaries. Therefore the HQLA on a net basis when reported will be lower than our current GLS number.
+Common equity increased $2.8 billion compared to Q1. This increase was driven by $4.9 billion of net income available to common and improved OCI of $700 million offset by common dividends and net share repurchases totaling $2.8 billion in the quarter. Tangible book value per share of $17.78 increased 6% versus Q2 2016.
+Turning to regulatory metrics and focusing on the advanced approach, our CET1 transition ratio under Basel III ended the quarter at 11.6%. On a fully phased in basis compared to Q1, the CET1 ratio improved 50 basis points to 11.5% and remains well above our 2019 requirement of 9.5%.
+CET1 increased $4.4 billion to $168.7 billion driven by earnings, utilization of deferred tax assets and less goodwill deductions given the UK card sale. These improvements in CET1 were partially offset by return of capital. The CET1 ratio also benefitted from a $34 billion decline in RWA driven by continued optimization work, including model improvements, as well as the sale of UK card.
+We also provide our capital metrics under the standardized approach. While our RWA reduction was lower under the standardized approach our CET1 ratio still improved 40 basis points to 12%. Supplementary leverage ratios for both parent and bank continue to exceed US regulatory minimums that take effect in 2018.
+Turning to slide 8, on an average basis total loans were up $15 billion or 2% from Q2 2016. Note that the sale of UK card lowered average loans by $2.9 billion, so you may want to adjust for that when studying growth trends. As usual, loan growth was reduced by the continued runoff of noncore consumer real estate loans in All Other.
+Year-over-year loans in All Other were down $24 billion. On the other hand, loans in our business segments were up $39 billion, or 5%. Consumer Banking led with 8% growth. We continue to see good growth in residential mortgages; we also saw good growth in credit card and vehicle loans. Home equity originations are up nicely but continue to be outpaced by pay downs.
+In Wealth Management we saw year-over-year growth of 7% driven by residential mortgages as well as structured lending. Global Banking loans were up 3% year over year. There was a lot of capital markets activity this quarter and this may have impacted more than usual loan growth among larger corporates as a number of funded bridge loans were paid off and as borrowers substituted bonds for loans in a flattening curve environment.
+On the bottom right note that we grew average deposits by $44 billion, or 4% year over year. This growth was driven by our consumer segment which grew deposits by 9% year over year.
+Turning to asset quality on slide 9. As I have emphasized before, the stability of our asset quality and loss trends reflects years of disciplined client selection and strengthened underwriting standards along with an improving economy. While there is room in the industry for other strategies, we remain focused on responsible growth. Credit quality continues to be solid with net charge-offs, NPLs, delinquencies and reservable criticized exposure all improving from Q1.
+Total net charge-offs were $908 million or 40 basis points of average loans, decreasing $26 million from Q1. Provision expense of $726 million declined $109 million from Q1 and was down $250 million from Q2 2016, driven by lower losses in consumer real estate and improvements across most of our commercial portfolio, particularly energy. Our reserve coverage remains strong with an allowance to loans coverage ratio of 120 basis points and a coverage level three times our annual net charge-offs.
+Turning to slide 10, we break out credit quality metrics for both our consumer and commercial portfolios. Asset quality metrics in consumer real estate continue to improve. While net charge-offs were down overall, there are a few small items to bring to your attention.
+Within consumer we had a small recovery on the sale of a legacy consumer portfolio. And note that one-third of the quarterly UK card losses went away with the June 1 sale. While US card losses increased from seasoning, they remain low. Consumer NPLs of $5.3 billion are at the lowest level since Q2 2008. NPLs came down from Q1 levels and keep in mind that 43% of our consumer NPLs are current on their payments. Commercial losses were up modestly from Q1 driven by a couple of names.
+Turning to slide 11, net interest income on a GAAP non-FTE basis was $11 billion, $11.2 billion on an FTE basis. Compared to Q2 2016, which has the same day count and seasonal factors, NII is up $868 million or 9% driven by an improving spread between our asset yields and deposit pricing in an environment where both short end rates and long end rates increased.
+We also benefited from loan growth and excess deposits deployed in security balances. Compared to Q1 2017, NII was relatively flat as the benefit from an increase in short end rates was offset by a number of factors, including lower long end rates in the quarter.
+First, we increased client financing activities and balances in our equities business to support clients and drive growth. Some of the products we used to accomplish this created interest expense with no interest income. Instead they drove trading account profits recorded in non-interest income.
+Second, the UK card sale closed June 1. That was earlier than we expected and so the quarter's comparisons to previous ones are negatively impacted by one-third of UK cards interest income.
+Third, we saw a decline in leasing interest from the seasonality we see in Q1, but that was offset by one additional day in interest in Q2 versus Q1.
+And then lastly, we experienced some negative debt hedging effectiveness. As a reminder, accounting rules require us to measure changes in the value of our debt differently than changes in the value of swaps we use to hedge, creating temporary ineffectiveness that will revert to zero over the remaining life.
+As a general comment on deposit pricing, overall we held pricing relatively stable in Q2; however, we did increase pricing for some commercial and wealth management clients late in the quarter and this will impact Q3 NII. While holding pricing relatively steady we were able to grow deposits 9% year over year in our consumer segment.
+Looking forward to Q3, please keep three additional things in mind. First, with respect to rates, the most recent June short end rate hike should benefit Q3 NII subject to continued stability in industry deposit pricing. But, the Q2 decline in long end rates will have a negative lag effect in Q3 with respect to the write-off of premium associated with prepayment of mortgage-backed securities.
+Second, we will benefit from one additional day of interest. And third, going forward we will also feel the effects of the full quarter loss of interest income from UK card equating to about $225 million. Having said all that, we would expect NII to be up compared to Q2 if the forward curve is realized and if we have some loan and deposit growth.
+With respect to asset sensitivity, as of 6/30 an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3.2 billion over the subsequent 12 months, which is broadly in line with our position at the end of the first quarter and continues to be predominantly driven by our sensitivity to short end rates.
+Turning to slide 12, non-interest expense was $13.7 billion. As I mentioned earlier, Q2 included roughly $400 million in higher costs from the combination of impairment costs associated with the sale of a few data centers and higher severance costs. Otherwise litigation and other operating costs were lower.
+We feel good about our expense progress this quarter especially in light of our continued investments in sales professionals and new technology. Also remember we have $100 million in higher quarterly costs from FDIC assessments compared to Q2 2016. The efficiency ratio hit our 60% target this quarter, improving 300 basis points year over year.
+With respect to associate levels, on a full-time equivalent basis, we are down modestly from the prior quarter. Please note that we have changed our disclosure on employees from FTE to headcount this quarter. By the way, that was a SIM idea from one of our associates. FTE is much more complicated to calculate and less relevant today given our shift from part-time associates.
+As you can see, the headcount is down more than 4,000 from Q2 2016. Half of that decrease is driven by UK card and half by Consumer Banking optimization. Note the continuing shift from non-client facing associates to primary sales professionals which now make up 21% of our headcount. Compared to Q1 2017 the release of associates from the sale of UK card was offset by bringing on 1,500 summer interns and hiring 1,000 primary sales professionals.
+Just a quick observation on these interns. We selected these 1,500 students from 133,000 applications as we continue to be an employer of choice. From a diversity perspective, 42% of these interns are female and 53% are ethnically diverse.
+Turning to the business segments and starting with Consumer Banking on slide 13. Consumer Banking recorded their highest earnings in a decade. Earnings were $2 billion growing 21% year over year and returning 22% on allocated capital. The business created 900 basis points of operating leverage, holding expenses flat while growing revenue 9%.
+Year over year average loans grew 8%, average deposits grew 9%, and Merrill Edge brokerage assets grew 21%. An improvement in NII drove the 9% revenue growth which was driven by an increase in the value of deposits given the rise in short end rates as well as solid loan growth.
+Note that the rate paid on deposits in this business remains low at 4 basis points as we remain very disciplined on pricing. Non-interest income included improvement in service charges and a small increase in card income that was more than offset by a decline in mortgage banking income.
+Through combined efforts to drive costs down, the efficiency ratio improved nearly 500 basis points to 52%. Cost of deposits fell below 160 basis points in the quarter. Consumer Banking credit quality remains strong with a net charge-off ratio of 121 basis points.
+Turning to slide 14 and looking at key trends, our strategy remains focused on relationship deepening and growing total revenue while improving operating leverage through expense discipline. The concept of total revenue is important as you evaluate NII and fee movements.
+Mortgage banking income was lower driven by our strategy of holding more of our originations on our balance sheet instead of selling to the agencies. We believe retaining these mortgages on our balance sheet provides better economics over time. In Q2 we retained about 90% of our mortgage production on balance sheet.
+Also note that our relationship deepening preferred rewards program is improving NII and balance growth while holding fee lines flat as we reward customers for doing more business with us. Spending levels on debit and credit cards were up 6% year over year and new issuance of credit cards was solid at $1.3 million. Spending levels on cards drives revenue but are largely offset by rewards given back to customers.
+Focusing on client balances on the bottom left, you can see that the success -- we continue to have growing deposits, loans and brokerage assets. At the bottom right you can see deposits broken out. Our 9% year-over-year average deposit growth continues to outpace the industry while the rate paid remains low and stable. Importantly 50% of these deposits are checking accounts and we estimate 90% of these checking accounts are the primary accounts of households.
+With respect to loans, residential mortgage continues to lead our growth while we also saw growth in card and auto. Client brokered assets are up 21% year over year driven by strong client flows as well as market performance, new accounts grew 10% from Q2 2016.
+The digitalization efforts that Brian discussed earlier and other productivity improvements continue to drive expenses lower. Expenses were stable compared to Q2 2016 despite strong revenue growth and increases in the FDIC assessment rate and charges. We continue to remain focused on prime and super prime borrowers with average book FICO scores of at least 760.
+Turning to slide 15, let's review Global Wealth & Investment Management which produced record earnings of $804 million, a pretax margin of 28% and a return on allocated capital of 23%. The industry continues to evolve as firms and clients anticipate new fiduciary requirements and other market dynamics such as the shift between active and passive investing. At the same time the financial markets continue to provide a tailwind to client activity and balances.
+We saw $28 billion of AUM flow this quarter continuing the strength of $29 billion in Q1. Net interest income rose 14% driven by an increase in the value of deposits given the rise in short end rates as well as an increase in loans. Year-over-year noninterest income improved 3%. However, note that in Q2 2016, non-interest income included a $60 million gain from the sale of cash management capabilities as we transition from proprietary products to open architecture.
+Adjusting for that prior period gain noninterest income improved 5% -- as 10% higher asset management fees were partially offset by lower transactional revenue. Year-over-year expenses were up 3% from revenue-related incentives as well as higher FDIC costs. Revenue growth outpaced revenue-related expense producing solid operating leverage.
+Moving to slide 16, we continue to see overall solid client engagement. Client balances now exceed $2.6 trillion driven by higher market values, solid AUM flows and continued loan growth. Average deposits of $295 billion (corrected by company after the call) were down $12 billion from Q1 reflecting both normal seasonality from tax payments as well as client shifts to investment in AUM and brokerage. Average loans of $151 billion were up 7% year over year. Loan growth remained concentrated in consumer real estate as well as structured lending.
+Turning to slide 17, Global Banking earned $1.8 billion in Q2. Earnings increased 19% from Q2 2016 driven by good results across investment banking and treasury services. Return on allocated capital was up year over year to 18% despite an increase in capital allocated to this business.
+A number of results to note given the strong performance: record revenue in the quarter, record advisory fees, record first-half revenue and net income and year to date we remain ranked number three in investment banking with fees of $3.1 billion. Year-over-year revenue growth of 7% coupled with flat expenses drove operating leverage of 600 basis points.
+Provision expense of $15 million in Q2 2017 is down $184 million driven by improvements across most of the portfolio, particularly energy. Global Banking loan growth was 3% year over year. The pace of loan growth remains good, but has slowed driven by both capital markets disintermediation as well as reduced demand from clients as they look for more certainty of economic growth.
+With respect to disintermediation, clients are using bond issuance to pay down loans and pay off funded bridges. Global Banking held expenses relatively flat compared to Q2 2016 as savings offset higher technology investment.
+Looking at trends on slide 18 and comparing to Q2 last year, average loans were up $11 billion or 3%. With the exception of CRE, loan growth was fairly broad-based with C&I loans up 5% in middle-market lending. Average deposits were stable relative to Q2 2016. NII growth drove the 7% year-over-year revenue increase.
+NII increased $286 million from Q2 2016 driven by an increase in the value of deposits, given the rise in short-term rates as well as increase in loans partially offset by modest spread compression on loans. Total investment banking fees of $1.5 billion were up 9% from Q2 2016, finishing strong in the last few weeks of the quarter. As I mentioned, record M&A fees drove the increase. Within debt capital markets we saw a solid increase in investment grade fees while leverage finance declined.
+Switching to Global Markets on slide 19, the business had a solid quarter earning $830 million or $928 million if one excludes net DVA. Global Markets generated a 10% return on allocated capital. Earnings were down relative to Q2 2016 which, if you remember, was uncharacteristically strong given a rebound from a weak Q1 2016 and the Brexit vote.
+Just to complete the picture, remember Q3 last year was also atypically stronger than Q2 2016. 2017 has followed a more typical seasonal pattern so far this year. While Q2 was solid, sales and trading, excluding DVA, declined 9% from Q2 2016. But comparing the first-half results of 2017 to 2016, sales and trading ex-DVA increased 6%. This is the first time in the past five years that first-half performance is up year over year. With respect to expenses, Q2 2017 was 3% higher than Q2 2016 driven by increased technology investment.
+Moving to trends on slide 20 and focusing on the components of our sales and trading performance, sales and trading revenue of $3.4 billion, excluding net DVA, was down 9% from Q2 2016, finishing ahead of our mid-quarter expectations. Excluding net DVA and versus Q2 2016, fixed sales and trading of $2.3 billion decreased 14%.
+Within FICC, the year-over-year decline was driven by stronger rates in emerging markets. In Q2 2016 equity sales and trading was up 3% year over year to $1.1 billion benefiting from growth in client financing activity offset by slower secondary market revenue.
+On slide 21 we show All Other, which reported a net loss of $183 million. This includes the $100 million after-tax gain associated with the sale of UK card. Revenue here also includes a roughly $800 million pretax gain from the UK card transaction which was almost entirely offset by related tax expense recorded here as well.
+Non-interest expense includes the data center impairment charge I mentioned earlier, which was mostly offset by lower personnel and other operating costs. When comparing expenses and earnings to Q1 2017, remember Q1 2017 includes seasonal retirement eligible incentives and elevated payroll tax expense of $1.4 billion.
+The effective tax rate for the quarter was 37.1%, which includes approximately $700 million of tax expense recorded in conjunction with the sale of UK card. We continue to expect an effective tax rate of approximately 30% for the rest of the year absent unusual items.
+Okay, a few summary points to wrap up. Again this quarter, we created operating leverage by managing expenses while improving revenue. For years we have been focused on growing responsibly including staying within our risk and client frameworks as well as simplifying the Company to improve operational efficiency, all aimed at making our growth more sustainable.
+In Q2 consistent with this strategy, we stuck to our strong underwriting standards while growing loans and investing in our clients in global markets. Asset quality remains strong as net charge-offs, NPLs, delinquencies and commercial reservable criticized exposure all declined.
+Several of the businesses set new records for revenue or earnings as we grow with our clients and manage costs well. Importantly, we continue to invest in new technology and capabilities while adding sales professionals in certain businesses. And we significantly increased the amount of capital we returned to shareholders and announced plans to increase that even more.
+These results tell us that responsible growth is working and that we are well-positioned to continue to invest in and grow with our customers and clients as the economy continues to improve. With that, we will open it up to Q&A.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions). Glenn Schorr, Evercore ISI.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Hi, thanks. I appreciate all the detail on the net interest income discussion. One piece of it on the repo borrowings part of it, financing -- the equity financing side. I'm curious if you think of that as a little episodic and you just go with the flow. Or is it more a permanent part of the strategy where you are using your strong balance sheet to help grow? The tag along to that is if it is more permanent why do it through repo? Is that more expensive?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [3]
+--------------------------------------------------------------------------------
+
+          I think it's a little bit of both. So we did make a decision to invest more on our equities business this quarter. That's going to go up and down depending on client activity in every quarter. We could always change our mind, but generally we made a decision to add more balance sheet [to] equities because we see an opportunity there and because our customers would like us to do that.
+In terms of how we add that balance sheet, that definitely can change one quarter to another. This quarter it was a lot of synthetic which tends to happen when you have clients overseas who have some demand. Next quarter it could be more plain old PB and that does change the mix of NII when that happens. But it's based upon client demand, not necessarily how we want to manage one part of our P&L versus another.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [4]
+--------------------------------------------------------------------------------
+
+          Got it. I appreciate that. And the tagalong for net interest income guidance is, as you mentioned, very low deposit beta on the consumer side, just 2 basis points up in the quarter. Is there a point in time where you expect that to accelerate over the next couple hikes? I know we all kind of ask the same thing each quarter, but it's amazingly low.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Yeah, look, you're -- we are watching it closely. I guess I would point out that Bank of America and the industry really haven't increased, as you point, out deposit rates on traditional bank accounts. I think we believe we deliver a lot of value to depositors: transparency, convenience, safety, mobile banking, online banking, nationwide network, rewards, advice and counsel. There's some real value to having a relationship with us.
+And I think this value plus the fact that there has been a lack of market pressure so far has allowed us on traditional accounts to leave rates relatively flat. We are starting to see some rate increases on some account types in GWIM and in Global Banking. And if you look at our models they anticipate that we are going to have to start raising eventually based upon historical experience.
+But the bottom line is we are going to balance our customer needs and the competitive environment with our shareholder interest and do the right thing. So we will just have to wait and see.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [6]
+--------------------------------------------------------------------------------
+
+          Glenn, I would just that when you dig into the supplement and other materials and look at the consumer business, even the GWIM business, you have to focus on the core checking balances in consumer on a $650 billion deposit base or $320 billion.
+And so, that is 10 years of hard work of driving core operating accounts to the consumer with our core checking balances in and the primary account as we call it running near 90% up from the 60%s and 70%s many years ago. And those are zero interest and they will remain zero interest because that's the nature of the beast.
+So where you will see other areas like CDs year over year down again 10%, and so we have been driving this business to be core, core and core and that's what's happening. In GWIM you are seeing the pieces that we are functionally investment equivalent move faster. But we feel good about it and we feel good about how we are driving both the value to the consumer for the total of our services relative to interest rate paid on certain types of deposits and frankly relative to non-interest-bearing deposits.
+
+--------------------------------------------------------------------------------
+Glenn Schorr,  Evercore ISI - Analyst    [7]
+--------------------------------------------------------------------------------
+
+          Great, thanks both. I appreciate it.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+          John McDonald, Bernstein.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [9]
+--------------------------------------------------------------------------------
+
+          Hi, good morning, guys. Just to follow up on the NII, Paul, it sounds like when you net a few positives and negatives in terms of your NII outlook for next quarter you are expecting a modest increase in the third quarter as of now. Could you put any size parameters on that?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [10]
+--------------------------------------------------------------------------------
+
+          No, I think we want to get out of the game of putting size parameters on it. I have given you all the inputs; I can run through them again if you like. But look, we feel good about where we are, that we had some transient things this quarter. There are a lot of variables that go into this. One of the biggest ones is, by the way, predicting people's behaviors, predicting customers. So I wouldn't want to give you a number. Again, if you want I would be happy to go through all the different ins and outs again if you want, but (multiple speakers).
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [11]
+--------------------------------------------------------------------------------
+
+          No, that's fine. Maybe you could just remind us how much the Fed hike itself -- what your estimate of how much that helps the June hike. And then also just how much the lower 10-year hurt in the second quarter? How should we think about the 10-year impact going forward? So the short and the long end impacts would be helpful. Thanks.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [12]
+--------------------------------------------------------------------------------
+
+          Look, again, I won't give you a number, but we had a significant improvement in NII from the short end. But the long end also did significantly impact us relative to what we were expecting. Because, as you know, we have a securities portfolio and as rates change there, customer behavior changes and we can amortize more or less of that premium.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [13]
+--------------------------------------------------------------------------------
+
+          Okay. And then just on expenses could you help us think through the expense trajectory for the back half of the year? And more importantly, your current thoughts on the target for the $53 billion next year. And how some of the -- maybe the tech consolidation you did this quarter, how does that impact either the timing or just confidence level on delivering expense saves?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [14]
+--------------------------------------------------------------------------------
+
+          Sure. We feel good about our goal. I will remind everybody that some time ago now we said that our full-year 2018 expense would be approximately $53 billion. A lot has changed since then, good, bad or whatever, a lot of things have changed. But we are still very confident in that goal. To get there we feel like we need to run in a normal quarter at around kind of $13 billion and then you have got the first quarter that has $1 billion or so more in retirement eligible and FICA.
+If you look at our expenses this quarter we reported [$13.7 billion]. Last year we reported [$13.5 billion]. If you back out the data center and the elevated severance we would be at [$13.3 billion]. So we think we've made pretty good progress year over year and we just have to continue to make that type of progress over the next few quarters and we will get there.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [15]
+--------------------------------------------------------------------------------
+
+          Effectively, John, it's about a $100 million step down over the next couple quarters, which has been very consistent with what we've been doing over the past several quarters. We used to have the major drops as we got it position, but it's going to be a $100 million-ish year-over-year step down from the prior year and so you will see that kind of play out we think.
+
+--------------------------------------------------------------------------------
+John McDonald,  Bernstein - Analyst    [16]
+--------------------------------------------------------------------------------
+
+          Okay thanks, guys.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Jim Mitchell, Buckingham Research.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [18]
+--------------------------------------------------------------------------------
+
+          Great, thanks. Good morning. Maybe getting back to the deposit question. You guys are growing 9% in the consumer book better than the industry, despite holding low obviously reflecting your mix. How far do you think -- A, I guess can you give your sense of what you think is driving that market share? And is this something where you are willing to test the patience of your customers to lag deposit rates until growth slows more materially? How do we think about what your decision-making process is in terms of rates in the consumer book?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [19]
+--------------------------------------------------------------------------------
+
+          I would make it -- Jim, I'd look more to the broader aspects of your question. Some of the statistics that I talked about earlier. What has been driving this has been, at the end of the day, to get ourselves positioned as the core transaction -- on the transaction side of the consumer business there's a core transaction provider to every household.
+And we have -- our checking account numbers are growing now slightly -- couple hundred thousand net new checking accounts this quarter type of numbers -- but have been falling from 37 million and small business consumer combined down to about 34 million-ish. And so, we had run off a lot of stuff that were extra checking accounts and things like that starting 10 years ago frankly.
+And so, that's what plays to your benefit here because, at the end of the day, as rates continue to rise, if they continue to rise, the value of the consumer deposit franchise, as you know being around this industry for a long time, is going to be driven by the advantage in the checking balances. And then from the other balances will help but they will be more rate sensitive.
+So it comes more from the operating business than it does from any strategy on actual pricing. Because those are free balances and will remain free. So the question is how do you gain share? And what you see is, if you think about it year over year, our consumer business grew about $60 billion in deposits, round number, half of that was in checking account balances, one half of that.
+And that is driven by the innovation I talked about, 1 billion digital interactions this quarter, 22.9 million active digital mobile customers, 30 million odd active digital customers, more and more capabilities there and becoming more and more embedded in everything the consumer does. And that then means you are gaining share against people who don't have all those capabilities in our minds.
+And so, as you think about it, that's what's going to drive a lot of deposit value. And if you look at some of the rates and volumes charts, even if you get to the interesting things when you look about the Corporation overall, year over year our deposit costs on interest-bearing, [not on] interest-bearing, we are up $100 million. $60 million of that was in the US and $40 million of it is on 10% of the interest-bearing deposits outside the US. So there is not even that much movement on the interest-bearing part.
+So we feel good about the franchise and where we need to price because it's more investment oriented say in the GWIM business, we've priced to maintain those balances. Half of what went out of GWIM this quarter was us putting people into the market based on our allocation methodology. So irrespective of the rate that went into the market as opposed to into other cash equivalent. So it really comes from all the different advantages we've been driving at to drive this franchise for 10 years.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [20]
+--------------------------------------------------------------------------------
+
+          All right, well, thanks for that. Maybe, Brian, a follow-up on regulation. Obviously the treasury report seemed pretty favorable for the industry. You are not really leverage constrained. Is there any aspect of the recommendations that you would find most helpful to your business?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [21]
+--------------------------------------------------------------------------------
+
+          All of them would be helpful in the sense that there's a good amount of work that's gone in by all the industry groups, all the individual companies and the administration to come up with a list of things that -- our belief is we want responsible, clear, transparent and regulation that helps maintain the safety and soundness and capabilities of this industry, there is no question.
+But in areas where things have gotten too far you've got to bring them back a little bit and that laundry list is really there to provide it. So while some are more important to our franchise than maybe other people's franchises and vice versa, at the end of the day a careful revisiting of some of these things to ensure that we maintain the safety and soundness while getting good regulation is critical. And I think hopefully the ball is moving forward on that.
+
+--------------------------------------------------------------------------------
+Jim Mitchell,  Buckingham Research - Analyst    [22]
+--------------------------------------------------------------------------------
+
+          Okay, thanks.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          Ken Usdin, Jefferies.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jefferies LLC - Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Thanks, good morning. If I can ask questions on the card business, first of all I noticed that the card losses were up first to second. They are typically down. I am just wondering if you can help us understand just where we are in the seasoning of the portfolio, also noting that the risk-adjusted margin continues to slip as well. So what do you think about card losses going forward and when do we see that bottoming of the card margin? Thanks.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [25]
+--------------------------------------------------------------------------------
+
+          Sure. So let's start with NCOs. Charge-offs this quarter were 2.87%. They were at 2.66% last quarter -- last year I should say. Both of those numbers -- and that delta is completely within our expectation and modeling for the portfolio, well within our risk parameters.
+As you think about what's going on here we've got a portfolio, we've got a back book that is in great shape that's getting smaller every day and we've got a front book that we are growing that is seasoning. So that's what's driving up the NCOs in a natural way very gradually.
+We also have a little different phenomenon going on this year. Obviously there is some seasonality as you go throughout the year. So as you think about the future next couple of quarters we have got seasonality, which is going to be -- all else equal if the year is normal it is going to be lowering the net charge-off rate, but you've got some seasoning that's going to be increasing it. So we will just have to see how that plays out over the next couple quarters. What was the second part of your question?
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jefferies LLC - Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Just on the risk-adjusted -- the card risk-adjusted margin.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [27]
+--------------------------------------------------------------------------------
+
+          Sure. I mean a couple of things. One, tend to think of it as opposed to the margin as put just the dollars that we are producing there and we've got modest growth in the number of cards outstanding. We have got good growth in debit and credit card spend.
+And just focusing on the margin I think overlooks some key benefits of our strategy to attract relatively higher quality card customers and reward them for deepening their overall relationship with us. That strategy is driving incremental deposit growth and making those deposits a little bit stickier, so that helps NII. It also, if you think about these customers, they have lower loss rates and they tend to reduce their interaction with the call center.
+We also have a model that has lower acquisition costs in terms of those new cards. So that's how we think about it. If you just want to focus in on the risk-adjusted margin, that's going to, I think, perform well in line with the industry and probably drift a little bit lower. But we are more focused on total revenue.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jefferies LLC - Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Understood. And if I can just ask one big picture one, all the points you made earlier, all the credit metrics are going the right way otherwise, NPAs, inflows, etc. Coming back into this point about where card is going and then just not seeing anything else, you guys have been at 40 basis points of losses. Any reason to see that changing really? And then do you still have some room for release as well given that?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [29]
+--------------------------------------------------------------------------------
+
+          Look, absent some change in the world and the economic situation, we don't see a reason why that necessarily changes materially. I don't want to give you guidance, but that's kind of our view.
+In terms of releases, we are building -- I just pointed out we are growing loans, we are growing card. Things are seasoning, that's seasoning. So, we may have some releases, but I would more think of those releases as potentially offsetting some of that growth.
+
+--------------------------------------------------------------------------------
+Ken Usdin,  Jefferies LLC - Analyst    [30]
+--------------------------------------------------------------------------------
+
+          Understood. Thanks a lot.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          Betsy Graseck, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Hi, good morning. Brian, two questions. One on the consumer banking efficiency ratio. You mentioned that there still is room for that to fall from the 52%, which is obviously very efficient as it stands right now today. And you indicated all various opportunities to drive incremental revenues at a much improved expense ratio with all the digital that you outlined earlier.
+But could you speak to how the branch network could also impact those numbers? I mean, your branch has been coming down about 3% the last couple of years. Is that the kind of pace that you think you are going to continue? Or does the digital improvements enable you to move even faster there?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [33]
+--------------------------------------------------------------------------------
+
+          Well, I think, Betsy, to be careful there, you have to go back to the broadest context which is the 6,100 to 45. We got after this relatively early and so we've got it down a level. We don't know where it goes from here because it will be based on customer behavior demand.
+But if you go back, if you think about it, over the last several years we've been adding branches in places like Denver and we will continue to build out there. We have been refurbishing branches heavily across the whole franchise. That's all in this run rate you see. And that will continue and in the expectation I'm talking about.
+So we'll -- I think we drifted down 15, 17 branches linked quarter, 100 odd year over year. That will continue to happen. But I think what you would expect is the efficiency of that system continues to improve dramatically. So let me give you an example.
+In Chicago we had one of these old big branches, and what we have done is created a call center in there and we have 70 teammates going to work in the call environment just to use up the physical space to keep the branch open as opposed to closing the branch. So if you think about it from the scheme, because the telephony capabilities that exist today you could actually distribute phone calls down to individual people based on the number coming in and things like that local calls.
+So we have done that in three or four markets. We continue to use up the excess capacity. So you wouldn't see a branch decline there, but you would see 80% of its real estate goes for a different purpose. So it's a very complex thing and I don't like to get caught by numbers. I'd say that you've seen us manage it well and we'd expect to continue to manage it well in the future. But we are not good to get ahead of the customer and create any disruption to the growth we are seeing in the core channel.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [34]
+--------------------------------------------------------------------------------
+
+          Okay, thanks for that. And then separately, you've spoken before about the op risk RWA burden that you guys have. We had some questions come in on how you are thinking improvements there could help you given that it's not directly in the CCAR stress test. But maybe you could give us a sense as to how you think any changes could help you given that it's not a constraining factor.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [35]
+--------------------------------------------------------------------------------
+
+          I think you've seen us start to make improvements and changes have gone through and the overall advanced RWA op risk being a portion of that, the change has been more in other areas quite frankly. We will expect to see further. But you have to be careful.
+At some point standardized then backs into your constraint. And so this will be a toggle between -- for a long time advanced was our need and over the years now it's coming down and so standardized at some point will counter veil the improvement overall and then we will go to work on standardized quite frankly.
+So expect us to continue to work on optimization of the balance sheet. Really at the end of the day opening up the difference between our GAAP capital levels for lack of a better term and our regulatory capital levels. So we are down -- RWA on an advanced base down $30 billion odd this quarter. Expect that to continue to improve, but be careful that at some point it hits the other side.
+And then where we have so much excess capital is just kind of an interesting exercise. But in a world where we actually start returning that capital through our earnings we are going to have to continue to optimize both sides of that equation.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [36]
+--------------------------------------------------------------------------------
+
+          And then just lastly, you had a nice increase in the dividend. Could you just speak to how you are thinking about dividend payout ratios? Do you feel like you are where you should be given the business model? Or is there more room and if there is more room what the drivers are to affect that change?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [37]
+--------------------------------------------------------------------------------
+
+          We've always been clear that -- in the guidance still relative to large banks is out there sort of 30% of earnings to dividends and 70% to share buybacks. We think that the shares are a tremendous value and we will continue to do that. And with $17 billion over the next 12 months we can make some headway. So think about 30/70 split for us and in the large bank category I think that's a responsible place to be. Right now we are moving up towards that but we are not quite there.
+
+--------------------------------------------------------------------------------
+Betsy Graseck,  Morgan Stanley - Analyst    [38]
+--------------------------------------------------------------------------------
+
+          Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [39]
+--------------------------------------------------------------------------------
+
+          Gerard Cassidy, RBC.
+
+--------------------------------------------------------------------------------
+Gerard Cassidy,  RBC Capital Markets - Analyst    [40]
+--------------------------------------------------------------------------------
+
+          Thank you, good morning, guys. In looking at your ROE, your returns on allocated capital in the Consumer and the Wealth Management businesses are very strong, well over 20%. Global Bank is 18%, Global Markets about 10%. Can you share with us how you are going to get the 8% ROE up let's say above your cost of capital let's say 10%? Is it going to be more coming from the Global Markets area or management of the capital or somewhere else?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [41]
+--------------------------------------------------------------------------------
+
+          Well, the first thing I would point out is that we have a goal to get our ROA up, we have a goal on our return on tangible common equity -- 1% on ROA, we are making a lot of progress. Return on tangible common equity we want to get to 12%, we are at 11.2% this quarter. And we have been making steady progress and if we stay focused on operating leverage and doing the right things for our customers we know we are going to get there.
+I would make a point to what Brian was talking about earlier about our excess capital. So if you just look at the 11.2% return on tangible common equity we had this quarter, and you -- if we ran the Company at 10% capital instead of 11.5%, that would still be above our regulatory minimum, we would have a 50 basis point buffer. That would have increased that return on tangible common equity to 12.6%.
+So we are at our goal right now from an operating standpoint if we could just continue to make progress on the amount of excess capital we have at the Company. In terms of ROE, look, we've got a lot of goodwill. We could tomorrow just write off all that goodwill -- nothing would change at the Company. Your ROE would just go up to your return on tangible common equity.
+
+--------------------------------------------------------------------------------
+Gerard Cassidy,  RBC Capital Markets - Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Very good. And then coming back to the mobile users, I think you guys pointed out you had just shy of 23 million mobile users. What percentage of your customer base are mobile users? And where do you see that number going to in the next two to three years?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [43]
+--------------------------------------------------------------------------------
+
+          I think -- every time I say this can't go up because we are starting some inflection point where you have got penetration, it continues to go up. So I think we ask 30 million odd checking holders, so think about the delta between those two being available, for lack of a better term. You've got 34 million digital users and so you still have some digital only users who don't use the mobile phone just because they do it which means they come through the website instead of an app, for example.
+And so, each year we think it's not going to -- you are starting to hit a possible inflection point it goes up 10% or 15% year over year. And so I think there's headroom ahead of us. So I think of us having 30% more that we could get just easily and we are growing the customer base and we will drive it. And as you see norms change you will see that penetration continue to increase.
+The important thing isn't necessarily only the 22.9 million users. The important thing is how people use it. And so, just take the P2P payments, even though we do 18 billion this quarter, even though it's been a product we've had for a while, even though we are going to re-launch it and we will see [whether the sale of that] will drive it, it's still 3%.
+And even though all the wallets, whether it's Apple or Samsung or Android, etc., all those are out there, they are still 1.5% of payments. And so at the end of the day we've got a lot of work within the customer base in how they use all the form factors to get more efficient and more effective for them on top of what you think is more penetration so to speak.
+So, we've got a long way to go on penetration, only 22% of the sales are done, so we will continue to drive that. But importantly for the team -- [Tom] and Dean and the team is to drive that usage up. And that's where we are starting to see some good pickup, but there's a lot of room to go there.
+
+--------------------------------------------------------------------------------
+Gerard Cassidy,  RBC Capital Markets - Analyst    [44]
+--------------------------------------------------------------------------------
+
+          Brian, you mentioned Gazelle. Any early read on what you are seeing there and when do you expect to have a broad launch of that product if you haven't done it already?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [45]
+--------------------------------------------------------------------------------
+
+          It's Zelle, not Gazelle, but -- I don't want to violate anybody else's trademark here, but it's still pretty early. The nice thing is that the industry has built a network among all of us that allows us to operate very easily among us all the companies. And so I think the better time to talk about it would be in six months or so after we've gotten everybody up and operating and driving it through.
+But previous to this we were already driving it and it was up double-digits year over year. And so, this ought to -- just awareness and with the students signing up for accounts from now to the fall you will see a lot of embedding this in our marketing and our capabilities. So maybe next quarter we will have a better read.
+
+--------------------------------------------------------------------------------
+Gerard Cassidy,  RBC Capital Markets - Analyst    [46]
+--------------------------------------------------------------------------------
+
+          Very good. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+
+          Matt O'Connor, Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [48]
+--------------------------------------------------------------------------------
+
+          Good morning, just a couple of quick follow-ups. Did you guys disclose the debt hedge ineffectiveness drag that was in net interest income this quarter?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [49]
+--------------------------------------------------------------------------------
+
+          We didn't disclose the amount. It was meaningful, not a huge amount but it was meaningful. And again I would remind everybody that over time it's just going to reverse itself.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [50]
+--------------------------------------------------------------------------------
+
+          Okay, does that show up in the 10-Q or -- I can't remember where we got that from.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [51]
+--------------------------------------------------------------------------------
+
+          No, I don't think so.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [52]
+--------------------------------------------------------------------------------
+
+          Matt, at the highest level, remember -- if we go back and think about where we started the quarter, where we ended it, we took out about half of what we thought the increase was going to be due to the card. The rest of it, all the factors, Paul has talked about ins and outs chewed up the other half of the projected increase. So that will give you a sense of dimension.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [53]
+--------------------------------------------------------------------------------
+
+          Okay, and then just separately the expenses related to the UK card business that go away, how much is that?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [54]
+--------------------------------------------------------------------------------
+
+          Sure. Let me just run you through the whole picture, okay, if you want to build any models. On the revenue side it's primarily interest income, think about $10 billion of receivables at 9%. Plus you've got a little small amount of card income, I think that was around $30 million in the second quarter. The efficiency ratio for that business is around 40%.
+If you look in our supplement you can see I think the net charge-off ratio has been running a little bit less than 2%, call it $40 million, $45 million per quarter. I think that probably gives you just about everything you need to model it. I would remind you that when we sold it we did get a 12 and 15 basis point improvement in our CET ratio on an advanced and standardized perspective respectively.
+
+--------------------------------------------------------------------------------
+Matt O'Connor,  Deutsche Bank - Analyst    [55]
+--------------------------------------------------------------------------------
+
+          Okay, that's helpful. Thank you.
+
+--------------------------------------------------------------------------------
+Operator    [56]
+--------------------------------------------------------------------------------
+
+          Steven Chubak, Nomura Instinet.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Analyst    [57]
+--------------------------------------------------------------------------------
+
+          Hi, good morning. So Brian, I appreciate the helpful commentary you've given on capital ratios and the continued effort to optimize your RWAs. And just given the significant capital cushion that you are operating with today, I'm just wondering how you are thinking about the payout trajectory over the next couple of years.
+And maybe just to help us frame it from an ROE perspective, because you did note that your excess capital continues to be a drag on returns, what do you believe is a reasonable spot capital target for you to manage to through the cycle?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [58]
+--------------------------------------------------------------------------------
+
+          Well, if you take that the 9.5% is the place we are at, we have 50 basis points or so of cushion on that at all times. And so, that gives you a sense where we are and we are running at 11.5% and that difference is available. So you would expect more. Assuming that we have a 2% growth environment and continue to grow and there is no big recession that comes, we continue to ask for more capital return.
+I think to keep you focused in the near-term, we've got $17 billion plus that we've got to take out in the next four quarters, which is a pretty healthy chunk. And then we will go through next year's CCAR process and you'd expect us, like the industry, to keep stepping that up to start to work against that excess.
+Against that, when Paul talked about the last question, the UK card, remember the thing that people have to think about is not only does it give you current capital benefit, but also in the stress the losses and stuff are out of the system. So you can also pick that up. So I would say simply pointing to the next 12 months we are going to return more capital we earned in 2016, to give you a framework, and we would expect to ask -- as we earn more in 2017 we would expect to ask more for the next ask and keep driving that forward.
+And everything contributes -- [it's] better asset quality, better earnings and better modeling and everything else. So, our CCAR losses continue to come down and we continue to drive to responsible growth. So just think about that as a framework to say more in the future, but we've got a nice pickup just coming in the next four quarters.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Analyst    [59]
+--------------------------------------------------------------------------------
+
+          Got it. And then just on some of the expense initiatives, Brian, that you outlined. I'm getting quite a few questions on how we should think about it from a timing perspective. I know that you have the $53 billion expense target that's out there, but just given some of the efficiency opportunities that you identified, should we expect that progress to continue beyond 2018?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [60]
+--------------------------------------------------------------------------------
+
+          You are asking me what have you done for me lately. We are getting to $53 billion first, Steven, and then we will move from there. But the idea is if you think about an expense base of a financial services firm, and Bank of America in particular, about two-thirds of the costs are people costs. The cost of salaries and wages, incentives, etc., healthcare costs rising at 6%, 7%, 8%, 9% a year.
+And so, our job is to figure out how to pay our teammates fairly and more for more productivity and what they do to drive for you US shareholders. And if you just lock in a growth rate on just that part of the expense base, you are locking 2% growth. So what we do through all these initiatives is figure out a way we can turn that into being on a core basis year over year sort of flattish.
+And so, whether the $53 billion keeps coming down or stays flat while revenue keeps going up, that will produce further operating leverage. And so, we haven't told -- we haven't made projections past the $53 billion. More just because we've got a lot of initiatives coming in.
+But you should expect that we will be just as disciplined and thoughtful about how we both invest and invest to take out expense that we have been so far. And I think that will redound to our benefit in terms of keeping those expenses relatively flat as revenues grow in the future.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Analyst    [61]
+--------------------------------------------------------------------------------
+
+          Thanks, Brian. And just one more quick one for me just on the DoL fiduciary rule. You had outlined your strategy previously for stopping or no longer engaging in retirement brokerage activities. But just given the potential for that rule to be repealed, I'm wondering if your thinking has evolved around that?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [62]
+--------------------------------------------------------------------------------
+
+          I would say -- let's see what happens. I don't think it will change our thinking. We have accommodated customers' larger balances in some of the areas and some cash IRAs and things that get a little bit different, but just out of necessity.
+But the overall trend of driving towards the model products and driving towards the effectiveness and offsetting demands for lower and lower cost structure the customer pays in fees to get higher and higher service and the capabilities from us is what's driving this. The fiduciary rule is only a part of it. And so, I don't expect to change our course.
+
+--------------------------------------------------------------------------------
+Steven Chubak,  Nomura Securities - Analyst    [63]
+--------------------------------------------------------------------------------
+
+          Thanks for taking my questions.
+
+--------------------------------------------------------------------------------
+Operator    [64]
+--------------------------------------------------------------------------------
+
+          Saul Martinez, UBS.
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS - Analyst    [65]
+--------------------------------------------------------------------------------
+
+          Hi, good morning. First wanted to follow-up on the net interest income. The 100 basis point -- the benefit of $3.2 billion you get from a 100 basis point parallel shift in the yield curve, you mentioned it's primarily sensitive to the short end. I think last quarter you gave sort of a 75/25 split between short and long and is that still a good rule of thumb to use?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [66]
+--------------------------------------------------------------------------------
+
+          It's changed a little bit. We are a little bit more sensitive on the long end now that -- since rates went down. The asset sensitivity on the short end hasn't changed that much.
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS - Analyst    [67]
+--------------------------------------------------------------------------------
+
+          Okay, so a little bit more skewed to the long end than the disclosure in 1Q?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [68]
+--------------------------------------------------------------------------------
+
+          It's like -- it's actually -- it's like two-thirds/one-third.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [69]
+--------------------------------------------------------------------------------
+
+          Just to back up, the first half of the year when you think about the rate environment it's really changed on the short end. Just to give a sense how it works, we got a $1.5 billion -- $1.4 billion to $1.5 billion pickup in first-half NII versus last year and so that gives you a sense. It really is driven 60%-70%, depending on the quarter, by the short end.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [70]
+--------------------------------------------------------------------------------
+
+          I think that's an important point. Again, we picked up that $1.5 billion and you haven't seen the sensitivity change much. So that tells you what is embedded in the pass-throughs in the first half of the year.
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS - Analyst    [71]
+--------------------------------------------------------------------------------
+
+          Okay, got it. Moving on -- just to discuss capital deployment strategies a little bit. You've talked about your excess capital position, obviously you upped your returns in the CCAR cycle and you will keep going forward with that.
+But is it too early to talk about acquisitions as part of the capital strategy? And how would you think about M&A in terms of opportunities whether from a product strategy, geographic segmentation standpoint? How do you think about M&A in the context of your capital strategy?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [72]
+--------------------------------------------------------------------------------
+
+          We don't think about M&A in the context of our capital strategy. We are organically growing this Company, including open up in markets, investing in bankers, investing in branches, investing in things. And the capability -- and investing in cash management capabilities. We've built out the lot in Asia, Tom Montag and the team driving our global franchise -- we just don't need the distraction.
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS - Analyst    [73]
+--------------------------------------------------------------------------------
+
+          Okay, all right, fair enough. Thanks a lot.
+
+--------------------------------------------------------------------------------
+Operator    [74]
+--------------------------------------------------------------------------------
+
+          Marty Mosby, Vining Sparks.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [75]
+--------------------------------------------------------------------------------
+
+          Thanks, I've got three bigger picture kind of questions. First, Brian, you've turned the corner on the customer growth and business growth. That was one of my main concerns after so many years of having to deal with the overhang issues to be able to re-energize and get that -- business segments growing again. What are the couple of things that you could say have helped go through that inflection point as quick as you've been able to do that?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [76]
+--------------------------------------------------------------------------------
+
+          I think, depending on the business, at the end of the day, if you go across eight businesses -- in the relationship business it's been just deploying more and more relationship management teammates and being able to pay for that while bringing expenses down across the board.
+So that's whether it's US trust or Merrill Lynch, the preferred business in Consumer, the business banking, global commercial bank, [global] corporate investment banking and driving that -- always had great products, we just literally had to add more sales teams. Behind that has also been the deployment in technology to help those sales teams. We are using artificial intelligence to prioritize their work in terms of targeting their efforts.
+And then if you look in both the markets business separate from the commercial side of it in the true markets business and you look in the mass-market consumer business, what we call retail, you see the nice thing about the retail business and mass-market is we are now growing and making money in a business which it was a little bit tricky. And that's largely because the electronification, digitization has been driving it.
+And if you go to markets, the team in equities and fixed income has done a great job of repositioning that business and it's gaining share. So in each case it's investments in people, technology, better customer experience. And that all sounds like you say it all the time, but it has been a relentless focus in just driving that and investing behind that at all times taking out some of the extraneous costs including credit costs through very disciplined client selection and credit underwriting capability.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [77]
+--------------------------------------------------------------------------------
+
+          Paul, one of the -- sort of the second question to look at, we've talked about the core, core, core and that the Company has taken actions to try to drive that. But really we've had an historical shift in the liquidity premium coming out of the financial crisis and just having rates at zero.
+So hasn't a lot of this shift been related to just the environment more than really Company actions? And what we are seeing has been the derisking. Now that GWIM deposits are starting to move out, is that the first sign of the rerisking or are the customers willing to take a little bit more risk and drop that liquidity premium? So I'm kind of watching for that first sign of the customer behavior beginning to change.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [78]
+--------------------------------------------------------------------------------
+
+          I think, Marty, across all the years since the crisis there has been ebbs and flows in customers' views about where they want to invest and the cash portion of our balance has come up and down. But I think the consumer and the investor are very bullish on America and they continue to invest in it.
+Consumers through their spending and activity do and investors on the personal side through their investments. And you've seen those investments in equities and risk products continue to rise almost without fail. And then when there's real market disruption concern you see it pull back a little bit. But basically without fail there has been a steady investment and that's why we've hit assets under management levels of record levels at this point.
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [79]
+--------------------------------------------------------------------------------
+
+          It just seemed like there's a little bit of a change sitting there. You will see it ripple into some of the other business maybe later. But a third question was with what's going on in the mortgage business, you are retaining 90% of loans. In the past, I don't know the number, but I bet you were securitizing before the financial crisis probably 90% of the loans.
+How do you look at that business different? That is such a paradigm shift that you really are now a portfolio lender much more than you are a securitization. Are there any other dynamics that we should look at separately?
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [80]
+--------------------------------------------------------------------------------
+
+          Well, the business pre-crisis that came out of some of the other firms, and etc., was driven by a basic view of generating more and more mortgages as opposed to customers and penetration of customers and giving mortgages to the customers. And so one of the ways -- the major way it did it, 75% of its production was bought from third parties, either its correspondence or brokers or brokers or whatever the methodology. All that is gone.
+And so, if you had that size of production that was bought in the secondary market through wholesale trades of the production you would have to go off balance sheet because you wouldn't have the capacity. During 2004 to 2008 we generated $2 trillion of mortgages or something like that. So you had to go off balance sheet.
+Now where we are now where quarterly production runs $13 billion, $15 billion, and this huge deposit franchise that needs to be invested, you can put those mortgages on the balance sheet. The odd thing would be in the past we were sending them off and then buying back mortgage-backed securities. The answer is we just retain the mortgages and frankly the credit quality in ours, it's not worth paying the insurance.
+But it really came to focusing on what we call direct to consumer where our market share continues to be solid and really saying we are in this business. It's always been a tough business, it's priced on a commodity basis, it's on your screen every day, and the MSR assets always had interesting issues of how you could hedge them and make them work.
+Our goal as a Company was to take all that volatility and up and down out and just focus then on getting mortgages to historic customers of high credit quality. And then why wouldn't we keep them, because, at the end of the day, we've got to invest our deposits somewhere and these are great investments.
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [81]
+--------------------------------------------------------------------------------
+
+          They're our customers; it's not like we're -- as Brian said, we are not buying somebody else's underwriting. These are our customers. We know these customers. We have [been underwriting] these loans and why pay the insurance?
+
+--------------------------------------------------------------------------------
+Marty Mosby,  Vining Sparks - Analyst    [82]
+--------------------------------------------------------------------------------
+
+          And it's not just you all, I mean it has been across the industry where you are seeing much more in retention than you are seeing in securitization. So I just didn't know if there was any operational or other issues that gives you more flexibility on pricing or product development. It's a very different market than what it used to be when we were in it before.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [83]
+--------------------------------------------------------------------------------
+
+          I agree, it's a different market and I think a better one because of it.
+
+--------------------------------------------------------------------------------
+Operator    [84]
+--------------------------------------------------------------------------------
+
+          Brian Kleinhanzl, KBW.
+
+--------------------------------------------------------------------------------
+Brian Kleinhanzl,  KBW - Analyst    [85]
+--------------------------------------------------------------------------------
+
+          Great, thanks. I just had a question first on the lending environment overall. Could you give an update of the pipelines? And I know last quarter you said middle market revolver, you were at record levels there. Were you able to increase utilization rates there? Just give a sense of where your clients are if optimism is waning?
+
+--------------------------------------------------------------------------------
+Paul Donofrio,  Bank of America Corporation - CFO    [86]
+--------------------------------------------------------------------------------
+
+          We feel good about loan growth. Unless the economy changes significantly we wouldn't expect much change from the past few quarters. We did see a little bit of disintermediation this quarter in commercial. That could slow growth in the future. But having said that, we haven't changed our medium-term outlook on our ability to grow loans.
+We expect total loan growth at the Company to be low-single-digits and we expect to grow mid-single-digits in our lines of business once -- that obviously excludes the headwind from loans in All Other, the mortgage runoff and now UK card is gone.
+So with respect to each segment, we are anticipating modest growth in consumer led by mortgage. We would also expect to grow card and auto, although auto growth has probably slowed a little bit. But we still expect a little bit of growth. That growth is going to be partially offset by continued runoff of home equity loans.
+In commercial, again, while things have slowed a little bit, our outlook still remains favorable led by middle market. You saw middle-market loans grow 5% year over year. And I would note that growth in any quarter in commercial can bounce around a bit because you've got acquisition financing thrown into the mix. All of that I think is consistent with responsible growth.
+
+--------------------------------------------------------------------------------
+Brian Kleinhanzl,  KBW - Analyst    [87]
+--------------------------------------------------------------------------------
+
+          Okay great. And then just a question on wealth and investment management. You did see the financial advisors increase 2 percentage points quarter on quarter. Is that a trend now that you think you can -- or back into a hiring phase where you can actually grow the number of financial advisors? Because productivity also increased as well. So there was no drag from hiring those advisors.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [88]
+--------------------------------------------------------------------------------
+
+          We have a tremendous customer base that is underserved in the investment management area. And so, we are going to continue to grow our financial advisor team to serve that customer base, whether it is the teams that work in the branches, the teams that work in the Merrill office, the team that work in US trust and we have been after that and growing that. And so, you should expect that number to continue to go up with Terry Laughlin, Andy Sieg, Keith Banks and the team are driving it.
+And so, that's -- it's through unit of production for lack of a better term. It's your team that really has the core customer interface and will drive that. Meanwhile on the nonfinancial advisor side you saw the assets in Edge up 21%, so that means that we are also facing off against the customers who choose to go about it a different way.
+
+--------------------------------------------------------------------------------
+Brian Kleinhanzl,  KBW - Analyst    [89]
+--------------------------------------------------------------------------------
+
+          Okay great. Thanks for taking my questions.
+
+--------------------------------------------------------------------------------
+Brian Moynihan,  Bank of America Corporation - Chairman, President & CEO    [90]
+--------------------------------------------------------------------------------
+
+          All right, I think, operator, that's all the calls. So I want to thank everyone for joining us again this quarter. I think if you think about this quarter it's a quarter which shows you what responsible growth is all about: solid earnings growth, very solid operating leverage.
+Each business grew first half of this year versus first half of last year and did it the right way, did it while maintaining great risk and did it while we invested heavily in technology and invested in our people. So we look forward to next quarter and talk to you soon.
+
+--------------------------------------------------------------------------------
+Operator    [91]
+--------------------------------------------------------------------------------
+
+          This does conclude today's call. You may disconnect at any time and have a wonderful day.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
+EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
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exam/original-files/Problem_1_Sample/2017-Jul-26-FB.OQ-136950829491-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2017 Facebook Inc Earnings Call
+07/26/2017 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah T. Crawford
+   Facebook, Inc. - VP of IR
+ * Sheryl K. Sandberg
+   Facebook, Inc. - COO and Director
+ * David M. Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - Founder, Chairman of the Board and CEO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Peter Coleman Stabler
+   Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst
+ * John Ryan Blackledge
+   Cowen and Company, LLC, Research Division - Head of Internet Research, MD and Senior Research Analyst
+ * Richard Scott Greenfield
+   BTIG, LLC, Research Division - Co-Head of Research, MD and Media and Technology Analyst
+ * Justin Post
+   BofA Merrill Lynch, Research Division - MD
+ * Brian Thomas Nowak
+   Morgan Stanley, Research Division - Research Analyst
+ * Brian W. Wieser
+   Pivotal Research Group LLC - Senior Analyst of Advertising, Media, and Internet
+ * Heather Anne Bellini
+   Goldman Sachs Group Inc., Research Division - Research Analyst
+ * Douglas Till Anmuth
+   JP Morgan Chase & Co, Research Division - MD
+ * Ralph Edward Schackart
+   William Blair & Company L.L.C., Research Division - Partner and Technology Analyst
+ * Ross Adam Sandler
+   Barclays PLC, Research Division - MD of the Americas Equity Research and Senior Internet Analyst
+ * Mark Stephen F. Mahaney
+   RBC Capital Markets, LLC, Research Division - MD and Analyst
+ * Benjamin Ari Schachter
+   Macquarie Research - Head of TMET Research 
+ * Michael Brian Nathanson
+   MoffettNathanson LLC - Co-Founder, Partner and Senior Research Analyst
+ * Colin Alan Sebastian
+   Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
+ * Mark Alan May
+   Citigroup Inc, Research Division - Director and Senior Analyst
+ * Lloyd Wharton Walmsley
+   Deutsche Bank AG, Research Division - Research Analyst
+ * Robert Jason Sanderson
+   MKM Partners LLC, Research Division - MD & Senior Internet Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook Second Quarter 2017 Earnings Call. (Operator Instructions) This call will be recorded. Thank you very much. 
+Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.
+
+--------------------------------------------------------------------------------
+Deborah T. Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon, and welcome to Facebook's Second Quarter 2017 Earnings Conference Call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO.
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. 
+Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.
+During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com.
+And now I'd like to turn the call over to Mark.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah, and thanks, everyone, for joining today. 
+This quarter, we reached an important milestone for our community. 2 billion people now use Facebook every month, and more than 1.3 billion people use it daily. We also saw good results on the business with total revenue growing by 45% year-over-year to $9.3 billion and advertising revenue up 47% to $9.2 billion.
+We're proud of the progress we're making, and it also comes with a responsibility to make sure that we have the most positive impact on the world that we can. That's why, last month, we updated Facebook's mission. For the past decade, we focused on making the world more open and connected. We have a lot more to do here to give people a voice and help everyone stay connected with their family and friends, but now I believe we have a responsibility to do even more. Our new mission is to bring the world closer together.
+A big part of this mission is building community. Communities give us a sense that we're part of something bigger than ourselves, that we're not alone and that we have something better ahead to work toward. Last month, we had our first ever Facebook Communities Summit to talk about our product road map focused on building what we call meaningful communities.
+Meaningful communities on Facebook are groups that quickly become an important part of your social network experience and your real-world support structure. And right now, over 100 million people are members of these groups, from new parents to people suffering from rare diseases. So these groups often span online and offline and bring people together physically as well as over the Internet.
+Our goal is to help more than 1 billion people join meaningful communities, and part of this involves helping people discover the right groups, which is why we're building technology like AI to better understand people's interests and suggest groups that might be meaningful to them. And in the 6 months after we started working on this, we've already helped more than 50% more people join meaningful communities than had before that. So we have a lot more to do here.
+We also want to make it easier for people to build and lead communities. Last month, we launched new tools for group admins, making it easier for them to get insights into who their members are, filter member requests and remove bad actors and their content quickly to keep a positive and safe environment.
+Next, I want to give a quick update on what we're building over our 3 time horizons: making our existing services more useful now; building new ecosystems over the next 5 years around our products that a lot of people already use; and creating foundational technologies to achieve our mission over the next 10 years.
+So we're pleased with the growth that we're seeing with Stories. Instagram Stories now has more than 250 million people using it daily, and WhatsApp Stories also now has more than 250 million people using it daily. We're always working to improve and give people more ways to share, and this quarter, we added the ability to reply to stories with a photo or video and share a replay of live video on Instagram.
+I'm excited about how AI will improve people's experiences across our products. We're finding AI is both delivering consistent improvements to many of our systems like News Feed, search ads, security and spam filtering and more. But more than just improving these existing experiences, I expect AI to change the way that we do business in some important ways. 
+So for example, today, to keep our community safe, we rely on people flagging content that might violate our community standards for us to review. In the future, AI will be able to help flag more of this content faster and before people have even seen it.
+Now we've started using AI to fight terrorism and keep propaganda and extremist accounts off Facebook. We've even started experimenting with using AI to understand text that might be being used to promote terrorism.
+When it comes to News Feed, we currently mostly show you content from people and pages you're connected to. And we can rank this better with algorithm improvement, but the really big improvement from AI will be when we can understand all the other content that's out there, so we can help you discover much more of what matters to you beyond just what your friends are up to.
+On the business side, we're seeing a large shift in the way that marketing works. In the first wave of marketing, people would buy ads in media they thought their customers might watch, like a TV show that had similar demographics, but they wouldn't know who saw their ad. Now the Internet gave people the power to target their messages to people who actually might be interested and to measure results much more precisely. And that was a big improvement. And now AI is taking this a step further. Now you can put a creative message out there, and AI can help you figure out who will be most interested. A lot of the time, you don't even need to target now because AI can do it more precisely and better than we can manually. This makes the ads that you see more relevant for you and more efficient for businesses.
+Those are just a few of the reasons why I'm optimistic about how AI is going to improve our core services over the next few years. Over the next 5 years, we're going to build ecosystems around products that a lot of our -- a lot of people are already using.
+We've talked about how video will continue to be a big focus and area of investment for us. It's growing quickly, and we're introducing new features to make the video experience even better. For example, in May, we made the option to go live with someone else available to all profiles and Pages on iOS, and we also launched closed captions to make Live more accessible.
+We're also working to build a business ecosystem around Messenger and WhatsApp. Messenger and WhatsApp both have large communities and are growing quickly with 1 billion people now using WhatsApp daily. It is still early on the monetization side here, although we have started showing ads to a small number of people on Messenger. I want to see us move a little faster here, but I'm confident that we're going to get this right over the long term.
+Now finally, over the next 10 years, we're working on foundational technologies that are necessary to achieve our mission. In VR, we launched Live from Spaces, so you can go live with friends in different places. And we think that this has the potential to be a powerful tool to bring people together and help build community in some new ways.
+We're also working to help everyone in the world access the opportunities that come with the Internet. In May, we successfully flew Aquila, the solar-powered plane that we're building to beam Internet to parts of the world that currently don't have access, and that was the second successful flight. 
+These initiatives and other projects require a lot of ongoing aggressive investment in the infrastructure to serve our community. Last quarter, our Fort Worth data center went live and is now serving traffic using 100% renewable energy. And we're also extending our data centers in Los Lunas, New Mexico and Altoona, Iowa.
+This first half of 2017 has been an important period for Facebook. We've achieved some major milestones, delivered good business results and set clear goals around building strong communities and bringing people and the world closer together. But we have a long way to go. So thanks to our community, our teams and our partners for all being a part of this mission. I'm looking forward to making more progress together.
+And now here's Sheryl.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hi, everyone. 
+We had a strong second quarter and a great first half of the year. Our business continues to deliver terrific results. Q2 ad revenue grew 47% year-over-year. Mobile ad revenue grew 53% year-over-year to $8 billion and is now 87% of total ad revenue. Our growth continues to be broad-based across regions, marketer segments and verticals. 
+Our goal is to build meaningful connections between people and businesses by focusing on our 3 key priorities: helping businesses leverage the power of mobile; developing innovative ad products; and making our ads more relevant and effective.
+Our first priority is helping businesses leverage the power of mobile. People are rapidly increasing the time they spend on mobile, and businesses know they need to be where consumers are. Given the size and engagement of our audiences, Facebook and Instagram are the best platforms to reach people and drive business results. We have over 70 million businesses on Facebook, and I'm excited to announce today that we now have more than 15 million business profiles on Instagram.
+Video is an important part of our mobile strategy. More video is being shared and watched on Facebook than ever before and it's increasingly helping people and businesses connect. That's because video on Facebook is personal, built around connections, conversations and communities. This is why it creates opportunities for businesses to reach people in new and creative ways.
+People consume content faster on their phones, and marketers are increasingly recognizing that this behavior is different than on other media. This means that developing short-form snackable content is a big opportunity on mobile. We're working hard to help marketers adopt mobile-first video ad strategies for Facebook and Instagram.
+In a mobile environment, native mobile video ads typically outperform more traditional ads. For example, when Tropicana launched its probiotic juice, the company tested 6-second video ads against 15- and 30-second ads. The shorter ads resulted in higher brand metrics across the board, including a 16-point lift in brand awareness compared to a 6-point lift for the longer ads.
+Our second priority is developing innovative ad products. We're listening closely to feedback from marketers around the world to develop new ad formats and innovate on existing ones. Last quarter, I talked about how our Dynamic Ads help retailers and e-commerce companies promote their products across devices. Dynamic Ads show people the products that are most relevant to them based on actions they've taken, such as viewing items on a company's website.
+This quarter, we continued to improve Dynamic Ads and extended them to new verticals and categories. Delta Air Lines used our new flight format to reach people who had searched for a flight but not yet booked one. Delta was able to run personalized ads based on the routes people viewed on their site and then bring people back to their booking page. This resulted in a 12.7x return on ad spend.
+This quarter, we also rolled out ads in Instagram Stories for all types of marketer objectives. As Mark described, Instagram Stories are growing incredibly well and are therefore a big opportunity for marketers. From driving brand awareness to increasing sales, businesses can now use full-screen Instagram Story ads for any goal. For example, Ben & Jerry's created a brand awareness campaign using vertical video in Instagram Stories and saw a 14-point lift in ad recalls and a 2-point lift in purchase intent for its new Pint Slices ice cream.
+Our third priority is making our ads more relevant and effective. This means better targeting and better measurement across Facebook, Instagram and Audience Network. Marketers of all sizes are increasingly following our best practices, like optimizing your ads to drive real-world outcomes rather than focusing on proxy metrics such as Page likes and video views. 53% of our revenue from SMBs is from campaigns that use these tools and strategies, up from 23% in the beginning of last year.
+This quarter, we also added new ways for marketers to improve their targeting and spend more efficiently. For example, we introduced Value Optimization, which helps businesses show ads to people who are most likely to spend based on previous purchase behavior. We also introduced value-based Lookalike Audiences, which use machine learning to help marketers reach people who are similar to their most valuable current customers.
+For example, California-based accessory company, Nomad, built a custom audience of people in the U.S. who bought something on their site and then created a multi-country Lookalike Audience of people with similar characteristics. They targeted ads to their international audience across Facebook, Instagram and Audience Network, resulting in a 2.7x return on ad spend.
+We know that many marketers want to verify and compare results across platforms, and that's why we're focused on giving our clients more options for third-party measurement and verification. We now have 24 partners in our measurement system, including 3 partners measuring viewability, and we're in the process of adding 2 more viewability partners, DoubleVerify and Meetrics.
+As the first half of 2017 comes to a close, we feel good about the progress we're making. As marketers build more meaningful connections with people on mobile, we help them grow their businesses, which in turn grows ours. 
+I continue to be grateful to our clients and partners all around the world and to our global teams who make all of this possible. Thanks, and now here's Dave.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. 
+Echoing Mark and Sheryl's comments, Q2 was another strong quarter for Facebook. We continue to see strong growth and engagement in our global community as well as momentum in our mobile ads business.
+Let's begin with our community metrics. In June, 1.32 billion people visited Facebook on an average day, up 17% compared to last year. This number represents 66% of the 2.01 billion people that visited Facebook during the month of June, which was up 294 million or 17% compared to last year. Our community growth was again driven by product improvements on Android, our Internet.org efforts and ongoing third-party promotional data plans in markets like India. We will begin lapping the impact of these promotions in Q3 of this year.
+We're also pleased to see strong adoption and community growth across video, Instagram Stories, Messenger and WhatsApp. While these products do not monetize at the same level as News Feed, they are providing new ways to build global community.
+Turning now to the financials. All of our comparisons are on a year-over-year basis unless otherwise noted. Q2 total revenue was $9.3 billion, up 45%. Had foreign exchange rates remained constant with last year, total revenue would have been approximately $140 million greater or up 47%. Q2 total ad revenue was $9.2 billion, up 47% or 49% on a constant currency basis.
+Ad revenue growth was strong globally. Rest of World and Asia Pacific grew at 56% and 54%, respectively, while U.S. and Canada and Europe grew at 45% and 43%, respectively.
+Mobile ad revenue was $8 billion, up 53% and represented approximately 87% of ad revenue. Desktop ad revenue grew 17% despite an ongoing decline in desktop usage. Note that our Q2 desktop ad revenue benefited from our efforts to limit the impacts of ad blocking technologies.
+In Q2, the average price per ad increased 24%, and the ads -- number of ad impressions increased 19%, primarily driven by mobile feed ads on Facebook and Instagram. 
+Payments and other fees revenue was $157 million, down 20%. Total expenses were $4.9 billion, up 33%.
+We ended Q2 with over 20,000 employees, up 43% compared to last year. Our hiring growth rate increased for the third consecutive quarter as we continued to invest in the many opportunities ahead. 
+Q2 operating income was $4.4 billion, representing a 47% operating margin. 
+Our tax rate was 13%. In the quarter, excess tax benefits recognized from share-based compensation decreased our effective tax rate by 6 percentage points.
+Net income was $3.9 billion or $1.32 per share. 
+Q2 capital expenditures were $1.4 billion, driven by investments in servers, data centers, office facilities and network infrastructure. 
+We generated over $3.9 billion in free cash flow and ended the quarter with over $35 billion in cash and investments.
+Turning now to the outlook. Growth, engagement and advertising demand remain healthy, but there are certain factors that will impact revenue growth that are worth mentioning. As we have discussed before, we continue to expect that Facebook ad load will play a less significant factor driving advertising revenue growth going forward and that desktop ad revenue growth rates will slow in the second half of 2017 when we begin to lap efforts to limit the impact of ad blockers.
+In addition, we expect that our strategic focus on driving engagement with mobile video may slow advertising impression growth given the relatively fewer ad impressions in video relative to News Feed. I would also note that we do not see our early efforts in Messenger monetization offsetting the factors that I just mentioned. For these reasons, we continue to expect that our ad revenue growth rates will come down as the year progresses. 
+We continue to expect full year 2017 payments and other fees revenue to decline compared to full year 2016.
+Turning now to the expense outlook. Based on our updated view of the remainder of the year, we are tightening our initial expense guidance range. We expect that full year 2017 total GAAP expense growth will be approximately 40% to 45%, narrowed from our previous range of 40% to 50%. I would note that we expect to accelerate our headcount growth rates in the second half of the year as we remain solidly in investment mode. We also expect that our video content investments will contribute to operating expense growth in the second half of 2017.
+In terms of capital expenditures, we expect that full year 2017 CapEx will be in the lower end of the prior range of $7 billion to $7.5 billion. We are ramping our infrastructure investments to support global growth and anticipate more data center building activity in the second half of this year. For example, we recently broke ground on new buildings at our New Mexico and Iowa data centers.
+Turning now to tax. As I have previously noted, our tax rate will vary based on our stock price. At the current stock price, we would expect that our Q3 and full year 2017 tax rates will both be similar to our Q2 rate.
+In summary, the first half of 2017 was a strong period for Facebook, both financially and in terms of growth and engagement of our community. We will continue to invest aggressively in the many opportunities we see ahead as we make progress on our mission to give people the power to build community and bring the world closer together.
+With that, Mike, let's open up the call for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) Your first question comes from the line of Brian Nowak from Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Thomas Nowak,  Morgan Stanley, Research Division - Research Analyst    [2]
+--------------------------------------------------------------------------------
+
+          I have one for Mark. Mark, the offerings on the core Facebook app have improved and changed a lot over the years from groups, live video, search, et cetera. I'd be curious to hear how you've noticed consumer behavior on the core product, the core Facebook app change as Instagram has grown. And how do you think about that evolving over the next 3 to 5 years?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [3]
+--------------------------------------------------------------------------------
+
+          So the main value proposition for the Facebook app is helping people share any type of content that they want with any audience that matters to them, right? So you can go from text to photo to video, from small groups to larger groups, from your friends to everyone in the world, and that's always been where the Facebook app has excelled. There have been different experiences that are more focused on specific things, but with a strong technological foundation supporting all of these different use cases, the Facebook app has always supported people using all of them. Now the biggest trend that we see in consumer behavior is definitely video, right? And there's a strong technological underpinning for that, which is that if you go back 5 years, you try to watch a video on your phone, it would probably have to buffer for a minute or so before you'd actually get to watch it, which wasn't a good experience. And if you wanted to upload a video, like whether it's a longer video like what you post to News Feed or a 10-second story like what you'd post on any of the apps, I mean, even that might take 30 seconds to upload, so it wasn't a good experience. So now as the technology on the network level improves to support that, what we're seeing is the ability to serve what is a large amount of demand for what's a very engaging type of content. And that demand flows across social content like we're seeing in Stories and feed to clearly a huge amount of public content. I mean, Pages are engaging in this and some of the trends that Dave just talked about for just a lot of video behavior across the platform.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Ralph Schackart from William Blair.
+
+--------------------------------------------------------------------------------
+Ralph Edward Schackart,  William Blair & Company L.L.C., Research Division - Partner and Technology Analyst    [5]
+--------------------------------------------------------------------------------
+
+          Mark, in the prepared remarks, you talked about Messenger and WhatsApp being on the early innings of the monetization. And then you also talked about your desire to move faster on Messenger. Just curious what are the factors sort of driving your willingness to move faster. And then how should we think about that both from a consumer and monetization experience?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [6]
+--------------------------------------------------------------------------------
+
+          Well, on Messenger, there are 2 basic things that we're doing. One is we're starting to put some ads into the product just to see the basic parameters around how that performs, how people like the ads or don't, how they work for businesses and just try to get an understanding of that. So we're starting to run that across the world. But as Dave said, even though we're starting to roll that out in a lot of places, the volume starts off pretty small. The biggest strategic thing that we really need to do in messaging right now is make it so that people organically interact with businesses, and that that is a good interaction both for people and for the businesses. So here's one way to think about this. If you're a business and you have a higher ROI for interacting with a person in your messaging thread than you do on the mobile web or trying to get them to install an app, then that creates this positive feedback loop where you're going to point your ads towards the Messenger thread, you're going to invest more of your engineering resources in building out the content and experience around the Messenger thread. So we're currently working on making it so that, that is the highest ROI thing. I think we're making progress there. It's not that we're going to crack every market at once, but in some, I think we're definitely getting there. We're getting some positive feedback from the market. But once we start to achieve that in more and more verticals, I think that that's going to start unlocking a lot of behavior, and a lot of businesses are going to want to push more interactions to happen there, which I think will really be the foundation for building that into a big business.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+
+          Yes. And, Ralph, it's Dave. I would just add that with messaging monetization, this is early, and it's not a near-term overall Facebook growth driver. And much like Instagram in its early days, we're going to be cautious. But unlike Instagram, this isn't a feed product, so there are just -- there are more unknowns here.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Heather Bellini from Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heather Anne Bellini,  Goldman Sachs Group Inc., Research Division - Research Analyst    [9]
+--------------------------------------------------------------------------------
+
+          I was wondering -- Sheryl talked a little bit about Instagram Stories. I was wondering if you could share with us kind of the initial feedback from advertisers. Did they see it as similar to advertising in the IG feed? Or are they using it to reach people in a different way if you've noticed anything over the period that you've been doing it?
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [10]
+--------------------------------------------------------------------------------
+
+          So it's pretty early for ads in Stories. And I think the way people largely think about this is this is another way of using the Facebook ad system, including our targeting and measurement capabilities, to create ads that are great creatives that can reach people. So the fully immersive format with the targeting and optimization of Facebook ads is a pretty unmatched opportunity. We also have a huge opportunity within Instagram, and obviously, the use of ads in Instagram is much, much bigger than the use of ads in Stories. The way we think about this is we're trying to help marketers reach their customers, both their existing and their new customers effectively, and we think it's the combination of all these offerings that really are the strength of our business and explains why we can continue to grow. So within one interface, we're working with one sales rep. If you're a large company or a small company, you can buy Facebook. You can buy Instagram. You can buy Audience Network. You can buy the different ad formats within Facebook and Instagram. And that means that you have multiple targeting opportunities, multiple opportunities and even opportunities to see who engages in an ad in one place and then reinvest to continue the conversation with those customers. So we think all of these things work together, and these new formats fit in really nicely with the ad system we built, which underlies all of the opportunity.
+
+--------------------------------------------------------------------------------
+Operator    [11]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Peter Stabler from Wells Fargo.
+
+--------------------------------------------------------------------------------
+Peter Coleman Stabler,  Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst    [12]
+--------------------------------------------------------------------------------
+
+          One for Sheryl if I could. Sheryl, you guys have rolled out some initiatives designed to address specific advertising categories like dynamic travel ads. Could we anticipate more efforts going forward to address categories that may be relatively underpenetrated by Facebook, Instagram and Audience Network? So I'm thinking about categories like financial services, auto, for example.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [13]
+--------------------------------------------------------------------------------
+
+          So we're really happy that our growth has been really strong across our verticals, and that continues to be the case. Our top verticals are pretty consistent in e-commerce, CPG, entertainment, media, retail and gaming. For the most part, when we build products, we build them to work for all verticals and you see us do that. So being able to upload your catalog of products can be used no matter what your product lists are. We do build vertical-specific ad products when they are necessary, so dynamic ads for travel, for example, as you mentioned, being an example. I think the heaviest lifting of the work we do is really helping marketers in different verticals focus on the right metrics, which are the sales metrics. Because, for too long, our industry has been focused on proxy metrics, how long someone viewed a video, even brand lift, measurements we care about. But these are all proxy metrics. What really matters is you see an ad and you buy a product. You see an ad, and you drive a car off a lot. You see an ad, and you order a service. And so there's very different processes with these different verticals in terms of helping them understand their own purchasing data so that we can connect our ads to their ultimate purchases. We believe that's one of the most important things that we've been very, very focused on, and we have a long way to go. And part of the results you see from us in different verticals are actually explained by the ability of us to help those marketers measure sales at the end of the day. The more that we can tie ad viewing to sales, the stronger our case is with our clients. And so we need to do a lot of work around the measurement with different verticals.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Doug Anmuth from JP Morgan.
+
+--------------------------------------------------------------------------------
+Douglas Till Anmuth,  JP Morgan Chase & Co, Research Division - MD    [15]
+--------------------------------------------------------------------------------
+
+          Two if I could. Mark, you visited many different parts of the country over the last several months. Just curious how you're applying what you've learned to Facebook and the broader platform. And then, Dave, can you just give any -- some more color on, I guess, how things have changed in terms of OpEx and CapEx just given that we're coming down toward the lower end of the ranges?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [16]
+--------------------------------------------------------------------------------
+
+          So a lot of the themes around building community and bringing people closer together have been underscored by a lot of experiences that I've had traveling around. And I've tried to write about them. I don't write about each visit that I make on Facebook, but it's been really striking to me, when you talk to folks in a lot of different communities, how important local institutions and their local communities are for supporting people there. And there's been a clearly documented trend across the world of declining membership in a lot of different kinds of communities, and I think that that's an important problem that is eating at the social fabric not only of our country but around the world that I hope that we can play a role in addressing. And that's not something that we can do directly, but I believe that we can empower people who want to build local communities and want to play a leadership role in their local community to have the tools that they need. And I think if we can do that, then you start bringing people together at a local level. And when people feel more comfortable in their lives at a local level, then I also think that, that helps bring people and bring the world closer together at a global level, too. So that all has been underscored by a lot of the visits and what I've seen as well as a lot of the research that we've done at Facebook, and it's all reflected in the new mission.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [17]
+--------------------------------------------------------------------------------
+
+          Doug, it's Dave. I don't think there's anything that's really fundamentally changed. We're tightening the range to 40% to 45% expense growth due to better visibility. We remain solidly in investment mode, and if anything, we're finding new opportunities to invest in. From the perspective of hiring growth, I'd really point to the fact that we've been consistently accelerating hiring so far in 2017, and I pointed to the fact that we expect to accelerate hiring in the back half of the year as well. And this quarter was the biggest recruiting quarter in terms of net hires ever for Facebook. We're continuing to invest in a number of key areas, hiring engineers to drive the 3-, 5- and 10-year priorities. We're going to be investing in content to help build a platform for content producers to find an audience and monetize. We are also continuing to invest in areas like community operations and other areas. So we remain solidly in investment mode from a total expense point of view. On CapEx, we still expect to be within the range of $7 billion to $7.5 billion, and we're investing aggressively in our data center footprint to support the global growth that we see. So I think across-the-board, we're investing heavily. On headcount, I would just point out that our payroll growth tends to lag headcount growth because headcount is an end-of-period number, so the acceleration that we're seeing in 2017 will obviously play out in 2018 as well.
+
+--------------------------------------------------------------------------------
+Operator    [18]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Ross Sandler from Barclays.
+
+--------------------------------------------------------------------------------
+Ross Adam Sandler,  Barclays PLC, Research Division - MD of the Americas Equity Research and Senior Internet Analyst    [19]
+--------------------------------------------------------------------------------
+
+          Good. Got couple of questions on the messaging apps. I think 2 years ago at F8, you talked about WhatsApp user base about a little north of 1 billion sending out 50 billion messages a day, and Messenger was about 1 billion and 20 billion messages a day, so implying kind of like 2.5x the engagement on WhatsApp compared to Messenger. Is that accurate? And where does that stand today? And then both of these messaging apps kind of started in different geographies around the world. So how does that impact your thinking around monetization ideas between Messenger and WhatsApp?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [20]
+--------------------------------------------------------------------------------
+
+          Yes. I don't think we're sharing detailed stats on engagement by messaging platform. They're obviously both critical platforms. Both have over 1.2 million monthly actives, and WhatsApp has demonstrated significant engagement with crossing 1 billion daily actives. So I think that indicates the engagements that you have on that platform. There are different geographies where the messaging platforms are stronger, and depending on that, that shifts our priorities in different ways. But overall, from a monetization perspective, I think the strategy there is clear. We're focused on growing the user base first and foremost, and then secondly, it's about building organic connections between businesses to -- and consumers. And then third, it's about how do we build monetization around those relationships. And I think, there, we're further along with Messenger than we are with WhatsApp. And so I think you see us rolling out the global data there with ads. So I think we'll watch and learn from that, and as we learn things, we can apply them in other areas.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Justin Post from Bank of America Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch, Research Division - MD    [22]
+--------------------------------------------------------------------------------
+
+          Maybe a question for Mark. I know video is a priority for the company. To start with, any change in user trends or engagement as you've added video to Facebook? And then secondly, just how do you think about semiprofessional or professional video for Facebook? Is that a good business given all the content sharing costs and the production costs when you compare it to kind of your existing social business? And do you see it as cannibalistic or additive as far as usage?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [23]
+--------------------------------------------------------------------------------
+
+          I can share a little bit about it. Then, Mark would want to jump in on any other color. I mean, I would say, as I mentioned, Justin, in my commentary, as people spend more time with video and more time is going to video, that is going to have a limiting factor to how much time they spend in News Feed. And so that's going to have an impact on impression rate growth. So there is, in that sense, a cannibalistic effect of sorts that happens there. But what Mark alluded to is video is where people -- as networks improve and devices improve and our products improve, video is the most engaging experience that we can offer. And so we're seeing consumers adopting that, and we're building products for them. In terms of the types of content, I think we're looking at a wide variety of content from -- of course, at the core is people sharing experiences in their lives as that's at the base of what we offer in terms of bringing the world closer together. It's just it's that community content. But then there's opportunities for semiprofessional and professional content, and we're exploring things around the platform of making sure that we're a platform where professional content providers can come find an audience and then also monetize that audience.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [24]
+--------------------------------------------------------------------------------
+
+          I think (inaudible) got it.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Colin Sebastian from Robert Baird.
+
+--------------------------------------------------------------------------------
+Colin Alan Sebastian,  Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Mark, I wanted to ask a question on conversational interfaces and specifically, if we should think of Facebook becoming integrated as a skill app or feature on platforms such as Alexa. Or should we think of things like Oculus, Messenger and perhaps even a dedicated device as part of Facebook's own alternative platform? And then, Dave, just hoping you could put a finer point on the timing around the reduction in ad load growth.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [27]
+--------------------------------------------------------------------------------
+
+          I mean, to the first question, we're going to build the services that we think are useful. Some of them are going to be platforms, and some of them are going to be apps and different things on top of platforms that other folks build. But fundamentally, we're trying to serve our community the best we can, and we'll do that across all these platforms.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [28]
+--------------------------------------------------------------------------------
+
+          Yes. And in terms of ad load growth, I pointed to the fact that we continue to expect that ad load will be a less significant factor in the remainder of 2017. And that's certainly the case. That starts in Q3 but there's a number of other factors that I also pointed to, including the desktop, lapping some of the efforts we made on desktop in terms of unblocking or working against the ad blocking technologies. And so that has a factor on desktop growth. And then, of course, I talked about video and our focus on driving and serving the consumer demand for video. And that's also leading to a potentially lower impression growth as well.
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Rich Greenfield from BTIG.
+
+--------------------------------------------------------------------------------
+Richard Scott Greenfield,  BTIG, LLC, Research Division - Co-Head of Research, MD and Media and Technology Analyst    [30]
+--------------------------------------------------------------------------------
+
+          On one of your blogs, you put a post up basically detailing basically what people were doing during TV, and you showed kind of a control group where Facebook usage was really constant. And then you did a group that was watching the TV show, and you saw huge spikes of Facebook usage during the television -- during the ad breaks during the show. Wondering like, as you go talk to marketers, obviously, TV ratings are down a lot. How does that type of study -- I realize it's just one TV show. But as you make the pitch of like why are you not shifting dollars faster to Facebook, how does that type of research start to play into their thinking? And what's holding them back? Is it just the creative doing or the embracing of 6-second ads? Like, what's the block to getting more of that $70 billion of TV ad dollars to shift over faster?
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [31]
+--------------------------------------------------------------------------------
+
+          Well, that is just one study, and I don't want to overstate its importance in how we sell ads. We make the case to our clients that consumers are moving to mobile and that they need to move to mobile. And not that mobile should replace all of their other advertising, but responsible marketers with great companies large and small, they'll advertise on TV and they advertise on mobile and they advertise in other places. Our goal is to be the best dollar and the best minute anyone spends. And the case we make is that we want them to take advantage of the opportunity that is mobile and the opportunity for the targeting we offer and the measurement we offer. I think what has taken us time and continues to take us time is we need to convince marketers to make mobile-first video, video and other ad formats. We talk a lot about how the first TV ads were people reading their radio ads in front of microphones. And we're still in the case that when people go to put an ad on mobile, they often will take an ad that's really produced for TV and put it on mobile. And those work, and they can work well. But they do not work as well as ads that are natively mobile like the Tropicana example I shared in my earlier comment. Mobile ads, when they're video, are shorter. The brand comes in faster. They tell a story that doesn't evolve but really gets you to understand the brand and the offering really quickly. We talk about it as Thumb-Stopping Creative. And so the work we have cut out for us is to help marketers and working with their agencies evolve the format of the ads so that they're optimized for mobile, optimized for Facebook, optimized for Instagram. I think we're making progress, but we have a long way to go there.
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Mark Mahaney from RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Stephen F. Mahaney,  RBC Capital Markets, LLC, Research Division - MD and Analyst    [33]
+--------------------------------------------------------------------------------
+
+          Mark, you talked about maybe trying to accelerate a little bit the messaging monetization, and I'm wondering if there's anything more behind that statement. Is it that you were frustrated with the level that you'd seen to date or that you saw some opportunity that you thought we -- you could accelerate the push towards, I guess, monetizing? And maybe big picture, I want to ask just, as you think about -- I know the monetization is very early stage or it's barely even begun. There's very few platforms around the world have got 1 billion users that are unmonetized. So you would think that there's a lot of opportunity there but maybe not, and maybe people are making a mistake in trying to look at Asian assets and seeing what they've done there and thinking that you can do that with your assets. So what's the upside? Like when you think about the real opportunity, like what gets you excited about the ability to monetize those assets 5 years from now?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [34]
+--------------------------------------------------------------------------------
+
+          Sure. So we're currently going through the process of figuring out what we want to invest in over the next year and doing our long-range planning. And this is certainly one of the areas where I think we want to be investing a lot more in and believe that there's a big opportunity and can accelerate all the effort. I do think, as you say, this is one of the rare times in business where you can look at messaging platforms that exist and see how they've successfully monetized in other parts of the world and have that be a floor. I mean, I think that, over time, we should be able to do better, but that at least provides this existence proof that despite -- regardless of what our internal logic is of what we're doing, that someone has done it. So that gives us some degree of confidence there in addition to our own execution on other things. But I think there's a pretty clear playbook that we have here of, first, building up the consumer usage, then building up the organic person-to-business interaction, making sure it works for both people and businesses, and then once you have that, the quality of those interactions is really what contributes the scale of how much you can grow it. We've seen this in News Feed, too. One of the factors that's contributed to ad load over time is the quality of the ads, where if ad quality was low, we wouldn't be able to put as many ads in because people wouldn't want them. But in a lot of markets around the world, we see that ad quality is increasing at a very fast rate, and that makes it so that, in a lot of times, people ask for the content, which, of course, creates a very different dynamic. So we need to get to that in messaging, and there's -- because messaging really started from this place of people communicating one to one with each other and now adding all these other uses, it's just a lot of investment and a lot of different functionality that needs to get at it. But for all the reasons that I've said here around our own experience doing this in other context with Facebook and Instagram proof points in the market of how it's worked, I think, over the long term, I'm pretty confident that we will get there. And we -- it's our job to just go do that.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [35]
+--------------------------------------------------------------------------------
+
+          Yes. And I would just add, we don't know at what level that is, right? So we're more -- we had more experience with fee-based product, so we kind of know how those play out. And so we're -- this is in very much early days mode.
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of John Blackledge from Cowen.
+
+--------------------------------------------------------------------------------
+John Ryan Blackledge,  Cowen and Company, LLC, Research Division - Head of Internet Research, MD and Senior Research Analyst    [37]
+--------------------------------------------------------------------------------
+
+          Two questions. On the Messenger ads, recognize that it's early days, but just wondering if you think there'll be more -- those ads will be more complementary for core Facebook and Instagram advertisers or perhaps serve a different advertiser base or different use cases versus core Facebook and Instagram. And then second question would be, at the high end of the OpEx guide, it implies 53% year-over-year OpEx growth in the back half of the year versus plus 36% in the first half. Just wondering if you can discuss other key drivers of OpEx growth in the back half of the year aside from headcount. Like should we consider investment in video content the #2 driver of OpEx growth in the back half of the year?
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [38]
+--------------------------------------------------------------------------------
+
+          On the Messenger ads, I think the way we think about it is, as Mark said, we have a lot of work to do to work on the format that. This is not a fee-based product. And this is a messaging product, so it's a different consumer format. And we believe that the ad format should follow the consumer format, so it's really integrated as part of the experience. And that's where we have a lot of work to do. We do think that the advertiser base and the targeting measurement we offer, once we figure out the format, will be a very considerable advantage. We already have 5 million advertisers on Facebook, 1 million advertisers on Instagram, and one of the reasons we were able to scale into Instagram ads more quickly is because we were building off of the Facebook advertiser base. And similarly, the work we've done in Facebook and Instagram and Audience Network will help us expand to Messenger. What we really want to emphasize, especially since there are so many questions on Messenger monetization on this call, that we're going to be slow and deliberate. We are always looking at the long run. We do not manage this company quarter to quarter. We protect the consumer product and the consumer engagement. Messaging is really strategically important for the company, and the long-term engagement with our users and the organic feel of the engagement with businesses and consumers is where we'll be focused. So it's early days this year, and it's going to continue to be early days for a while.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [39]
+--------------------------------------------------------------------------------
+
+          So yes, on the OpEx guide, clearly, the biggest driver there is going to be the accelerating headcount growth. In addition, I mentioned video content as being a driver. And then also, we're just supporting the global growth of the platform. We continue to see growth in users. We continue to see growth in time spent per DAU across the Facebook family of apps and Facebook, and we're bringing more data centers online and the like towards that growth. So those will start hitting cost of revenue with depreciation. So there's going to be a variety of contributions to that growth, but like you mentioned, I would point to both headcount specifically in R&D. R&D headcount grew 48% year-over-year in Q2, and that's going to be a key driver along with the content layering in.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Mark May from Citi.
+
+--------------------------------------------------------------------------------
+Mark Alan May,  Citigroup Inc, Research Division - Director and Senior Analyst    [41]
+--------------------------------------------------------------------------------
+
+          Sheryl, in your prepared remarks about a case study, you discussed the benefits of shorter video ads, but I was hoping you could provide an update on the mid-roll ad breaks that you've now been testing for a few months and maybe what kind of progress that you're seeing in terms of completion rates. Are you at a point where those -- where ad breaks could start to roll out more broadly? And then, Dave, you mentioned that a greater focus on video could impact growth in ad impressions. But would you also assume that a greater focus on video ads could also drive improved ad pricing and yield on your available inventory?
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [42]
+--------------------------------------------------------------------------------
+
+          On ad breaks, we're currently really just testing the ability to put a short ad break in uploaded videos. We do it if a video is longer than 90 seconds or live videos are longer than 4 minutes. We're just in the process right now of expanding to more publishers in the United States, so it's really early. In terms of the metrics we're looking for, it's a great question. And obviously, we care that people view the ads, but the most important thing is tying those ads impressions, even if they're short views, all the way through to that same purchase data that we keep talking about. And so as we work on rolling out more ad breaks, and we are rolling out slowly, we're really focused on finding ways to help marketers measure the right things, and that's a very important focus for the company going forward.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [43]
+--------------------------------------------------------------------------------
+
+          And then, Mark, you were asking about video and its impacts on pricing growth. I would probably step back and look at it from an overall system perspective. And so starting with the supply side, there's a variety of factors that'll impact impression growth, and I mentioned slower ad growth and then increasing video watch time as being 2 of them. And given there's an auction that drives the pricing in how we run the business, there's always an interplay between supply growth and pricing growth. And to the extent -- and so what we're really focused on, right, is driving better ROI for our advertisers. And Sheryl alluded to it in her earlier commentary about if we get better at converting our impressions into things that are valuable for advertisers, we get more efficient in doing that, we'll be rewarded with better pricing and higher demand at better pricing as a result of that hard work. That doesn't necessarily specifically pertain just to video. It really is across-the-board. So if we're effective at continuing to do that, then that should benefit pricing growth. And if we can grow demand faster than we grow supply, then we're going to see that play through in price. And that's really the goal of a lot of the hard work that the ads team does to make our products better and more effective for advertisers.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Michael Nathanson from MoffettNathanson.
+
+--------------------------------------------------------------------------------
+Michael Brian Nathanson,  MoffettNathanson LLC - Co-Founder, Partner and Senior Research Analyst    [45]
+--------------------------------------------------------------------------------
+
+          I have one for Dave, one for Sheryl. Dave, going back to your prepared comments, I think you mentioned there was a 24% growth in pricing this quarter on unit pricing. Can you help us explain or understand underlying that growth which products you're seeing the greatest inflation maybe quarter-over-quarter or year-over-year?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [46]
+--------------------------------------------------------------------------------
+
+          Yes. I don't think there's any -- I would really just kind of point to the overall dynamics of the system. And again, what we're seeing is, with slower supply growth, that's going to play out to higher pricing and again, are we effective? And we've been effective at delivering good return on investment for our advertisers and getting better at converting what we have as inventory into what they care about as outcome. And that, from a systemic point of view, is what's playing through there. From a product perspective, as we get things like Dynamic Product Ads rolled out, those are incredibly valuable as we connect more advertisers with those and bring more data into the system, and we can get more of the impressions that are very highly targeted and very relevant, then we'll be rewarded with better pricing. As we can expand that out into things like Lookalike, we've talked a lot about on this call, that basically takes some of that really good targeting and extends that into a much bigger audience. And then we can get more impressions at better value because we're really connecting that with end results that the advertisers value. So it's really those types of -- all that type of work that we do to get the system better and better. And so we're constantly working to get better penetration of these key ad products. In terms of the supply side, obviously, News Feed is incredibly valuable because it's very present for the consumer. And we've improved the quality of the ads in News Feed, and so that's another driver from the supply side.
+
+--------------------------------------------------------------------------------
+Operator    [47]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Rob Sanderson from MKM Partners.
+
+--------------------------------------------------------------------------------
+Robert Jason Sanderson,  MKM Partners LLC, Research Division - MD & Senior Internet Analyst    [48]
+--------------------------------------------------------------------------------
+
+          Already feel like a call about Messenger monetization, so I'm almost reluctant to ask another. But just 2 things. Compared to what you saw in the early phases of testing News Feed ads, what can you say so far about users' responsiveness to ads in Messenger? And then second, obviously, there's a lot of momentum in the development of bots on the platform. And do you see this enabling of a great organic interaction, as Mark put it, as a way to ultimately make Messenger a great ad platform? Or do you think that enabling these other business services can lead to other monetization opportunities down the road independent of advertising?
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [49]
+--------------------------------------------------------------------------------
+
+          It's really too early to understand the impact of the ads on consumers because there aren't enough of them and they haven't been rolled out for long enough. In terms of the bots, what we really think about is our business is in people making useful connections on both sides, on Messenger or any platform. If the connection is useful for marketers' businesses and useful for people, then it will grow. And we're open to automated bots being useful. We're open to other forms of things being useful. I think when you think about what bucket of spend that is in, which is a question we get, it really is both marketing spend and any other spend companies have where they're reaching their customers of which, if you think about marketing spend and customer service spend, marketing spend is way bigger because marketing spend grows as you can grow sales, and customer service spend is something that people generally try to minimize. So the way we think about it is we want to grow the organic connections, whether they're automated or whether they're personalized, and make sure that, that is growing the business of our customers.
+
+--------------------------------------------------------------------------------
+Operator    [50]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Brian Wieser from Pivotal Research.
+
+--------------------------------------------------------------------------------
+Brian W. Wieser,  Pivotal Research Group LLC - Senior Analyst of Advertising, Media, and Internet    [51]
+--------------------------------------------------------------------------------
+
+          I was wondering if you'd comment on how you think the European Commission's GDPR and related privacy initiatives will impact the business, either -- generally either positively, negatively and whether or not those policies around privacy might yet become global standards. Curious how you think that impacts both the consumer product as well as the advertising business. And maybe separately, I'm just curious if -- among those advertisers who've expressed particular concern around third-party tool access, we certainly heard from some who've said very publicly that they're going to reduce their spending. Obviously, others clearly are increasing their spending. But curious how far you've gone towards allaying those concerns and possibly regaining any loss spent.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [52]
+--------------------------------------------------------------------------------
+
+          Well, when we think about any regulatory issues, GDPR or anything else, we respect local laws and regulations, and we have to work really closely with regulators to make sure they understand our business practices, understand how we contribute to economic growth in their countries and understand the steps we take and continue to take to protect privacy. Certainly, regulation is always an area of focus that we work hard to make sure that we are explaining our business clearly and making sure regulators know the steps we take to protect privacy as well as making sure that we're in compliance. When you think about the metrics question you asked, how we think about what is I think -- what I think you're asking about is third-party verification. We're very interested in making sure that marketers can verify or measure outcomes through third parties, and that's why we're working to actively expand those partnerships.
+
+--------------------------------------------------------------------------------
+Operator    [53]
+--------------------------------------------------------------------------------
+
+          The next question is from the line of Lloyd Walmsley from Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Lloyd Wharton Walmsley,  Deutsche Bank AG, Research Division - Research Analyst    [54]
+--------------------------------------------------------------------------------
+
+          Another one on Messenger. So you guys have talked up building -- the importance of building organic consumer-to-business interaction here. So wondering if you can share kind of what sort of adoption you are seeing in those kind of interactions. And are there certain verticals or geos where it's really taking off? And then a second if I can. We've talked a lot obviously already about ad impression growth and how it's set to slow in the second half. You're already seeing a big slowdown in impression growth in the first half, and yet, as you've noted with supply growth slowing, pricing has gone up as you've added a lot of ROA as to your customers. So wondering why should this phenomenon not continue to carry ad revenue growth in the second half.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [55]
+--------------------------------------------------------------------------------
+
+          I'll take this. So there have been a number of questions about Messenger, and in general, we're seeing a -- I'm happy with the rate of growth in the experiences of -- that we're seeing on Messenger. But if there's one message here that I think is actually important to say, it's that we're trying to communicate that the pace of growing the Messenger business, it's a longer-term thing. I actually think in the -- over the next couple of years or a few years, the much bigger driver of the business and determinant of how we do is going to be video, not Messenger. Messenger, I think, is a really important thing and WhatsApp over a 3- to 5-year period, and we're investing a lot in it. I think it's a huge opportunity. But as has been noted on the call, video is both at large scale and the economics are quite different from what the current fee-based businesses that we have today, especially around how -- with mid-roll ads and rev share around that, the margin structure will be different. So I mean, one of the big questions that we're focused on as we build this out, we're very committed to building it out because it's what people in the community want. But one of the big things that we're really very focused on is making sure that we get this right so that even though this business will likely be -- not likely, I think, almost certainly will be a lower-margin source of revenue than the current thing that we do, there's this big question of how incremental is that behavior going to be. And I mean just -- I just want to -- I'm just throwing this context out there because so many of the questions here today have been about Messenger. And I want to make sure on these calls that we do an accurate and a full job of conveying what we're actually thinking about as a business and what we think the outlook is going to be. And I think that those questions around video, which, I mean, I'm optimistic about, but there are real questions there that we need to manage well, is going to be a much bigger driver of the business over the next 2 to 3 years likely even than the trajectory of what we're doing on Messenger and WhatsApp.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [56]
+--------------------------------------------------------------------------------
+
+          And, Lloyd, you asked about why the good work that we've done so far in basically providing value for advertisers, that's playing through into price. Look, that's not just happening. That's a bunch of hard work that goes into making our ads more targeted, that makes the outcomes that advertisers get more valuable. We're going to continue to work to do that, and we're going to continue to invest in making improvements in the ad products. But yes, there's -- and we think there are great opportunities to continue to make improvements to ROI. But obviously, if you have rising prices, it's going to make that work against an upstream trend, so we need to continue to work hard to deliver more value for advertisers in the face of that. So we've got our work cut out for us, and we think we've got a great team working on that -- on those challenges.
+
+--------------------------------------------------------------------------------
+Operator    [57]
+--------------------------------------------------------------------------------
+
+          The last question comes from Ben Schachter from Macquarie.
+
+--------------------------------------------------------------------------------
+Benjamin Ari Schachter,  Macquarie Research - Head of TMET Research     [58]
+--------------------------------------------------------------------------------
+
+          Mark, you stated that AR-mixed reality could be the next computing platform, and obviously, this is way out in the future. But if that implies something so large, how do you think about allocating resources for that? I mean, how much are you willing to spend on it and how you think -- any new thoughts on how this all evolves? Then related to that, the next iPhone is coming out soon. Do you think that there'll be capabilities there that will impact the AR evolution meaningfully?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [59]
+--------------------------------------------------------------------------------
+
+          Well, this is certainly something that I'm really excited about longer term. I think it not only does it have the possibility of being the next major computing platform, AR and VR together, but I think it has the possibility of being much more social and intuitive and natural than some of the devices that we have today, whether they're computers or phones. So that's why I'm really excited about that. When you think about AR glasses, the technology and science to build an experience that would be both comfortable to wear and something that people would actually want to wear out in public, that doesn't exist yet, right? So there's a lot of foundational work that needs to get done there. That's partially why I'm excited about doing the VR work because it doesn't have that constraint. You're not wearing VR out in public. But also recently, I think one of the things that we've seen is that there are a lot of AR experiences on mobile, right? So the work that we started talking about at F8 that we are releasing slowly over the course of the year is certainly one of the precursors for building up that ecosystem that I'm excited about. But I mean, look, if I was just saying that video is going to be the primary driver or one of the big drivers over the next few years and Messenger maybe after that, I think AR is quite far down the road. But when you're running an operation and serving people of this scale, I think you have a responsibility to invest in all these things that are downstream that could help shape and improve people's lives because I don't think that there are that many other folks in the world who will. So I think that that's a thing that we take seriously, whether it's connectivity and making sure that people actually all around the world get to enjoy and benefit from the opportunities that the Internet has or the improvements that come from AI, or eventually upgrading the computing platforms that we all get to use. This stuff just doesn't happen automatically. And someone in the world needs to focus on building it, and we want to play a role in that.
+
+--------------------------------------------------------------------------------
+Deborah T. Crawford,  Facebook, Inc. - VP of IR    [60]
+--------------------------------------------------------------------------------
+
+          Great. Thank you. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again.
+
+--------------------------------------------------------------------------------
+Operator    [61]
+--------------------------------------------------------------------------------
+
+          Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2017-Jul-27-AMZN.OQ-137040257613-Transcript.txt

@@ -0,0 +1,331 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q2 2017 Amazon.com Inc Earnings Call
+07/27/2017 05:30 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian T. Olsavsky
+   Amazon.com, Inc. - CFO and SVP
+ * Darin Manney
+   Amazon.com, Inc. - Head of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Heath P. Terry
+   Goldman Sachs Group Inc., Research Division - MD
+ * Brian Patrick Fitzgerald
+   Jefferies LLC, Research Division - MD and Senior Equity Research Analyst
+ * Eric James Sheridan
+   UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst
+ * Jason Stuart Helfstein
+   Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst
+ * Daniel Salmon
+   BMO Capital Markets Equity Research - Media and Internet Analyst
+ * Justin Post
+   BofA Merrill Lynch, Research Division - MD
+ * Mark Stephen F. Mahaney
+   RBC Capital Markets, LLC, Research Division - MD and Analyst
+ * Brian Thomas Nowak
+   Morgan Stanley, Research Division - Research Analyst
+ * Colin Alan Sebastian
+   Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
+ * Mark Alan May
+   Citigroup Inc, Research Division - Director and Senior Analyst
+ * Douglas Till Anmuth
+   JP Morgan Chase & Co, Research Division - MD
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q2 2017 Financial Results Teleconference. (Operator Instructions) Today's call is being recorded. For opening remarks, I'll be turning the call over to the Director of Investor Relations, Darin Manney. Please go ahead.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Head of IR    [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q2 2017 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO.
+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. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2016.
+Our comments and responses to your questions reflect management's views as of today, July 27, 2017, 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 and subsequent filings. During this call, we may 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.
+Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements and excludes the impact of our proposed acquisition of Whole Foods Market. It is not possible to accurately predict demand for our goods and services, and therefore our actual results could differ materially from our guidance.
+With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) Our first question comes from the line of Heath Terry with Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath P. Terry,  Goldman Sachs Group Inc., Research Division - MD    [2]
+--------------------------------------------------------------------------------
+
+          I was just wondering if you could give us a sense on the investments that are planned in Q3. Previously, you've been willing to provide sort of some qualitative guidance around how you're rank ordering those in terms of the ones that are -- the largest areas of investment in the quarter. Just wondering if you could update us on that just given the guidance for Q3 and what we saw in investment in Q2.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [3]
+--------------------------------------------------------------------------------
+
+          Sure. Let me see what I can tell you on that. First of all, I want to remind you that Q3 is typically a lower operating income quarter as we're preparing for the Q4 holiday peak. The other dynamic is that similar to last year, a large percentage of our new fulfillment centers are coming online in the second half of the year, a lot of them in Q3. So to give that some perspective, the Amazon-Fulfilled Network or the combination of retail and FBA shipments coming out of our warehouses has been nearly 40%. It was that last year and it's continued through this year. Last year, we added 30% additional square footage to handle that additional shipping volume, and about 80% of that went in to service in the back end of last year. That's what I mentioned about this time last year. The -- similar dynamic this year. We're going to have about 80% of our increase in square footage for fulfillment and shipping coming online in the back end of the year. So that's a major increase. The other comment I would make is on the content -- video content. Video content, last year I highlighted the fact that it was going to be a significant step up between first half -- second half of 2016 and the second half of 2015. We are still -- we lapped that most of the first half of this year, and we'll also be increasing video spend on a sequential and year-over-year basis in Q3 and that's included in this guidance. Other than that, I can't give much more specifics except to say that the large investment areas remain increasing fulfillment capacity to service the strong growth of the FBA business. I'll also point out that the strong usage growth at AWS has led us to a step up in infrastructure in the form of capital leases. We've built capital leases in the trailing 12 months. They've increased 71% through the end of Q2 versus last year. That is servicing -- accelerating usage in our largest AWS services as well as geographic expansion. So that's additional factor sequentially in the quarter year-over-year.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Colin Sebastian with Robert W. Baird.
+
+--------------------------------------------------------------------------------
+Colin Alan Sebastian,  Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst    [5]
+--------------------------------------------------------------------------------
+
+          A question on the grocery category and the announcement that we have -- that we heard recently. Specifically, does that imply that the strategy has changed around Fresh, which was presumably replacing the trip to the grocery store? Or should we think about adding different modes, such as pickup points and bricks-and-mortar, as serving a distinct customer base or geared to reduce the cost bottleneck around home delivery? Any comments would be helpful.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [6]
+--------------------------------------------------------------------------------
+
+          Sure, Colin. First, as far as Whole Foods is concerned, as Darin mentioned, it's not included in this guidance since it hasn't closed yet, but we are excited about that acquisition and looking forward to working with the team at Whole Foods. We think they're very customer-centric just like us. They've built a great business focused around quality and customers. So we're really glad to join up with them. On your larger question about with the place of AmazonFresh, that include Prime Now and some of our other efforts, I would say we believe there will be no one solution. So we're experimenting with a number of the formats, from physical pickup points in Amazon Go to online ordering and delivery to your door through Prime Now and AmazonFresh. And we'll see how customers respond. We like the response that we've seen so far. We think they're valuable. All those are valuable services. Amazon Go is not out of beta, but the other ones are. On top of that, we're looking forward to adding the Whole Foods team and their great reputation for quality and customer service to this offering.
+
+--------------------------------------------------------------------------------
+Operator    [7]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Justin Post with Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch, Research Division - MD    [8]
+--------------------------------------------------------------------------------
+
+          A couple of questions. It definitely seems relative to your guidance, you may have stepped up spending in the second quarter. Anything in particular to call out, India or anything like that? And then just thinking bigger picture, I'm wondering why physical locations might make sense for Amazon. Why is that a positive use of capital going forward?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [9]
+--------------------------------------------------------------------------------
+
+          Sure. As far as Q2 is concerned, we were very encouraged by the revenue and unit growth acceleration, particularly in North America. We see that as tied to the Prime growth and the adoption of Prime and success of that program. Also point out that AWS stepped up its run rate from a $14 billion run rate last quarter to $16 billion. So we saw the largest quarter-over-quarter and year-over-year increase in revenue in that businesses as well, and gross margin expanded 130 basis points. So as you point out, the year-over-year difference is primarily driven by investments. The -- we're within the guidance range, and we continue to invest in, as I said, fulfillment capacity and logistic services, digital video, our Echo and Alexa -- Echo devices and Alexa platform, India, the buildup at AWS infrastructure, all the things I mentioned, not to mention Prime Now and AmazonFresh and Prime benefits. We did see a big jump in headcount in year-over-year. You'll see it's 42%, and in the past I've said most of that is driven by operations hiring. And I've even said that headquarters office hiring many times in the past was below the level of revenue growth. Right now what we're seeing is an accelerated growth rate in software engineers and also sales teams to support primarily AWS and advertising. So yes, those -- the growth rate of those 2 job categories actually exceeded the company growth rates. So we are adding -- having success hiring a lot of people and pointing them at some very important programs and customer-facing efforts. On the place of physical, again, as I mentioned in the earlier question, we are experimenting with a number of formats. You've seen the physical bookstores, and I would say that the benefit there is -- again, we have a curated selection of titles and it's also a great opportunity for people to touch and feel our devices and see them, especially the new Echo devices. I went into the store in Seattle last week and I saw about 1/3 of the people were standing around the device table, learning how they work, how they interact with the devices. So I saw firsthand the customer experience. I think that's where we're seeing the benefit to the physical stores right now.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Mark May with Citi.
+
+--------------------------------------------------------------------------------
+Mark Alan May,  Citigroup Inc, Research Division - Director and Senior Analyst    [11]
+--------------------------------------------------------------------------------
+
+          Question on the comments around the fulfillment investments. Could you characterize or maybe even quantify how much of the fulfillment infrastructure investment that you're making is going to incrementally gear towards handling growth in sort of the existing business and infrastructure versus expanding your capabilities in fulfillment, like adding more inbound or last mile and/or from entering new international markets where you need to invest ahead of growth versus just sort of keeping up and maintaining growth within sort of your existing footprint? And then AWS, you had some price adjustments in May, yet the Q2 growth was quite good. Can you just comment about the impact that those cuts may have had in Q2? And if you're modeling those also in your Q3 guidance, maybe the impact there.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [12]
+--------------------------------------------------------------------------------
+
+          Yes, let me start with the second one. So yes, we've had numerous price increase -- or decrease, excuse me, and we continue to have that in the AWS business, both absolute decreases in service costs and also rolling out new services that may be cannibalizing more expensive, other services that we provide. So nothing really to note on Q2 or Q3 from that standpoint. The fulfillment investments, I can't split it out for you between Amazon Logistics support sort centers and fulfillment centers. What I can say, the biggest dynamic going on, again, is that Amazon-Fulfilled unit growth of nearly 40%, which was last year and carrying it to this year. It's a global number, and we are very glad of the success of the FBA program. We're matching that with just over 30% increase in square footage. And yes, you're right, that does include some shipping sort centers and things that are incremental and new functions for us, if you will. But that's about all I can say on that right now. I think we're very happy -- we're very happy with the FBA program, its impact on Prime and we think Prime and FBA are self-reinforcing. We know customers really like it, the additional selection that FBA provides. So we like those combined, and we are working very hard to match that with capacity in an efficient manner.
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          Our next question is from Douglas Anmuth with JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Till Anmuth,  JP Morgan Chase & Co, Research Division - MD    [14]
+--------------------------------------------------------------------------------
+
+          I just wanted to follow up on AWS and just on the back of the price cut, obviously 1Q being the first full quarter, but it looks like 2Q, as Mark said, things did stabilize some. Can you just talk about whether you're seeing more of a volume pickup response here and companies kind of more actively moving volume into the cloud at these lower prices? And then just secondly on Prime, the value of the Prime subscription for the consumer seems to continue to increase as you add more features in there. Can you just talk about your view around the flexibility of the price of an annual Prime subscription?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [15]
+--------------------------------------------------------------------------------
+
+          Sure. On the price of Prime, I have nothing to add at this time. We think that the -- we're increasing the value of the Prime program every day. So it becomes more and more valuable and again, as we've said, it's the best deal in retail. On AWS, yes, the -- we are seeing great customer adoption. The -- again, as I've said earlier, the run rate's gone up from $14 billion to $16 billion in Q2. And also, we had the largest sequential and year-over-year dollar rise in revenues. Our usage in all of our large services are actually accelerating, so -- and they're growing at a rate higher than our revenue growth. So we're seeing great adoption. We are seeing AWS customers migrate more than 30,000 databases over the last 1.5 years. We've signed some very big customer wins like Ancestry, Hightail, California Polytechnic State University and others that we're very proud to have. So yes, the momentum in the businesses is very strong. We continue to open new regions. We'll be opening 5 regions in the near future in France, China, Sweden, Hong Kong and a second government cloud region in the east. So yes, we like the momentum in that business. Stepping back, I would say that where pricing is important, again, we're generally being selected because of our functionality and pace of innovation. The innovation keeps accelerating. It did in the first half of this year, the pace of new services and features. We also know that customers value our partner and customer ecosystem, and really the experience we've had. We've been at this longer than anybody else.
+
+--------------------------------------------------------------------------------
+Operator    [16]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Mark Mahaney with RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Stephen F. Mahaney,  RBC Capital Markets, LLC, Research Division - MD and Analyst    [17]
+--------------------------------------------------------------------------------
+
+          I want to stick with AWS, please. So the AWS revenue growth showed almost no change, but the AWS operating margin was lower, I guess, than we've seen in, I don't know, 6 quarters or something like that. I find that a little surprising, but then I also saw that the tech and content came in materially heavy, I think, versus our and, I assume, other expectations. So could you just talk about that a little bit, the profitability, if there's anything that's changed in the profitability of AWS?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [18]
+--------------------------------------------------------------------------------
+
+          Sure. Those margins, as we say frequently, are going to fluctuate quarter-to-quarter and always going to be a net of investments, price reductions and cost efficiencies that we drive. So I would say the biggest impact in the margin that you're seeing in Q2 is really around the 71% increase in assets acquired under capital leases. Most of that is for the AWS business. So we've really stepped up the infrastructure to match the large usage growth and also the geographic expansion, and that is showing up in tech and content. On the marketing, if you look under the marketing expenses, they are also up and that is driven by the increases we're seeing in the sales team, both in AWS and advertising. So I would point to those 2 as probably larger-than-normal impacts on Q2 operating margin.
+
+--------------------------------------------------------------------------------
+Operator    [19]
+--------------------------------------------------------------------------------
+
+          Our next question comes from Brian Nowak with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Thomas Nowak,  Morgan Stanley, Research Division - Research Analyst    [20]
+--------------------------------------------------------------------------------
+
+          I have 2. The first one, as you continue to add more Prime Now markets with 1- to 2-hour shipping, can you just talk to some of the logistical challenges you've already encountered and worked through? And talk to kind of -- if you really do see 1- to 2-hour shipping become a larger piece of the business over the next year, what's the biggest challenge to make sure that you manage? And the second one on the subscription revenue. Looks like subscription revenue growth was strong again, over 50%. Can you just talk to what drove that acceleration? Was it Prime, or was there something else in there?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [21]
+--------------------------------------------------------------------------------
+
+          Sure. Let me start with your second question. On the subscription revenue, grew 53% year-over-year versus 52% in Q1. So yes, we continue to see strong Prime membership growth. That is the main thing. There's also, in that line item, are also other monthly fees associated with some of our other subscription services like audiobooks, eBooks, digital video and digital music. But again, I would say that we're very happy with the Prime membership growth, and it remained pretty consistent both in Q4 and then through Q1 and Q2 of this year. On your second question on Prime Now, so Prime Now is now available in 50 cities across 8 countries. We do learn something new in every city and have different -- slightly different shapes and sizes of those buildings and different density profiles. And so we are learning as we go. We learn as we grow internationally as well. That is a service that customers love. That's not an inexpensive service though, and we also have -- so we're constantly working on our cost of delivery and our route densities. And again, we like what we see, and we'll continue to expand that and we'll be working very hard on making that not only a valuable Prime offering, Prime benefit, but also lower-cost operation as well.
+
+--------------------------------------------------------------------------------
+Operator    [22]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Dan Salmon with BMO Capital Markets.
+
+--------------------------------------------------------------------------------
+Daniel Salmon,  BMO Capital Markets Equity Research - Media and Internet Analyst    [23]
+--------------------------------------------------------------------------------
+
+          Brian, I think I heard you earlier say that your headcount for advertising salespeople is growing faster than the company as a whole -- or company's headcount growth rate as a whole. I'd just like to use that maybe as a springboard to talk a little bit about what you think the right mix is for how you sell in terms of the self-service versus salespeople. And then a second one would just be a quick one. I know it's early, but I'd be curious to see what you're seeing with users of the Echo Show with the screen on it and if you're seeing any particularly different type of user behavior there versus the original devices without one.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [24]
+--------------------------------------------------------------------------------
+
+          Sure. Yes, it's early on the Echo Show. As you know, we just started shipping those in late June, but we're very excited about the potential and the additional -- the addition of the video screen and the messaging capability and video capability. So it's -- I've used mine and it's awesome. It's a big step up, in my mind, but we'll get more customer feedback as we go along. On advertising, technically, what I said is the sales force has grown higher than the rate of growth in the business itself, which was 42% regular headcount, and that sales force is primarily AWS and advertising. So we build self-service tools and obviously that we want to make those as efficient as possible for customers and advertisers, but we realize it will need actual sales contact with accounts as well. So it's a mix. I can't get into the split really, but I would see both growing.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Eric Sheridan with UBS.
+
+--------------------------------------------------------------------------------
+Eric James Sheridan,  UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Maybe 2. One, with respect to international margins, is there anything there you can give us in terms of rank order or color, whether it'd be geographies or category expansion that we should be thinking about that are driving some of the cost curve in the international side of the business? That would be number one. Number two, stock-based comp stepped up a lot both quarter-over-quarter and year-on-year. Wanted to know if there was anything either organic or inorganic that was driving that step up in stock-based compensation.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [27]
+--------------------------------------------------------------------------------
+
+          Sure. I'll start with the second one. Yes, as you noted in the press release or the 8-K, we had an absolute step up from Q1 of $792 million to Q2 of $1.2 billion. So it increased 51% year-over-year in Q2 versus a headcount increase of 42%. I'll also say that we generally see a step up from Q1 to Q2 because we do our employee RSU grants in Q2 of each year. So that's a normal trend. But the 51% year-over-year is also -- is a combination of the hiring we've done, but also an adjustment we've made to our estimated forfeiture rate. We're seeing less forfeitures, which is a great sign for our employee retention, but you have to make adjustments to your reserves as you see that. So that was another influence in Q2. On operating margins internationally, I'd step back and say, we -- a lot of the investments we're making in North America, we're also making in international: Prime benefits, including Prime Video and remember, we launched global video in Q4 of last year to 200 countries; Prime Now; AmazonFresh; the general rise of FBA and added selection, both retail and FBA, to make Prime more attractive and the fulfillment and logistics costs that go with that, any additional constant effort to reduce prices and accelerate shipping. So that all impacts both North America segment and international. The North America segment is a little further along in the Prime -- or excuse me, yes, the Prime membership growth curve. And so in some respects, we are giving benefits earlier in the life cycle to international Prime customers than we did in North America just because it launched later. And then there's also India. As I mentioned, we continue to invest in India. We're very hopeful with the progress we've made with sellers and customers alike in India, and we see great momentum and success there. So we'll continue to invest, and we have some of our best people in that business.
+
+--------------------------------------------------------------------------------
+Operator    [28]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Brian Fitzgerald with Jefferies.
+
+--------------------------------------------------------------------------------
+Brian Patrick Fitzgerald,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [29]
+--------------------------------------------------------------------------------
+
+          You mentioned before as you stand up new fulfillment centers, it takes a bit of time for them to ramp up optimization. How should we think about that path optimization over a year or so as you continue to scale operations and you bring data to bear in robotics, in Kivas and AI machine learning? Are you finding that kind of new fulfillment center optimization curve is accelerating?
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Head of IR    [30]
+--------------------------------------------------------------------------------
+
+          Brian, this is Darin. Yes, we're getting more efficient every time we put new capacity into the network, whether that's through automation or just through the experience that we've gained over the years. We still say it takes up to 3 years or 3 peaks to get to kind of network efficiency for a new particular facility. And that's about staying the same, although the whole network gets efficient over time. So there's a big mix going on, and we like the new innovation that we're bringing to the capabilities, but that ramp stills stays about consistent as it was.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          And our final question comes from the line of Jason Helfstein with Oppenheimer & Co.
+
+--------------------------------------------------------------------------------
+Jason Stuart Helfstein,  Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst    [32]
+--------------------------------------------------------------------------------
+
+          Just one. Other slowed from 58% in the first quarter to 53% year-over-year. Anything to call out? And then you made a comment about the physical stores in reaction to one of the other questions that was really about showcasing new devices. Is it fair to say that probably means locations would have small footprints versus the large footprints if you were thinking about that?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [33]
+--------------------------------------------------------------------------------
+
+          I'm sorry, what was the first part of your question?
+
+--------------------------------------------------------------------------------
+Jason Stuart Helfstein,  Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst    [34]
+--------------------------------------------------------------------------------
+
+          Other revenue slowed from 58% in the first quarter to 53%. Is there anything to call out around that?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - CFO and SVP    [35]
+--------------------------------------------------------------------------------
+
+          No, nothing. In that other line item is advertising and also other things like co-branded credit card agreements. I would say that the main -- excuse me, advertising revenue growth has been strong and fairly consistent over the past 3 quarters. So that number will move around, but there's other things that more the variance in the volatility as in the other line items. Your question on stores. We are -- again, I personally think that new devices -- the ability to see new devices is a great asset, but I don't want to shortchange our -- the rest of the bookstore and the ability to have curated selection and the creativity we've had in taking a new look at the bookstore. So we are experimenting with different formats, and we look at different sizes and we look at revenue and cost per square foot just like any other physical retailer. So we haven't essentially nailed the model yet, and we continue to experiment and see what works and how it differs by city or more suburban locations.
+
+--------------------------------------------------------------------------------
+Darin Manney,  Amazon.com, Inc. - Head of IR    [36]
+--------------------------------------------------------------------------------
+
+          So thank you, Brian, and thank you all for joining us on the call today and for your questions. A replay will be available on our Investor Relations website through at least the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking to you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2017-May-03-FB.OQ-137850824087-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q1 2017 Facebook Inc Earnings Call
+05/03/2017 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah T. Crawford
+   Facebook, Inc. - VP of IR
+ * Sheryl K. Sandberg
+   Facebook, Inc. - COO and Director
+ * David M. Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - Founder, Chairman of the Board and CEO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Eric James Sheridan
+   UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst
+ * John Ryan Blackledge
+   Cowen and Company, LLC, Research Division - Head of Internet Research, MD and Senior Research Analyst
+ * Justin Post
+   BofA Merrill Lynch, Research Division - MD
+ * Peter Stabler
+   Wells Fargo Securities, LLC, Research Division - Director and Senior Analyst
+ * Brian Thomas Nowak
+   Morgan Stanley, Research Division - Research Analyst
+ * Heather Anne Bellini
+   Goldman Sachs Group Inc., Research Division - Research Analyst
+ * Douglas Till Anmuth
+   JP Morgan Chase & Co, Research Division - MD
+ * Ross Adam Sandler
+   Barclays PLC, Research Division - MD of the Americas Equity Research and Senior Internet Analyst
+ * Michael Brian Nathanson
+   MoffettNathanson LLC - Co-Founder, Partner and Senior Research Analyst
+ * Mark S. Mahaney
+   RBC Capital Markets, LLC, Research Division - MD and Analyst
+ * Colin Alan Sebastian
+   Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
+ * Mark Alan May
+   Citigroup Inc, Research Division - Director and Senior Analyst
+ * Anthony Joseph DiClemente
+   Instinet, LLC, Research Division - Media Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook First Quarter 2017 Earnings Call. (Operator Instructions) This call will be recorded. Thank you very much. 
+Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.
+
+--------------------------------------------------------------------------------
+Deborah T. Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Thank you. Good afternoon, and welcome to Facebook's First Quarter 2017 Earnings Conference Call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO.
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. 
+Factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-K filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.
+During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com.
+And now I'd like to turn the call over to Mark.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [3]
+--------------------------------------------------------------------------------
+
+          Thanks, Deborah, and thanks, everyone, for joining today. We started the year off with a good quarter. Our community continues to grow with more than 1.9 billion people now using Facebook every month and almost 1.3 billion people using it every day. Our ads business is doing well too. Total revenue grew by 49% year-over-year to $8 billion, and advertising revenue was up 51% to $7.9 billion. 
+In my letter to our community back in February, I talked about how, for the past decade, Facebook has focused on connecting friends and families. Now with that foundation, our next focus will be building community. There's a lot to do here. Building global community is bigger than any one organization, but we can help by developing social infrastructure for the community: for supporting us, for keeping us safe, for informing us, for civic engagements and for including everyone.
+Building a global community that works for everyone starts with building millions of smaller supportive communities. This is especially important since membership in many physical communities is declining. We recently found that more than 100 million people on Facebook are members of what we call very meaningful groups, like parenting or rare disease support groups that are an important part of their support structure. My hope is to help more than 1 billion people join meaningful groups to strengthen our social fabric over the next few years. 
+To help build a safe community, we launched Community Help, a tool that allows people to give and get things like food, shelter or transportation in the wake of a natural disaster. We also launched a new fundraising tool that allows people to raise money for themselves, a friend or a cause that isn't already on Facebook. 
+But it's clear we have more to do here. We're going to continue building new tools to keep people safe on our platform. Over the next year, we'll be adding 3,000 people to our community operations team around the world, on top of the 4,500 we already have today, to review the millions of reports we get every week and to improve the process for doing that quickly. 
+To help build a more informed community, we make changes to our News Feed ranking to reduce the financial motivation to spread hoaxes. We're working with independent fact checkers to give people more information on whether an article has been disputed. We launched an educational tool at the top of News Feed in 14 countries to help people spot false news. And we're beginning to test related articles that appear before you read an article, giving you easier access to more perspectives and information.
+We're also helping to build a more civically-engaged community. In March, we launched Town Hall to help people find and connect with their government representatives on a local, state and federal level in the U.S. And in just this, the first month, we created more than 1 million new connections between people and their representatives. We also rolled out a tool in France ahead of their election that allows candidates to share statements about where they stand on different policy issues. 
+So these are some of the changes we've made to help people build stronger communities.
+Next, I want to give a quick update on what we're building over our 3 time horizons: how we're making our core services more useful and engaging right now; how we're building ecosystems around product that a lot of people are already using over the next 5 years; and how we're investing in the technologies that will give more people a voice and make sharing more immersive over the next 10 years. 
+This quarter, we launched a set of new cameras. Photos and video are becoming more common than text, so the camera is becoming more central than the text box in all of our apps. 
+In the Facebook app, you can now swipe right from News Feed to access our new camera with masks, frames and filters. We've developed new computer vision tools that can apply the style of a painting to a photo or a video, and we can do that in real time on your phone for the first time. 
+This is part of making the camera the first augmented reality platform. We want to give developers the power to build all kinds of AR tools in the camera so more people can experience augmented reality on their phone. Creating the first open camera platform is a huge step forward, and we're excited to keep pushing augmented reality forward.
+We also expanded the Stories format to give people more new ways to share. Instagram Stories now has more than 200 million daily active people using it. And just a couple months after we launched it, WhatsApp status has more than 175 million daily active people using it. More recently, we also rolled out Messenger Day and Facebook Stories, and we're going to keep putting video at the center of all these services. 
+Over the next 5 years, we're going to build ecosystems around our products that a lot of people are already using. I put Live video in this category. Last month, we announced that 1 in every 5 Facebook videos is a live broadcast. And over the past year, daily watch time for Facebook Live broadcasts has grown by more than 4x. This year, we also gave people the ability to go Live in 360.
+Messenger is in this category too. And we just announced that 1.2 billion people use Messenger every month. At F8, we launched the second generation of our Messenger platform and introduced a Discover tab to make it easier to find the best experiences quickly. 
+Finally, over the next 10 years, we're developing consumer use cases around technologies that are a big part of our future but won't be a part of our business, a big part of the business for a while. 
+On the connectivity side in April, we successfully simultaneously beamed 16 gigabits of data in each direction between a location on the ground and a Cessna aircraft circling more than 7 kilometers away. Eventually, we're going to use this technology along with Aquila, our solar-powered plane that we're building, to beam Internet to parts of the world that currently don't have access. 
+In virtual reality, we launched Facebook Spaces, the first social VR platform that lets you create your own avatar and hang out with your friends. And we also released the Facebook 360 app for Gear VR that makes it easier to discover and experience 360 photos and videos. And we continue to ship Rift and Touch to people everywhere and deliver a strong content ecosystem across both Rift and Gear VR.
+As people share more video, as we explore more things like augmented reality and as we build more tools to keep our community safe, we're going to keep investing aggressively in the infrastructure that we need to grow and serve our community. That's why we announced that our next 2 data centers will be built in Odense, Denmark and Papillion, Nebraska. 
+We've made some good progress but we have a lot more to do to help build community and connect the world. So I want to thank everyone in our community, our teams, our partners and all of you for being a part of this journey with us. 
+And now here's Sheryl.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [4]
+--------------------------------------------------------------------------------
+
+          Thanks, Mark, and hi, everyone. We had a strong first quarter and a great start to the year. Q1 ad revenue grew 51% year-over-year. Mobile ad revenue was $6.7 billion, up 58% year-over-year and was approximately 85% of total ad revenue. Growth again this quarter was broad-based across regions, marketer segments and verticals.
+Our goal is to build meaningful connections between businesses and people. We're doing this by focusing on 3 key priorities: helping businesses leverage the power of mobile; developing innovative ad products; and making our ads more relevant and effective.
+Our first priority is helping businesses leverage the power of mobile. More businesses around the world are shifting to marketing on mobile. Over 70 million businesses are now using Facebook Pages around the world on a monthly basis, and more and more of them are becoming advertisers. We also recently announced that over 5 million businesses are actively advertising on Facebook, including more than 1 million in emerging markets. Most of these advertisers start by using our free Pages product because it's easy to use.
+People are increasingly recognizing that the small screen is big. Our Creative Hub is providing tools that make it easier to create ads optimized for mobile, what we talk about as thumb-stopping creative. Marketers can see previews of their ads across Facebook and Instagram before rolling them out and get tips to help drive business results. 
+Our second priority is developing innovative ad products that help businesses make the most out of their campaigns. We continue to improve Dynamic Ads, which enable advertisers to promote their full range of products across all devices. Advertisers can now target Dynamic Ads to broad audiences and are seeing great results. 
+Last week, I visited home retailer Wayfair in Boston. They use Dynamic Ads to reach a large audience with personalized recommendations from their catalog of over 8 million items. By finding higher revenue customers at a lower cost, the campaign beat Wayfair's return on ad spend goal by more than 20%.
+We're also helping marketers use video to capture shoppers' attention. People are watching more video on Facebook than ever before, and it's changing how they connect with businesses. In a recent study Facebook commissioned with Kantar, 30% of mobile shoppers said video is the best way to discover new products. 
+This quarter, we introduced a new ad format called Collection. Collection helps marketers tell stories on mobile by combining creative videos or photos of product images. Clicking on the products leads to an immersive shopping experience, driving purchase consideration and ultimately sales. 
+For example, adidas, which is how you pronounce them at their headquarters, and its agency, iProspect, created a video highlighting the innovative features of a Z.N.E. Road Trip Hoodie. Using our Collection ad format, adidas featured 4 more items from their product catalog below the video. They saw a 5.3x return on ad spend and a 1.8x decrease in cost per conversion. It's still early for this new format but it's a great example of how we can deliver innovative mobile experiences that work for advertisers and work for people.
+This quarter, we also launched full-screen sound-on ads in Instagram Stories. Advertisers can now reach over 200 million daily actives on Stories to do everything from building brands to selling products.
+Our third priority is making our ads more relevant and effective. Measurement is critical. We recently introduced new and expanded verification partnership and committed to audits with the Media Rating Council. Whether marketers are trying to get people to buy something on their website or in their store, we now have systems in place to help them measure results and third-party partnerships to verify those results. These are important steps as we continue to build the advertiser trust.
+Bud Light's NFL campaign is a great example. To promote the designs of their new team-specific cans, Bud Light took a national and regional approach. They ran video ads featuring the new cans to people ages 21 to 49 in the U.S. Then they also ran more targeted ads in each region, featuring the 2 cans of the teams playing each other. Using Facebook polling and Oracle's data cloud, they saw a 24-point lift in ad recall and a 4.4x return on ad sales. 
+We know marketers want to compare results across platforms and placements. Historically, we've enabled larger marketers to do this. In Q1, we started testing a set of advanced measurement tools that make it easier for marketers of all sizes to compare the effectiveness of Facebook, Instagram and Audience Network alongside other publishers.
+We're off to a strong start in 2017. We're helping marketers leverage the power of mobile, developing innovative ad products and delivering proven and measurable results. We're excited about the growing adoption of our platforms, and we're going to continue to invest in helping businesses and people connect.
+Thanks, and now here's Dave.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+
+          Thanks, Sheryl, and good afternoon, everyone. Q1 was a strong quarter for Facebook. We continued to see healthy growth and engagement trends across our community as well as broad-based growth in our ads business. 
+Let's start with our community metrics. In March, 1.28 billion people visited Facebook on an average day, up 18% compared to last year. This daily number represented 66% of the 1.94 billion people that visited Facebook during the month of March, which was up 282 million or 17% compared to last year. Our community growth in Q1 was driven by product improvement, Internet.org and ongoing third-party promotional data plans in markets like India. Note that we do not control the timing or terms of these promotions.
+Before diving into the financials, I want to highlight that we are no longer reporting non-GAAP expenses, income, tax rate or EPS. Given that stock is an important part of our compensation structure, we believe that investors should focus on our financial performance with stock-based compensation included.
+Turning now to the financials. All of our comparisons are on a year-over-year basis, unless otherwise noted. Q1 total revenue was $8 billion, up 49%. Ad revenue was $7.9 billion, up 51%. Exchange rates did not affect our overall growth rate this quarter as headwinds in certain currencies were offset by tailwinds in others. 
+In terms of regional advertising growth, Rest of World and Asia Pacific were our strongest growers in percentage terms at 66% and 60%, respectively. Both regions benefited from particularly strong advertiser demand. Europe and North America both grew at 47%.
+Mobile ad revenue was $6.7 billion, up 58% and represented approximately 85% of ad revenue. Desktop ad revenue grew 22% despite a decline in desktop usage and was aided by our recent effort to limit the impact of ad blocking technology, which we began in Q3 of last year.
+Our mobile ads business continued to be driven by healthy supply and demand dynamics. In Q1, the average price per ad increased 14%, and the total number of ad impressions served increased 32%, primarily driven by mobile feed ads. 
+Payments and other fees revenue was $175 million, down 3%. Q1 total expenses were $4.7 billion, up 40%. 
+In 2017, we have continued to accelerate our hiring efforts. We added over 1,700 employees in Q1, predominantly in technical and recruiting functions, and ended the quarter with approximately 18,800 employees, up 38% compared to last year. This marked an acceleration from the 34% growth rate in Q4.
+Q1 operating income was $3.3 billion, representing a 41% margin. Our tax rate was 10%, which reflects the adoption of ASU 2016-09 in the fourth quarter. Excluding this adoption, our tax rate would have been approximately 9 percentage points higher. 
+Note that the new accounting guidance does not impact the cash taxes we pay but merely how the tax provision is presented under GAAP, whereby now excess tax benefits are flowing through the P&L and in this quarter positively impacted EPS. 
+Net income was $3.1 billion or $1.04 per share.
+Q1 capital expenditures were approximately $1.3 billion, driven by investments in data centers, server, office facilities and network infrastructure. In Q1, we also broke ground on our ninth data center in Nebraska.
+We generated approximately $3.8 billion in free cash flow.
+In the first quarter, we repurchased $228 million of our Class A common stock and used $771 million in cash for taxes paid related to the net share settlement of equity awards. We ended the quarter with $32.3 billion in cash and investments.
+Turning now to the outlook. With regards to revenue, we continue to expect that our ad revenue growth rates will come down meaningfully over the course of 2017. We expect that ad load will play a less significant factor in driving revenue growth after mid-2017. We also expect desktop ad revenue growth rates to slow in the fourth -- in the third quarter when we begin to lap our efforts to limit the impact of ad blockers.
+We continue to expect that our full year 2017 Payments and other fees revenue will decline compared to full year 2016. As a reminder, Payments and other fees revenue is primarily generated from payments related to games played on personal computers. 
+Turning to the expense outlook. We continue to expect that full year 2017 GAAP expenses will grow 40% to 50% compared to full year 2016. I would note that as we look into 2017 and beyond, there are going to be a number of initiatives we believe are valuable to the community and to the company in the long term that are going to be net negative on our operating margin.
+We are embarking on a significant ramp-up in infrastructure supporting global growth, and we continue to expect that full year 2017 capital expenditures will be in the range of $7 billion to $7.5 billion, which is up over 50% compared to last year.
+Turning now to tax. As we noted in the last call, under the new accounting guidance, our tax rate will vary based on our stock price. At current stock prices, we expect that our Q2 and full year 2017 tax rates will both be in the mid-teens, so up from the first quarter rate. 
+In summary, Q1 was a strong quarter and a great start to the year. Growth in the Facebook community remains strong. Engagement across our family of apps is healthy and growing, and advertiser demand from our growing base of marketers is robust. Importantly, we continue to invest aggressively to build our business and drive value for our community over the long term. 
+With that, operator, let's open up the call for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) Your first question comes from the line of Eric Sheridan from UBS.
+
+--------------------------------------------------------------------------------
+Eric James Sheridan,  UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Maybe one thematic question on Instagram for Mark and Sheryl. I wanted to understand what you're seeing in terms of the development of the community on the user growth side, the engagement side as well as on the monetization side with respect to breadth of advertisers and ad product evolution, what that means for Instagram's future and how it compares to maybe what you've learned growing the business on the Facebook side over the last couple of years.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [3]
+--------------------------------------------------------------------------------
+
+          Eric, why don't I take the beginning of that and then Sheryl can augment with some additional color? So when you think about Instagram, we're seeing great growth there with the community. So this past quarter, we announced 700 million daily -- sorry, monthly actives, so that was a big announcement. And that's broad-based growth across the globe so we're pleased with that. In terms of the development on the advertising side, we're not specifically breaking out Instagram revenue, as you know, because that's sold through the same Facebook ad interfaces. But we're seeing really good contribution and good growth there. And we're developing it across a wide variety of ad products. So VR is becoming a more significant part of the Instagram story, whereas it was originally more brand-focused, but we've expanded the product offerings on the direct response front. And we're continuing to bring more ad products to Instagram.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [4]
+--------------------------------------------------------------------------------
+
+          We're pretty excited about what's happening in the Instagram ad space because Facebook and Instagram are the 2 most important mobile ad platforms. And there's a special property with Instagram, which is that the increasing visualization of ads and the creative canvas it offers with the science behind the Facebook targeting and measurement systems is really a pretty unusual combination. We're also seeing very broad adoption including small customers. We're pretty excited to have 1 million advertisers and 8 million Instagram business profiles on the platform. To share 1 example, an online store in Brazil called [Lohanama], they sell decorative items and accessories. Their business owner, [Joanna], took photos of her products on her phone and then created ads with our Shop Now button. She targeted young audiences in Brazil who are interested in fashion, decoration, movies and architecture. And during the period of her campaign, Instagram accounted for 78% -- 79% of her sales. And I think what that shows is the power of the very sophisticated targeting we offer across our platforms, along with really the ability to use a very simple tools like a phone to create very sophisticated but visually compelling ads.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Douglas Anmuth of JP Morgan.
+
+--------------------------------------------------------------------------------
+Douglas Till Anmuth,  JP Morgan Chase & Co, Research Division - MD    [6]
+--------------------------------------------------------------------------------
+
+          One for Mark and then perhaps one for Sheryl or Dave. Mark, first, just on the video strategy, I was hoping you could talk a little bit about how that's evolving in terms of the type of content that you're licensing and featuring within the Facebook video tab. And then if you have any more clarity just on how the economics are going to work there around revenue share and gross margins. And then on ad revenue, the U.S. and Canada was very strong at 47% growth, but at the same time, it also did decel a little bit more than we've seen in recent quarters. I was just wondering if there was anything else to call out there.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [7]
+--------------------------------------------------------------------------------
+
+          Yes, Doug, why don't I take the decel question on the U.S. and Canada. I don't think there was anything particularly surprising about the deceleration in the growth in U.S. and Canada. We've been talking about expecting a deceleration in ad revenue growth, and we saw that play out U.S., Canada modestly. Obviously, we're particularly pleased that there was really strong demand that benefited regions like APAC and Rest of World so really broad-based strength in APAC. And then Rest of World, we saw a rebound in Latin America. So especially, Brazil so we're seeing some particular strength there. So I think that, sort of, I think, was a big highlight. On the content front, we're looking at investing in kickstarting an ecosystem for longer-form content on Facebook. And that involves us working with content providers to develop that content. In the long run, we expect it to be a revenue share model on the platform. And obviously, we're going to be -- we're going to be in an area where we're sharing revenue with content providers so it's going to have a different margin profile than core Facebook News Feed from an expense profile perspective.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [8]
+--------------------------------------------------------------------------------
+
+          I think you pretty much got that.
+
+--------------------------------------------------------------------------------
+Operator    [9]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Brian Nowak from Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Thomas Nowak,  Morgan Stanley, Research Division - Research Analyst    [10]
+--------------------------------------------------------------------------------
+
+          I have one for Mark on Messenger monetization. Can you just talk about some of the biggest trends you're monitoring and what you're most excited about as you think about ways to monetize Messenger over the next 2 or 3 years? And then on engagement, you continue to grow Instagram and Messenger user bases really helpfully. I guess, I'd be curious to hear, do you still continue to see rising time spent per user across all 3 of those platforms even as the DAU base gets bigger?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [11]
+--------------------------------------------------------------------------------
+
+          You can start with the stats, Wehner?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [12]
+--------------------------------------------------------------------------------
+
+          Yes, I can start with the stats. So on -- yes, Mark, on the engagement front, we're seeing time spent growth per DAU across the Facebook family of apps and that includes Facebook itself. Instagram has been strong, especially with feed ranking and Stories. We're not breaking out specific time spent stats on a quarterly basis on those. And then on the Messenger monetization front...
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [13]
+--------------------------------------------------------------------------------
+
+          I can talk about the strategy. Yes, so the first thing that we need to do on Messenger and WhatsApp is get a lot of businesses using it organically and build the behavior for people that they reach out to businesses for different things, like customer support or for getting news content, things that may not eventually be the big business use cases but establish the behavior of people interacting not only with their close friends but also with businesses. In terms of making money on that, once we have that behavior, I think that there are going to be a number of ways that we can amplify that. We're already experimenting with a couple. One is ads that actually display in News Feed, not in Messenger or WhatsApp, but that link to the ability to communicate with a business directly in Messenger or eventually WhatsApp. And that's great. I mean, it converts better for the businesses. They can have a better dialogue with the person, a persistent relationship. So that's one way that I think that this will be valuable. The other way is, of course, eventually showing paid content in Messenger whether that's in the inbox or in relevant ways throughout the product. But the top priority right now is just building up the base of organic interactions between people and businesses that they want to interact with. And once we get that to a big base, I think there are going to be a lot of opportunities to build the business. And the business will be proportional to the amount of that activity that people want to do organically.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Justin Post from Bank of America Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch, Research Division - MD    [15]
+--------------------------------------------------------------------------------
+
+          A couple of things on advertising and modeling. When we think about Q1, can you help us at all think about how much the ad load growth is contributing? And what drove the improvement in pricing in the quarter? And then, Dave, when you look out to the third quarter and you kind of lap the ad blocking on desktop, are there more ad blocking you can do to help maintain that growth? Or are there other drivers there for desktop that we could think about?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [16]
+--------------------------------------------------------------------------------
+
+          Sure, Justin. Not breaking out specific drivers on the supply side, supply growth was healthy and we had contributions from users, time spent and ad load in the quarter. In terms of what drove the improvement in the pricing, it's strong demand. So that's playing through in the face of a little bit slower supply growth. And so you're seeing, of course, the auction drives the pricing and there's interplay between the supply growth and the pricing growth, and we're seeing the strong demand play through on the pricing side. When we get to lapping our efforts on desktop, I do think you're going to -- just you have a secular trend away from desktop, so that's going to be an overall factor in desktop -- our ability to grow and maintain the desktop business, so I think that's an underlying factor. We're always going to be in a back and forth with ad blockers on the desktop side, so I think that's going to constantly be a thing that plays into the desktop revenue.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Colin Sebastian from Baird.
+
+--------------------------------------------------------------------------------
+Colin Alan Sebastian,  Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst    [18]
+--------------------------------------------------------------------------------
+
+          First off, I guess, as a follow-up on the earlier video question from Doug. Could you add some perspective on engagement trends with video content and video ads, such as average viewing time and whether those mix is what is impacting impression growth? And then more broadly, if you can offer some perspective on how much of the video ad spending on Facebook applications are incremental to television budgets or if there's any evidence you're seeing of a share shift?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+
+          Sure, Colin. I'll take that first one. So yes, impression growth was 32% in Q1, as I noted. And that was a bit slower than in previous quarters. Those of you who have been following us for a while know that periodically, we make changes to the product that it's going to impact some of the metrics. One of the things that I would call out in Q1 as a contributing factor on the impression growth side was our decision to rank longer-form video higher in News Feed. That means more time in video. And that does come at the expense of some impression growth in News Feed. So I think you do see some interplay there on the impression growth side due to our focus on video. And then Sheryl was going to follow-up on the video ad spending.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [20]
+--------------------------------------------------------------------------------
+
+          On TV, we are definitely seeing people continue to advertise on TV and use us as a complement. Over time, we believe that the dollars shift with eyeballs, and we want to earn it from our clients and be the best dollar and the best minute they spend and help them measure across channels. I think increasingly, the question is not you can do without TV but if you can do without mobile. And we're working hard to help advertisers develop the video creative that really works for mobile because that makes a really big difference. And we think the combination of the creative working for mobile but also the measurement and targeting we can do is a very powerful offer. To share one of my favorite new examples, Subway working with their agency, 360i, developed video ads and images for Facebook and Instagram to promote their limited-time offer Reuben sandwich. And they used Audience Insights, targeting people aged 18 to 49 who purchase meat and cheese. And that's just pretty incredible targeting. Nowhere else I don't think you could actually target that way and people interested in fast food and encourage them to visit Subways. They then used Nielsen Brand Effect and were able to measure a 16-point lift in ad recall and a 5-point lift in intent to visit Subway. So it's a really unique combination of the power of creative that was designed for video for mobile with very specific targeting and very specific measurement.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of John Blackledge from Cowen.
+
+--------------------------------------------------------------------------------
+John Ryan Blackledge,  Cowen and Company, LLC, Research Division - Head of Internet Research, MD and Senior Research Analyst    [22]
+--------------------------------------------------------------------------------
+
+          Two questions. Mark, you mentioned adding 3,000 reviewers to content at Facebook. Could artificial intelligence be used over time to help solve some of the monitoring? And then just more broadly, how is AI being employed in processes at the company now  versus a couple of years ago? And then second item would be, could newer ad units like mid-roll video help mitigate the decel from the lower ad load growth contribution in second half '17?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [23]
+--------------------------------------------------------------------------------
+
+          I'll talk to the content and AI questions and then someone else can talk about the ad piece. The short answer is yes. AI tools over time will be able to do a better job of flagging things for the set of people who are in the community ops teams that we can prioritize what we look at. A lot of what we're trying to do here, it's not just about getting content off Facebook. Last week, there was this case where someone was using Facebook Live to broadcast -- or was thinking about suicide. And we saw that video and actually didn't take it down and helped getting in touch with law enforcement, who used that Live Video to communicate with that person and help save their life. So a lot of what we're trying to do is not just about taking the content down but also about helping people when they're in need on the platform, and we take that very, very seriously. Over time, the AI tools will get better. Right now, there are certain things that AI can do in terms of understanding text and understanding what's in a photo and what's in a video. That will get better over time. That will take a period of years, though, to really reach the quality level that we want. So for a while, our strategy has been to just continue building intuitive tools as we can because no matter how many people we have on the team, we're never going to be able to look at everything, right? So that's going to be a big challenge. But given the importance of this and how quickly Live Video is growing, we wanted to make sure that we double down on this and made sure that we provide as safe of an experience for the community as we can, which is why we're almost doubling the size of the community ops team to focus on some of these issues around safety on Live Video. But over time for sure, more AI will do this, but this is over a period of time.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [24]
+--------------------------------------------------------------------------------
+
+          John, I think your question then was on ad breaks and the mid-roll type of format. I think there, we're testing the ability and are putting short ad breaks into longer-form live and on-demand videos. Tests are going well, but it's really early days to talk about that being a significant contributor. So we're working to continue to make those products better and continuing those tests. But it's early. We are -- on that front, we're focused on building out the best video experiences for our community and growing longer-form content as a priority. And ad break is going to allow us to have a monetization strategy with that longer-form content. So like I said, it's early.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Heather Bellini from Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heather Anne Bellini,  Goldman Sachs Group Inc., Research Division - Research Analyst    [26]
+--------------------------------------------------------------------------------
+
+          I guess I had a question just related to Instagram and Facebook Stories. I mean, we've talked a lot about ad load growth over the last year, and Dave's been talking about the pending slowdown, which I think we're all expecting. But how do we think about these new applications or new ways to engage with the apps at the top of the -- at the top of your phone where you're starting to see ad insertion show up as well? Is that thought of as a -- is that thought of different than the general ad load comment that, Dave, you're making? And I'm sorry to split hairs here, but I'm just trying to get a sense of how to think about when they're starting to show up in new places. And then, I guess, I just had a follow-up for Sheryl. And one question in particular was if there's any measurement metrics that advertisers are asking for now that if you could help them with, it would make them even more eager to shift their budgets over from TV and follow their eyeballs.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [27]
+--------------------------------------------------------------------------------
+
+          So yes, Heather, on the -- on Stories, again, it's a pretty similar answer, I think, to ad break in the sense that it's early in terms of using -- putting -- using the ads format in Stories. We certainly rolled those out. They are not in the ad load calculation per se. So it is different, as you said, from the ad load commentary that I've given. But obviously, it's very early on those products. And then, Sheryl, you had the question about measurement metric.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [28]
+--------------------------------------------------------------------------------
+
+          Yes, we know that measurement is so critical. And we really want to measure core business results and focus on becoming the #1 growth driver for our clients. We are continuing to constantly review our metrics. When we find bugs or errors, we're reporting them to our clients and addressing the issue and continuing with that analysis as we work through all of our metrics. We're also very focused on extending measurement partnerships and third-party verification. This last quarter, we extended viewability measurement to the Audience Network, add another verification partner, double verify for video and display measurement and introduced our MMM portal so that we can help people measure across all of the different platforms and compare the effectiveness of their ad spend no matter what their end goal is.
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Anthony DiClemente from Nomura Instinet.
+
+--------------------------------------------------------------------------------
+Anthony Joseph DiClemente,  Instinet, LLC, Research Division - Media Analyst    [30]
+--------------------------------------------------------------------------------
+
+          I have one for Mark and one for Sheryl. Mark, at F8 and in your comments today, you talked about making the camera central to the app being the camera, the first augmented reality platform. I know it's early but can you maybe share with us your thoughts about the potential commercial application of augmented reality as you see it today? And then, Sheryl, there's been more lately about the use and effectiveness of influencer marketing on both Facebook and Instagram. How is Facebook thinking about sharing in the economics of when brands use celebrities or influencers to market their products using their Facebook posts? Is it by bringing more transactions onto the platform, building on the shopping experience on Facebook. How is Facebook going to share in those economics?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [31]
+--------------------------------------------------------------------------------
+
+          All right. Well, I can start by talking about augmented reality. The big step forward that we announced at F8 is that there are lots of different apps that have cameras in them right? Or that independent developers just build an app that has a single camera effect. But what we're basically seeing is that there's so much innovation and so many different types of effects that people are creating that we didn't want developers to have to build their own separate app and get to a huge scale in order to build some new kind of visual tool. So we built  -- we're making the cameras inside the whole family of apps into the first augmented reality platform, into an open platform, which is different from what any other apps that has a camera has done before. It's going to open up a much greater diversity of use cases, not only making it so that use cases like face masks, the style transfers that we already have, you're now going to have thousands of options instead of just 10 or 20 at a time. But there are also going to be all these new kinds of things that we're not even building today that developers will be able to experiment with. One of the examples I showed at F8 was around using object recognition and computer vision to be able to point your camera at something and then tap on it and get a card of information and maybe even a buy button, right? So there are lots of different ways that, over time, this kind of content is going to both augment existing real-world objects and eventually replace them, which I think is going to be an interesting opportunity, maybe not on augmented reality on the phone but on glasses eventually when you have that. I think we're going to get to a point where things like TV, you no longer need a physical TV. You'll get a $1 app that you can watch a screen on. And it will just be an interesting exercise to see how many of the things that we have that are physical things don't actually need to be physical in that world and how much innovation that opens up for independent developers all around the world. And a lot of people don't have a factory, right, where they can build a TV. But think about how many kids and different developers around the world, kids sitting in dorm rooms and all these different places, they're going to be able to create things that today they couldn't. So I know this is going to create a pretty interesting economy, but a lot of that stuff is pretty far out, 5, 10 years. But we want to be pushing this forward. And we -- I think we're a little bit late to the trend initially around making cameras the center of how sharing works. But I do think at this point, we're pretty much ahead in terms of the technology that we're building and making it an open platform, I think, is a big step forward. A lot of people are using these products across our family of apps, and I would expect us to continue leading the way forward on this from this point on.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [32]
+--------------------------------------------------------------------------------
+
+          When you think about influencer marketing, we definitely see publishers interested in it, brands interested in it. And so we've worked on branded content, the ability to tag a sponsor and share posts and insights. And the financial arrangement remains between a sponsor and a publisher. It's early, but we're seeing some positive results with publishers of many different types bringing branded content to Facebook. In Q1, we opened this up to unverified pages, so we could enable more people to take advantage of this kind of targeting. We see this in a broader context of better targeting. When you think about what really drives great performance for both people who are using Facebook but for marketers, it's well-targeted ads. And so influencer marketing is one way to get there, but we're focused on a very full range of ability to target well. We've been really pleased with the adoption of our targeting products from Custom Audiences to Lookalike to Dynamic Ads. And we think all of these can improve the relevance of the ad by making ads more targeted because when they're more targeted, they have higher returns for marketers and they're more enjoyable and relevant for people.
+
+--------------------------------------------------------------------------------
+Operator    [33]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Mark Mahaney from RBC.
+
+--------------------------------------------------------------------------------
+Mark S. Mahaney,  RBC Capital Markets, LLC, Research Division - MD and Analyst    [34]
+--------------------------------------------------------------------------------
+
+          First thing, it's a great move to go all in GAAP in terms of reporting. Second, David, when you talked about the ad, your ad load commentary, I couldn't tell if there was a subtle shift there when you're saying that the ad load pressure would occur after the end of the year rather than in the second half year. And then third, this is for Sheryl and Mark. The recent stories about gender bias amongst the engineers at Facebook, and I know you quickly responded to that and said that, if anything, there may be a rank bias. But in my mind, it kind of creates the opportunity potentially for Facebook to better tap into what is probably underappreciated female engineering talent in the Valley and across technology. How do you think about that as an opportunity for the company?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [35]
+--------------------------------------------------------------------------------
+
+          And I'll just real quickly address the ad load issue, Mark. Sorry if it wasn't clear. Really no change in outlook there. We continue to expect that we'll see deceleration in ad revenue growth. And that's going to be particularly pronounced as we get into the second half of 2017 because ad load will be a less significant factor driving growth starting in the second half.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [36]
+--------------------------------------------------------------------------------
+
+          On the issue you raised at the Facebook female engineers, I'm really glad to have a chance to address this because this is an issue I take very seriously. On the specific report on this study, the study was conducted by a former employee with very incomplete data. When that study was shared with people internally, and we have that culture where people do studies and share things, and we're really glad because that helps surface issues, we immediately conducted our own research using the full data. And what we found is that the main reason code was sent back at different rates was not correlated with gender. It was correlated with level, and the fact that we have more male senior engineers was explaining it. If you compared now and female engineers at the same level, there was not the discrepancy. Well then, that leads to the obvious question is, are you promoting men and women at the same rate? And the broader question of are you paying men and women fairly? And we do a comprehensive look at that every single promotion and pay and performance cycle we have, which is 6 months. And we know that we're promoting men and women at the same rate as men. Now, that said, our industry still has issues and we still have issues. We don't have enough senior female engineers. We don't have enough women going into computer science. And we take this very seriously from the work we've done with LinkedIn to get CS&E lean in circles all over college campuses to encourage more women and underrepresented minorities to come into our field. We've had a really nice program in extra internship, where we're taking people who are not yet majoring in computer science but we think have the ability and teaching them for summer and seeing them return to the work we're doing with our female engineers to make sure that all forms of bias are surfaced and eliminated and we can continue to use the full talent of the population. Nothing is more important to us.
+
+--------------------------------------------------------------------------------
+Operator    [37]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Ross Sandler from Barclays.
+
+--------------------------------------------------------------------------------
+Ross Adam Sandler,  Barclays PLC, Research Division - MD of the Americas Equity Research and Senior Internet Analyst    [38]
+--------------------------------------------------------------------------------
+
+          Just had 2 questions on video. We know it's kind of early, but what kind of traction do you see with the video tab that's in beta? And do you think longer term, the video consumption is going to be in that dedicated tab or will it stay in the News Feed based on what you're seeing right now? And then, Dave, just a follow-up on one of your previous answers. So on the cost related to video ad rev share or licensing of video content, is that baked into your OpEx guidance for '17? Or is that something that will step up after this year?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [39]
+--------------------------------------------------------------------------------
+
+          I don't know if we have any public stats on the video tab. Probably not. But in terms of the strategy, I can talk about that quickly. There are 2 basic use cases for checking in with Facebook and seeing what's going on in the world. What people do with News Feed a lot of the time is they have a few free minutes or you want to sit down for maybe a longer session to see everything that's going on in the world. You don't have a specific intention to watch a specific type of content. You kind of just want to check in and see what's going on in the world. There's this whole other use case around content, which is going because -- going to the app or sitting down at TV because there's some content that you want to watch and you want to go directly to it. And that's what we're trying to do with the video tab, to make it so that all the different folks whether they're pages that you follow or creators that you like, who you want to subscribe to and kind of -- and get the updates to what they're doing that you have a place that you can go to with more intent to consume that content. The reason why it needs to be a different tab or at least a different service from News Feed is because people come to it with a different intent. I think you're going to start in the future getting people coming to Facebook for the News Feed use case of checking in and people coming with an intent to go to the video tab to watch specific video. So that's what we're doing there. That's the strategy. And I guess we'll update on stats when we have them.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [40]
+--------------------------------------------------------------------------------
+
+          And, Ross, on the costs related to the video ad rev share, yes, our guidance on total cost is all inclusive, so it includes all the R&D investments we're making. It includes the content. It includes things like community operations investments that we talked about today in the announcement. But I would say that the nature of the types of video content deals that we're doing, will make them more likely to show up after 2017. So there'll be some content expense in 2017, but I think it'll be something you will see step up after 2017.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Mark May from Citi.
+
+--------------------------------------------------------------------------------
+Mark Alan May,  Citigroup Inc, Research Division - Director and Senior Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Mark, in your prepared remarks, you talked about doing more to foster local communities and groups. And it would seem like one of the more interesting test cases here already is in local marketplaces. Just wondering if you could talk to us a little bit about the kind of adoption and engagement that you've seen with local marketplaces and maybe anything that you've learned that you can apply to some of the newer initiatives that you're looking at. And then secondly, probably for Sheryl, for ad breaks to scale, it appears that content creators need to adapt their programming for this. And, of course, users need to engage with the ads. So I guess the question is how are kind of completion rates for ad breaks? I know it's early but kind of what's your -- what are you seeing so far? And how would you characterize the willingness of content creators to adapt?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [43]
+--------------------------------------------------------------------------------
+
+          I can talk about marketplaces first. So I think your basic point is right that the reason why we started working on marketplace and the tab around that is because when we were exploring what the biggest use cases were of Groups, we uncovered that a very large number of people, hundreds of millions, use Groups to buy and sell different things. And so these whole communities that have formed, which was somewhat surprising to us honestly because we hadn't developed that product specifically for buying and selling. It was for group communication, and that's what people are using it for. So we decided, "Hey, we're going to put together a team that's going to invest in making this actually good for buying and selling and see how much we can grow that economy." So I don't know that have any public stats on that yet, but that's an area that I'm certainly very excited about. And then in terms of local communities, one of the big trends in the world that we've seen is just that participation in all kinds of different physical communities, whether they're sports teams or some religious groups or different kinds of different things, have been declining a lot over the past several decades. And that, I think, is a big social issue that is eroding the social fabric of the whole society, not just our country but around the world. And that's one where I look at that and I wonder if Facebook can play a role in helping to strengthen that. And we look at -- there are more than 1 billion people every month who use our Groups product. But if you think about your own use of the Groups product, you probably are a member of a bunch of different groups that you may be checking on very infrequently. So that's very different from there's a handful of people, around 100 million or a bit more, who are a member of what we call a very meaningful group. So it's -- that could be a parenting group or you're diagnosed with a rare disease and you can now connect with people all around the world to share stories around that. These are groups that upon joining may become one of the things they spend the most time with on Facebook, one of the most important parts of your experience and a really fundamental part of your real-world support structure. So we looked at that and we asked the question of, "Hey, if 100 million people are in those very meaningful groups today, can we get that to be 1 billion people over the next several years?" And if so, then that can help reverse some of the decline in community membership and help strengthen the social fabric not only in our country but around the world. So that's a big part of what we're focused on across a number of different initiatives.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [44]
+--------------------------------------------------------------------------------
+
+          And I'll talk a little bit about the ad break, what we're seeing. It's really early both in terms of testing the ads and getting any feedback from users so people who use Facebook, so we don't have that data to share. But we're pleased that the test is active. We're pleased that it's going well and that we can do both Live and uploaded videos. We think over time that marketers will follow where people are spending their time. And if the ads can be well targeted, we think we'll be able to see engagement and we already see that. When ads are really well targeted in taking full advantage of the kind of targeting we offer, that you're showing people something they want to see, we see engagement that we think is really critical. It's also worth noting that the metrics that really matter at the end are driving sales. And so any of the engagement with ad metrics, whether it's remembering an ad, going back to, say, people have been measuring that for a long time to how long a video ad is viewed, our only proxy metrics, what matters is the impact on sales. And so we think the better we can do at getting the measurement to what actually matters, which is the end behavior marketers are trying to drive, the more people will shift their focus to business metrics, the better it will be for the return they get and ultimately our business.
+
+--------------------------------------------------------------------------------
+Operator    [45]
+--------------------------------------------------------------------------------
+
+          Your next question comes from the line of Michael Nathanson from MoffettNathanson.
+
+--------------------------------------------------------------------------------
+Michael Brian Nathanson,  MoffettNathanson LLC - Co-Founder, Partner and Senior Research Analyst    [46]
+--------------------------------------------------------------------------------
+
+          I have 3 philosophical questions on video for you guys and (inaudible). The first is, it was interesting to see the NFL games go from Twitter and Amazon. I wondered, do the NFL games fit with your video strategy? Why or why not? That's one. Two is, I know the model is revenue share, but a lot of the more traditional companies would like license fee or the ability to sell their own inventory on your platform. Is that something you'd consider? And last but not least, the question about monetization. Why is mid-roll optimal to pre-roll? And could you share anything about the testing of that concept?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [47]
+--------------------------------------------------------------------------------
+
+          I can talk about sports. So in terms of experimenting with different content, I think we'll try a number of different things here in terms of working with folks to produce all kinds of content. Sports is probably something that we'll want to try at some point. But again, like Dave said before, the goal is going to be creating some anchor content initially that helps people learn that going to the video tab, that they -- that that's a great destination where they can explore and come to Facebook with the intent to watch the video that they want. And then the long-term goal is actually not to be paying for a specific content like that but doing a revenue share model once the whole economy around video on Facebook is built up. But we're working on that. And I think we'll probably look at different pieces of content like this around the world, but, at this point, don't feel like any specific one of them is a must-have for us.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [48]
+--------------------------------------------------------------------------------
+
+          And I think Mark touched on the question of a business model here, and our focus really is on revenue share. We'll be investing to kickstart the ecosystem with content, so derisking it for some of our content partners to start off with. But the focus is really to build a rev share model over time that's sustainable. That's the focus as opposed to other models. In terms of why mid-roll is preferable to pre-roll, Facebook is well suited for shorter form content where we're ranking things to be longer-form as well so we're ranking longer-form video. But that's still relatively short video views. And for that reason, we think mid-roll is a good -- is a better user experience.
+
+--------------------------------------------------------------------------------
+Operator    [49]
+--------------------------------------------------------------------------------
+
+          Your last question comes from the line of Peter Stabler from Wells Fargo.
+
+--------------------------------------------------------------------------------
+Peter Stabler,  Wells Fargo Securities, LLC, Research Division - Director and Senior Analyst    [50]
+--------------------------------------------------------------------------------
+
+          One for Sheryl. Sheryl, you've talked a lot about the targeting advantage of Facebook. And you have a number of data signals and sources informing that. Wondering if you could talk about the relative importance of collecting signals on the platform versus off the platform. For instance, the behavior of Facebook users interacting with third-party websites. Is this the depth of your off-platform collection? Is this a significant competitive advantage for you?
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [51]
+--------------------------------------------------------------------------------
+
+          We think that targeting and measurement are significant competitive advantages for us. We're very focused on the privacy of what people do, wherever they do it and using the information we have in a very responsible way. We believe that because people are sharing interests, because people are themselves their real identity on the Facebook platform, we have a significant advantage. Just in basic targeting itself, just age and gender, we're 38% more accurate than broad-based targeting according to Nielsen in the U.S. And that's just age and gender. And then if you think about some of the case studies I shared, targeting people who purchase a certain item, targeting people who are interested in a certain item, we think that's very substantial. We also think that there's a real competitive advantage in focusing on business results as we have. We're really working on shifting people to understanding what their real objectives are so that they can focus on driving businesses. At the end of the day, when you show an ad, you want to move a product off a shelf into a shopping cart, whether it's online and off-line. And that's where our focus is and will continue to be.
+
+--------------------------------------------------------------------------------
+Deborah T. Crawford,  Facebook, Inc. - VP of IR    [52]
+--------------------------------------------------------------------------------
+
+          Great. Thank you again, everybody for joining us today. We appreciate your time, and we look forward to speaking with you again.
+
+--------------------------------------------------------------------------------
+Operator    [53]
+--------------------------------------------------------------------------------
+
+          Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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+--------------------------------------------------------------------------------
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+
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exam/original-files/Problem_1_Sample/2017-Nov-01-FB.OQ-137641444844-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2017 Facebook Inc Earnings Call
+11/01/2017 05:00 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Deborah T. Crawford
+   Facebook, Inc. - VP of IR
+ * Sheryl K. Sandberg
+   Facebook, Inc. - COO and Director
+ * David M. Wehner
+   Facebook, Inc. - CFO
+ * Mark Zuckerberg
+   Facebook, Inc. - Founder, Chairman of the Board and CEO
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Kenneth Michael Sena
+   Wells Fargo Securities, LLC, Research Division - MD, Head of Internet Equity Research & Senior Analyst
+ * Eric James Sheridan
+   UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst
+ * Brent John Thill
+   Jefferies LLC, Research Division - Equity Analyst
+ * Richard Scott Greenfield
+   BTIG, LLC, Research Division - Co-Head of Research, MD and Media and Technology Analyst
+ * Justin Post
+   BofA Merrill Lynch, Research Division - MD
+ * Brian Thomas Nowak
+   Morgan Stanley, Research Division - Research Analyst
+ * Heather Anne Bellini
+   Goldman Sachs Group Inc., Research Division - Research Analyst
+ * Douglas Till Anmuth
+   JP Morgan Chase & Co, Research Division - MD
+ * Youssef Houssaini Squali
+   SunTrust Robinson Humphrey, Inc., Research Division - MD & Senior Analyst
+ * Ross Adam Sandler
+   Barclays PLC, Research Division - MD of the Americas Equity Research and Senior Internet Analyst
+ * Mark Stephen F. Mahaney
+   RBC Capital Markets, LLC, Research Division - MD and Analyst
+ * Colin Alan Sebastian
+   Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
+ * Mark Alan May
+   Citigroup Inc, Research Division - Director and Senior Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook Third Quarter 2017 Earnings Call. (Operator Instructions) This call will be recorded. Thank you very much. 
+Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.
+
+--------------------------------------------------------------------------------
+Deborah T. Crawford,  Facebook, Inc. - VP of IR    [2]
+--------------------------------------------------------------------------------
+Thank you. Good afternoon, and welcome to Facebook's Third Quarter 2017 Earnings Conference Call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO.
+Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.
+During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com.
+And now I'd like to turn the call over to Mark.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [3]
+--------------------------------------------------------------------------------
+Thanks, Deborah, and thanks, everyone, for joining us today. Our community continues to grow, now with nearly 2.1 billion people using Facebook every month and nearly 1.4 billion people using it daily. Instagram also hit a big milestone this quarter, now with 500 million daily actives. And we saw good results in the business where total revenue grew 47% year-over-year, and we had our first-ever quarter with more than $10 billion in revenue.
+But none of that matters if our services are used in a way that doesn't bring people closer together or the foundation of our society is undermined by foreign interference. I've expressed how upset I am that the Russians tried to use our tools to sow mistrust. We built these tools to help people connect and to bring us closer together, and they used them to try to undermine our values. What they did is wrong, and we are not going to stand for it.
+Now for those who followed Facebook, you know that when we set our minds to something, we're going to do it. It may be harder than we realized up-front and may take longer and we won't be perfect, but we will get it done. We're bringing the same intensity to these security issues that we brought to any adversary or challenge that we have faced.
+The first step is doing everything we can to help the U.S. government get a complete picture of what happened. We've testified in Congress over the past couple of days about the activity we found in last year's election. We're working with Congress on legislation to make advertising more transparent. I think this would be very good if it's done well.
+And even without legislation, we're already moving forward on our own to bring advertising on Facebook to an even higher standard of transparency than ads on TV or other media. That's because in traditional media, there's no way to see all of the messages an advertiser is showing to different audiences. We're about to start rolling out a tool that lets you see all of the ads a page is running and also an archive of ads political advertisers have run in the past.
+We're also working with other tech companies to help identify and respond to new threats because as we've now seen, if there's a national security threat involving the Internet, it will affect many of the major tech companies. And we've announced a number of steps to help keep this kind of interference off our platform.
+This is part of a much bigger focus on protecting the security and integrity of our platform and the safety of our community. It goes beyond elections, and it means strengthening all of our systems to prevent abuse and harmful content.
+We're doing a lot here with investments both in people and technology. Some of this is focused on finding bad actors and bad behavior. Some is focused on removing false news, hate speech, bullying and other problematic content that we don't want in our community. We already have about 10,000 people working on safety and security, and we're planning to double that to 20,000 in the next year to better enforce our community standards and review ads.
+In many places, we're doubling or more our engineering efforts focused on security. And we're also building new AI to detect bad content and bad actors just like we've done with terrorist propaganda. I am dead serious about this. And the reason I'm talking about this on our earnings call is that I've directed our teams to invest so much in security on top of the other investments we're making that it will significantly impact our profitability going forward. And I wanted our investors to hear that directly from me. I believe this will make our society stronger and, in doing so, will be good for all of us over the long term. But I want to be clear about what our priority is: protecting our community is more important than maximizing our profit.
+So security and the integrity of our services will be a major focus. Beyond this, our focus is on building community. I talked about this last quarter when we changed our mission to focus on building community to bring the world closer together. And that's more important now than ever. And this gets into our road map for the next 3, 5 and 10 years.
+Over the next 3 years, the biggest trend in our products will be the growth of video. This goes both for sharing where we've seen Stories in Instagram and status in WhatsApp grow very quickly, each with more than 300 million daily actives. And also for consuming video content. We recently launched the Watch tab where you can discover shows, follow creators, connect with people watching an episode and join groups with people with similar interests to build a community.
+But as video grows, it's important to remember that Facebook is about bringing people closer together and enabling meaningful social interaction. It's not primarily about consuming content passively. Research shows that interacting with friends and family on social media tends to be more meaningful and can be good for our well-being, and that's time well spent. But when we just passively consume content, that may be less true.
+When done well, video brings us closer together. We found that communities formed around video, like TV shows or sports, create a greater sense of belonging than many other kinds of communities. We found that live videos generate 10x the number of interactions and comments as other videos.
+But too often right now, watching a video is just a passive consumption experience. Time spent is not a goal by itself. We want the time people spend on Facebook to encourage meaningful social interaction. So we're going to focus our products on all the ways to build community around video that people share and watch. That's something Facebook can uniquely do.
+Moving along, over the next 5 years, I expect us to make some good progress on several newer initiatives. In messaging, today, already more than 20 million businesses are communicating with customers through Messenger. Now we're starting to test business features that make it easier for people to make the same kinds of connections with businesses through WhatsApp.
+We rolled out Marketplace to Canada and 17 countries across Europe, giving people the ability to discover, buy and sell things in their local communities. Today, more than 550 million people are using Marketplace and buy and sell groups on Facebook to connect with other people for transactions.
+We're also seeing good progress with Workplace, helping companies connect their own teams internally through their own versions of Facebook. It's been less than a year since we launched Workplace, and today, more than 30,000 companies are using it. This quarter, we welcomed on Walmart, the largest employer in the U.S.
+Over the next 10 years, we are working on the foundational technologies needed to bring the world closer together. I'm proud of the work we're doing with AI. We're now using machine learning in most of our integrity work to keep our communities safe. When Hurricane Maria hit Puerto Rico, we used AI to look at satellite imagery and identify where people might live and need connectivity and other resources. Progress in AI can unlock a lot of opportunity. So this quarter, we opened a new AI research lab in Montreal, and we're building another lab in Paris as well.
+This quarter, we held Oculus Connect and we announced Oculus Go, our first-ever all-in-one headset that's great for feeling like you're present with someone when you can't physically be together in person. It's great for playing games, watching movies or hanging out with friends. And at $199, we think it's going to help us bring great virtual reality experiences to more people. It ships next year.
+At Connect, I also showed off our new Santa Cruz prototype, which is the first time any company has shown the full experience of positional tracking with stand-alone headset and controllers. It's a major technical achievement, and I'm looking forward to getting this into developers' hands next year.
+In order to support our communities' growth, we need to keep investing in our infrastructure. This quarter, we broke ground on our New Albany data center, and we announced that we'll build our 11th major data center in Henrico County, Virginia. As always, all our new data centers are powered by 100% renewable energy.
+These long-term investments are important for our community's future. We can do a lot to help people connect through phones and computers, but so much more will be possible in a world where everyone has Internet access, where AI improves all our services and where we -- where we can basically teleport anywhere or be within -- with anyone anytime we want.
+With all the issues we face, it would be a lot to just invest in addressing those. But we know that we also have a responsibility to deliver these fundamental technical and scientific advances to fulfill the promise of bringing people closer together. So we're going to keep making significant investments looking ahead towards the future, too.
+We've made some real progress this year. Across the board, we have a lot of work to deliver on our mission of bringing the world closer together, but we're committed to rising to the challenge and doing what we need to for our community. Thanks to all of you for being a part of this journey, and I'm looking forward to the road ahead. 
+And now here is Sheryl to discuss our business.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [4]
+--------------------------------------------------------------------------------
+Thanks, Mark, and hi, everyone. We had a strong third quarter with growth across all regions, marketer segments and verticals. Ad revenue grew 49% year-over-year. Mobile ad revenue was $8.9 billion, a 57% year-over-year increase, making up approximately 88% of total ad revenue.
+We're continuing to build our business by focusing on our same 3 priorities: helping businesses leverage the power of mobile; developing new ad products; and making our ads more relevant and effective.
+Today, we're announcing that Facebook has over 6 million active advertisers, and we recently announced that Instagram had over 2 million advertisers. The vast majority of these are small- and medium-sized businesses, which are a major source of innovation and create more than half of all new jobs globally. These businesses often have small ad budgets, so the ability to reach people more effectively is really valuable to them.
+A great example is LoveBook, a small business in Michigan, which lets you make personalized books to people you love. During a recent campaign, they used Facebook ads to reach people getting ready to celebrate their first anniversary. They have grown so much for marketing on Facebook that they've been able to hire 10 new employees this year alone. We're proud of the role we are playing in enabling businesses like LoveBook to reach people on mobile to grow and to create jobs.
+One of our strongest areas this quarter was SMBs in Europe, with revenue growing more than 60% year-over-year. When I was in Germany 2 months ago, I had a chance to meet Victor, one of the cofounders of Brooklyn Soap Company, which, despite its name, is based in Hamburg. Victor and his friends came up with the idea for their business while staying in a hostel in Brooklyn. Now they sell their grooming products in 38 countries using mobile video ads on Facebook and Instagram. As a result, their sales increased 62% over the last year. They're one of many small businesses using mobile to find new customers and grow across borders.
+Our second priority is developing innovative ad products. Video is exploding, and mobile video advertising is a big opportunity. Until recently, ads were only eligible for ad breaks if they also ran in News Feeds. But in Q3, we gave advertisers the option to run ads in videos alone. We're seeing good early results, with more than 70% of ad breaks up to 15 seconds in length on Facebook and Audience Network viewed to completion, most with the sound on.
+As Mark said, Instagram Stories are growing well, too. People and businesses are finding creative new ways to use full screen vertical video in Stories. This quarter, we gave advertisers even more flexibility in the content, format and reach of their ads in Stories.
+We're also seeing how immersive video and images can help people discover new products on Facebook. We added a new creative template to Collection ads, which helps retailers bring their catalogs online. west elm, a home decor company, recently used this template to promote its furniture and home accessories. They targeted people who already got their physical catalog and saw a 5.5% lift in purchases in-store.
+Our third priority is making our ads more relevant and effective. In Q3, we introduced new tools powered by machine learning and automation to help businesses reach people more likely to spend with them. We also simplified the tools for creating ads, making it easier for businesses of all sizes to advertise with us.
+It's important for all businesses to reach the right audience, but it's especially important for small businesses that have limited budgets. Targeting allows them to show ads only to the people they want to reach. Neon Retro Arcade in L.A. is a great sample. They advertise to people within 10 miles of their location who are interested in video games and comic books. Last year, they moved their entire ad budget to Facebook and Instagram, and their revenue was up 25%.
+Relevance and effectiveness are also about giving businesses more control over where their ads run. In Q3, we clarified which publishers and creators can include ads next to their content. This is good for creators who want guidance on how to earn money from their content on Facebook, and it's good for advertisers who want transparency and control to make the right decisions for their brands. We're also working to give advertisers more clarity on where their ads were shown so they can make informed choices about where to run them in the future.
+I want to close by talking about what we're doing to protect our platform and help ensure that the ads and content people see on Facebook and Instagram are legitimate and authentic. When I was in Washington a few weeks ago, I made clear that we are determined to do everything we can do to minimize abuse going forward.
+As Mark said, we're investing heavily in new technology and people to review ads and posts. This will enable us to look more closely at the content of the ads, targeting and the advertiser who submits them as well as tighten our ad policies, particularly for ads directed at social and political issues. We believe that ads are important to free expression, and we will continue to accept ads on issues, but we will also do our part to elevate the quality of that discourse.
+Transparency helps keep -- helps everyone keep advertisers accountable for their messages. We're working with Congress on new requirements for online political advertising, but we are not waiting for legislation. We're building a tool now that will allow anyone to see the ads a page is running even if those ads are not targeted to them. We will test it soon in Canada and then in the U.S. in the coming months.
+For ads related to U.S. federal elections, we'll start sharing even more information, including an archive of past ads with total amount spent and demographics about the people the ad reached. We're also going to require more thorough documentation from these advertisers, and we'll label their ads so it's clear who paid for them. We believe these actions will set a new standard for transparency in online ads.
+Because the interference on our platform went beyond ads, we're also increasing transparency around organic content from pages. We're looking at ways to provide more information about who's behind a political- or issue-based Facebook page. We believe this will make it harder for deceptive pages to gain large followings and make it easier for us to identify malicious activity.
+We are all committed to getting this right and to investing in strengthening our platform so we can better serve our community. We are also committed to continuing to help businesses all over the world attract customers, sell their products and create jobs. 
+As always, I'm grateful to all of our clients for their partnership and to our global Facebook teams for their hard work.
+Thank you, and now here's Dave.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [5]
+--------------------------------------------------------------------------------
+Thanks, Sheryl, and good afternoon, everyone. Q3 was another great quarter for Facebook. We saw continued growth in engagement in our community as well as strong performance in our ads business.
+Let's begin with our community metrics. Daily active users in Q3 reached 1.37 billion, up 16% compared to last year. This number represents 66% of our 2.07 billion monthly active users in Q3. MAUs were up 284 million year-over-year or 16%. Our community growth was again driven by product improvement, promotional data plans and Internet.org. Note that in Q3, we began to lap the introduction of promotional data plans for mobile operators in markets like India.
+Before going to the financials, let me touch briefly on our ongoing effort to improve our user estimate. This quarter, we implemented a new methodology to help identify duplicate accounts. As a result, we increased our estimates for duplicate accounts to approximately 10% of worldwide MAUs from our previously disclosed estimate of 6%. Duplicate accounts are those that we believe are used by the same person and represent real activity and engagement on Facebook.
+We have also increased our estimate for inauthentic accounts to approximately 2% to 3% of worldwide MAUs. Inauthentic accounts are largely those that are used for spam and other policy-violating reasons. We continuously monitor and aggressively take down those accounts. These accounts tend to be less active and thus, we believe, impact DAU less than MAU.
+Now turning to the financials. All comparisons are on a year-over-year basis unless otherwise noted. Q3 total revenue was $10.3 billion, up 47% or 45% on a constant currency basis. Foreign exchange tailwinds contributed $128 million of revenue in Q3. Q3 total ad revenue was $10.1 billion, up 49%. On a constant currency basis, our ad revenue growth rate was 47%, down 2 percentage points compared to the growth in Q2. Ad revenue growth was strong globally, led by Europe and APAC with 56% and 54% growth, respectively. Mobile ad revenue was $8.9 billion, up 57%.
+In Q3, the average price per ad increased 35%, and the number of ad impressions served increased 10%, driven primarily by feed ads on Facebook and Instagram. I would note that compared to a year ago, price is a much more important driver of our ads revenue growth. Payments and other fees revenue was $186 million, down 5%. Total expenses were $5.2 billion, up 34%. 
+Q3 was our biggest hiring quarter ever. We added over 2,500 people and ended the quarter with over 23,000 employees, up 47% compared to last year.
+Operating income was $5.1 billion, representing a 50% operating margin. Our tax rate in the third quarter was 10%. Excess tax benefits recognized from share-based compensation decreased our effective tax rate by 6 percentage points, a level that was driven by appreciation in our stock price.
+Net income was $4.7 billion or $1.59 per share. Year-to-date, capital expenditures were approximately $4.5 billion, driven by investments in servers, data centers, office facilities and network infrastructure. In Q3, we generated over $4.3 billion in free cash flow and ended the quarter with over $38 billion in cash and investments. Year-to-date, we have brought back over $1 billion of our Class A common stock.
+Turning now to the revenue outlook. Our ads business remained strong. But it's worth noting that in Q3, our year-over-year ads revenue growth rates decelerated for the fifth consecutive quarter on a constant currency basis, and we expect this trend to continue for the foreseeable future. Going forward, we also expect the growth in advertising revenue will increasingly be driven by price. This is a shift from prior years when growth was primarily driven by increases in supply.
+Turning now to expenses. We anticipate that our full year 2017 total expenses will grow approximately 35% to 40% versus our prior range of 40% to 45%. We anticipate that full year 2017 capital expenditures will be approximately $7 billion.
+As mentioned previously, our tax rate will vary based on our stock price. At the current stock price, we would expect that the Q4 rate will be in the low teens. 
+I also wanted to provide some comments on 2018 expenses and capital expenditures. Please recognize that these are preliminary estimates as we have not yet finalized our 2018 budget. That said, it is shaping up to be a significant investment year, and I wanted to provide initial guidance to align investors with our most current thinking.
+We expect full year 2018 total expenses will grow approximately 45% to 60% compared to full year 2017. We continue to invest aggressively across the business, but there are 3 important factors driving an acceleration in our expense growth rates from 2017 levels.
+First, as Mark outlined in his earlier comments, we are making sizable security investments in people and technology to strengthen our systems and prevent abuse. Secondly, we are investing aggressively in video content to support the Watch tab. Finally, we continue to invest in our long-term initiatives around augmented and virtual reality, AI and connectivity.
+Given our expectation of continued deceleration in revenue growth rates, we expect these significant investments will be net negative on our operating margins. In addition, we expect to make substantial investments in our infrastructure to support growth and improve our products. As such, we expect full year 2018 capital expenditures will roughly double from 2017 levels. We would also anticipate that the full year 2018 tax rate will be in the mid-teens.
+In summary, Q3 was another strong quarter for Facebook across the board. We are excited about the opportunities we see ahead and will continue to make significant investments to support our growth and our mission. 
+With that, Mike, let's open up the call for questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+(Operator Instructions) Your first question comes from the line of Eric Sheridan, UBS.
+
+--------------------------------------------------------------------------------
+Eric James Sheridan,  UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst    [2]
+--------------------------------------------------------------------------------
+Maybe revisiting Mark's comments at the beginning of the call. Would love to get a better sense or granularity about what sort of video content you'd like to see on the platform that could drive a more active or interactive experience than passive. And then the second question will be what does that mean in terms of the business model? Will there be licensing content, funding content that you have to do to build the sort of business you're aiming for, for the medium to long term?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [3]
+--------------------------------------------------------------------------------
+So the strategy here around helping people connect reflects more on what we do around the videos than some of the content itself, right? So hopefully, the experience on Facebook will not just be that you come and watch a video, and you get informed, you feel entertained, and that's it. We think that the most valuable thing that people do are help build relationships with other people on the platform. So to the extent that the -- that video can serve as a touchstone for building community and helping facilitate interaction, then that's the thing that we feel like we can uniquely do. So we're going to continue investing heavily in video content for Watch that is centered around people, that is centered around things that people want to talk and connect around, that give people a sense of pride and bring people together. We're going to invest as much and just build -- making sure that we build out the community features around that. And that, I think, is going to be the thing that differentiates us over time.
+
+--------------------------------------------------------------------------------
+Operator    [4]
+--------------------------------------------------------------------------------
+Your next question comes from Brian Nowak, Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Thomas Nowak,  Morgan Stanley, Research Division - Research Analyst    [5]
+--------------------------------------------------------------------------------
+I have 2. Just -- Mark, to go back on your focus on community and video. I was wondering if you could show us or kind of help us understand what you're seeing in engagement trends or in time spent per user on the core Facebook platform as you've had so many efforts focused on community and video. And then secondly, for Sheryl. You've made such good progress growing the advertising business across SMB and a lot of verticals. I wonder if you -- can you step back -- could you talk to any areas or any verticals where you really see the potential for material improvements or verticals where you're having a hard time cracking into? Do you think it will really be bigger drivers of ad revenue growth going forward?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [6]
+--------------------------------------------------------------------------------
+So Brian, on -- just on engagement metrics. I mean, we're -- we continue to see good growth in DAU, as you saw, in the 16% growth that we posted this quarter. In addition, we do continue to see time spent growth per DAU on the Facebook family and on Facebook.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [7]
+--------------------------------------------------------------------------------
+For my part, when I think about our marketer segments, we have SMBs, we have brand direct response and developers, we're seeing strong growth across. I think if you think about where the growth remains, it really is in increasing the relevance of the ad because the ads, I think, are getting better in terms of reaching the right people at the right time. But I think there's still a lot more we can do. And as people really use our Custom Audiences, our targeting tools, the quality of the ads improve, and the returns improve. And the more we -- the better we get at measuring those returns, the better the ads get. And so I'll share just one example, but one I really love, which is the Alameda County Fair, which is a local fairground in Pleasanton, California. I happened to meet this woman, [Angel], who's running their marketing this year. And they used Facebook to target people within 25 miles of their fairgrounds aged 20 to 51 who had specific interest in concerts, music festivals and theme parks. And what they saw for season pass ticket sales for 2017 was a 50% increase compared to 2016, and they attribute that to Facebook. And that's really about finding the people that are interested. And if you look at the percentage of our ads business where people are using our most sophisticated approaches to finding the right audience, I think we still have a lot of opportunity for growth there. And that will improve both the quality of the ads people see but also the returns to marketers. And I think that will hit all of the verticals and all of the segments.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+Your next question comes from Mark May, Citi.
+
+--------------------------------------------------------------------------------
+Mark Alan May,  Citigroup Inc, Research Division - Director and Senior Analyst    [9]
+--------------------------------------------------------------------------------
+I had 2 related questions on video. First, on the OpEx guidance. One of the real consistencies of the business is OpEx growth. You've been growing that at $4 billion to $5 billion incremental spend per year. But the midpoint of your guidance is looking like a $14 billion increase next year. Is the differential there the additional $6 billion, $7 billion, is that -- should we be thinking of that as the video content spend that you're kind of setting aside possibly to spend next year? Just trying to understand where the significant increase would be coming from. And then related, the 35% increase in ad prices. Would you say that, that's predominantly being driven, the acceleration there, by the mix towards video ad breaks and other longer-form video ads?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [10]
+--------------------------------------------------------------------------------
+Sure, Mark. So on the acceleration of the growth rate in expenses from 2017 to 2018, I would really look at this sort of the growth rate that we grew at in 2017, apply that to the total expense base and look at that growth in 2018. And then I would say the additional expense that leads to the acceleration is driven by 3 factors, not just one factor. And those 3 factors are the ones that I outlined in my commentary: number one, the substantial investments that Mark highlighted that we're making to just improve the security on our platform; two, the video content investments we're making for Watch Tab; and then, three, additional investments we're making in the long-term initiatives like AR/VR, AI and connectivity. And each of those are significant. So it's really the combination of those 3 factors that's driving the expense growth acceleration. And then on the 35% increases in ad prices, this is really being driven off of a couple of things. One is just the auction dynamic, which as supply growth has slowed, then there's more competition, and you're seeing prices increase as demand continues to grow. But I think what is important here is we've been getting better and better at targeting as we optimize for real business results for advertisers, and we're better at converting the signals that we get from those advertisers and to finding the right ad spots for them. And I think that's really what's allowing us to improve yield and effectively driving higher effective CPMs for us while still delivering business outcomes to them at attractive ROIs. So that's really what's driving it, not a shift to a different format like video. It's really about us getting better at targeting and working with especially people where we get those downstream signals like direct-response advertisers.
+
+--------------------------------------------------------------------------------
+Operator    [11]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Douglas Anmuth, JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Till Anmuth,  JP Morgan Chase & Co, Research Division - MD    [12]
+--------------------------------------------------------------------------------
+I wanted to hit on 2 topics. First, just on the security comments. You talked about headcount increasing from 10,000 to 20,000. I was hoping you could just help us understand. Is that 10,000 fully in the 23,000 headcount that you have today? Or is there a part of it that's not included in there perhaps because it's not full-time? And then just secondly, just going back to the ad pricing changes. Dave, just to clarify on that. I mean, it sounds like what you're saying, it's not that advertisers across the board are seeing that substantial of an increase in pricing, but that's just more an output in your eCPM. Is that the right way to think about it?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [13]
+--------------------------------------------------------------------------------
+Right, Doug. So on the first one, yes, the 10,000 number, that encompasses both employees at Facebook and also employees at partners. So it's not all Facebook employees. So that's a fully loaded number. So that's also in the OpEx guidance as well. So it's -- but yes, you can't compare the 10,000 with the 23,000 directly. On the ad pricing, what you're seeing is that most of the advertising we get isn't necessarily bid on an impression basis. You're getting people bidding for other actions and optimizing against other actions like a click to a website or a downstream e-commerce transaction and app install. And our ability to optimize the inventory that we have against those downstream activities allows us to deliver those at still good prices while seeing effective CPMs go up. You do have, obviously, people who are bidding on impressions if they're looking for, like, a brand campaign or a reach campaign. But those aren't necessarily a part of the business that's driving up prices. It's more around just us doing a better job at being able to optimize campaigns for people who have downstream activities that we can do that for.
+
+--------------------------------------------------------------------------------
+Operator    [14]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Heather Bellini, Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heather Anne Bellini,  Goldman Sachs Group Inc., Research Division - Research Analyst    [15]
+--------------------------------------------------------------------------------
+I wanted to just ask a question about your content strategy. And I was wondering, how do you think about Facebook Watch in terms of Facebook-produced content versus the licensing of content that you might engage in? And I was wondering if there's a certain type of content that you think will be best suited to optimize the watch experience.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [16]
+--------------------------------------------------------------------------------
+I think it might be useful to take a step back and first talk about why we're funding lighthouse content and Watch overall. So video is growing incredibly quickly on Facebook. And today, most of that is in News Feed. But most people who come to News Feed and who come to Facebook today in general are trying to figure out -- they are trying to see what's going on with their friends, see what's happening in the world. They're not coming necessarily to engage in a specific type of video or a specific community around video. So the Watch Tab is mainly -- it's a way to give people a tool to do that. When they want to specifically come and engage around video or communities around that, they can go to the Watch Tab. So the intent there is different. Now in order to build that up, we think it makes sense to first invest in a bunch of lighthouse content, some that we may produce or some that we may license. To get to your question, we're pretty agnostic on how that goes. We just want to start the flywheel going. So there's content and communities that are there that support this use cases of people coming to Facebook specifically to engage in that. Long term, our hope is that the business here will primarily be through revenue shares of videos that normal creators and businesses put into the system rather than ones that we proactively go out and license ourselves. So that's a look at where we're trying to get on this. But first, we need to build this behavior where people want to come intentionally to engage with this content.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Ken Senna, Wells Fargo Securities.
+
+--------------------------------------------------------------------------------
+Kenneth Michael Sena,  Wells Fargo Securities, LLC, Research Division - MD, Head of Internet Equity Research & Senior Analyst    [18]
+--------------------------------------------------------------------------------
+Just going back maybe to the investment in security comments. Maybe could you provide a little more detail just on what that investment could look like and how we could think about that showing up in R&D, cost of revs, G&A or maybe a combination? And then maybe any early thoughts on GDPR and potential impact there and maybe some of this transparency efforts if they could have possible benefit?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [19]
+--------------------------------------------------------------------------------
+Yes. So on the first part, Ken, you're going to see that show up in a variety of different line items, but we don't have it specifically broken out. We're making substantial product and engineering investments. So as part of the overall hiring on R&D headcount, that -- there's going to be a pretty significant allocation of that to some of the product-related security initiatives that we're doing. So that's going to show up in R&D. You're going to have some of the ads work that we're doing, the ads quality work showing up in the sales and marketing line. So you're going to see some there. And then you're going to also just have overall impact on G&A as well for things like policy-related expenses and the like. So I think you're going to see it kind of impacting across the spectrum of our lines. But overall, one of the significant factors driving the acceleration in growth rate.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [20]
+--------------------------------------------------------------------------------
+On GDPR, the Facebook family of apps already applies the core principles in the framework because we built our services around transparency and control, and we're building on this to ensure that we comply in May of next year. It's too soon to tell whether this will impact the extent to which EU users opt out of certain services, but we're going to continue to give people personalized experience and be clear about how we're using the data. We believe that we'll be able to obtain consent for uses of the data across Europe and that people still expect the content and their ads to be relevant. And so we expect a good result here, and we're going to do it very carefully and very seriously as we always do.
+
+--------------------------------------------------------------------------------
+Operator    [21]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Justin Post, Bank of America, Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch, Research Division - MD    [22]
+--------------------------------------------------------------------------------
+I had 2 things. First, as you've integrated more video content into Facebook, are you seeing better time spent per user? Is that really showing up in more engagement on the site? And then secondly, it looks like you're running around $80 a year per user now in the U.S. Quite good improvement over the last couple of years. Just think about benchmarking that versus other media categories or other things in traditional media. Do you still think you have a lot of room ahead to grow that $80 over time?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [23]
+--------------------------------------------------------------------------------
+I'll talk about video engagement, and then Dave can jump in on some of the stats. So one of the important points here that I tried to communicate in my comments up-front is that connecting with friends and family and having those meaningful interactions is more important than just consuming content, right? So video is growing incredibly quickly, and that goes across both social content and kind of more passive public consumption of content. Then they create different dynamics in the system, and I think that's an important thing to understand. When your friend posts something and you get to engage with it, it might inform you and entertain you but you also -- if you interact with -- you're building a relationship with that person, right? You feel closer to that person. And that is a really important part of what social networking is supposed to do. Whereas when you engage with public content, you might get informed or be entertained, but it's not necessarily increasing social capital in the same way or relationships between people. So we really differentiate what the core thing is that we're trying to do, which is help people connect with each other and build meaningful relationships. And that's why on a lot of these calls, I emphasize products like Instagram Stories or WhatsApp status, which are very video-based products, but they're improving social interactions. And we're going to focus a lot more on helping people share videos of their moments in their lives because in a lot of ways, I think if -- when you take a video of yourself and your family out trick-or-treating, that's more engaging than a photo and a better representation of that than writing it out in text. But overall, I would say not all time spent is created equal. That's why I tried to stress up-front that time spent is not a goal by itself here. What we really want to go for is time well spent. And what the research of that we found shows is that when you're actually engaging with people and having meaningful connection, that's time well spent, and that's the thing that we want to focus on. So out of this big video thing that's growing very quickly, I think that is the real opportunity and product area that we should be focused on more. And to the extent that there is going to be a lot of public content, which there will be, a big part of the focus is going to be around building community and interactions around that content.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [24]
+--------------------------------------------------------------------------------
+Justin, on your question on ARPU in the U.S. We do think that there are opportunities to continue to grow the business in the U.S. on a lot of different fronts. So we can continue to grow engagement on core Facebook as well as there's opportunities with Instagram and the other services that we have that are not monetizing significantly today. So there's opportunities there. But most importantly, kind of I would go back to the fact that we're getting better at -- on the ad product side of being able to optimize our inventory for the advertisers in a way that will, we think, drive good pricing in the system for us and good outcomes for the advertisers. So we do think that, that will lead to the potential for additional revenue growth in the U.S.
+
+--------------------------------------------------------------------------------
+Operator    [25]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Ross Sandler, Barclays.
+
+--------------------------------------------------------------------------------
+Ross Adam Sandler,  Barclays PLC, Research Division - MD of the Americas Equity Research and Senior Internet Analyst    [26]
+--------------------------------------------------------------------------------
+I had 2 questions for Mark. One, Mark, as you move to make changes around safety and security and kind of (inaudible), do you think that this will have any adverse impact on engagement? Or is it just too small to even be material? And then a follow-up on the video consumption comment happening mostly in the feed. Is the deceleration you guys are seeing around impression growth right now a function of promoting video in the feed versus, what else, other things that might be in there? And I guess, asked a different way, should we see impression growth kind of revert back to be at your growth at some point? And then is that likely the next year? Or is that further off in the future?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [27]
+--------------------------------------------------------------------------------
+So I can take the second one, which is the question about impression growth. So there's a couple of factors there. Certainly this quarter, we saw that ad load is predicted -- had a much less significant impact on impression growth. So overall, that story has played out sort of as we thought, and that's one of the reasons you're seeing the impression growth come down. And then yes, I do think that there are less impressions when people are consuming video. So that also is a factor as more time is spent on video. So I think you have both of those factors coming into play. In terms of how those play out going forward, hard to say. We just kind of point to our overall comments on just continued revenue growth deceleration. And I believe the first question was whether the security investments would have an adverse impact on engagement.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [28]
+--------------------------------------------------------------------------------
+Yes, and I can speak to that. Let me be clear on this that people do not want false news or hate speech or bullying or any of the bad content that we're talking about. So to the extent that we can eradicate that from the platform, that will create a better product, which will also create a stronger long-term community and better business as well. So the reason why we haven't been able to get these things to the level that we want today is not because we somehow want them on the platform; it's that it's a really hard problem. And we're going to invest both in people and technology because we think that both are really important parts of the solution here to go after all different parts of these problems. And that was what I tried to stress earlier on. We're going from 10,000 people working on safety and security to more than doubling that to 20,000. We're building -- we're doubling, in some cases, more our engineering teams focused on security. We're building AI to go after more different areas of harmful content and finding fake accounts and other bad actors in the system. And I expect that all of these things will make our product better over the long term, but we will incur the expenses a lot sooner as we ramp up these efforts. And I also just think that going forward, we're going to be investing at these things at a much higher level because we realized that this is important not only for our community and this company, but it's a part of our responsibility to the society overall.
+
+--------------------------------------------------------------------------------
+Operator    [29]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Rich Greenfield, BTIG.
+
+--------------------------------------------------------------------------------
+Richard Scott Greenfield,  BTIG, LLC, Research Division - Co-Head of Research, MD and Media and Technology Analyst    [30]
+--------------------------------------------------------------------------------
+A couple of things. You talked about creators, I think, Mark, creating for the platform on their own without you having to invest. But just trying to frame it in the sense of Hollywood, like I look at what Apple is doing now and going -- hiring a couple of Sony executives and doing a $5 million an episode buy of a Steven Spielberg show. And I guess, what I'm trying to understand or I think a lot of investors are trying to understand is, what type of content do you ultimately want? Because I don't think, like, someone like Spielberg is going to work for an ad revenue share no matter how good that advertising is like. So how do you balance what type of content business you ultimately want to build? And then when you look at sports, which I also think about as being kind of really relevant content that has a huge community around it, something like the NFL Mobile rights, I think, come up next year. Wondering how important are those types of -- how important is that type of content? I know you were bidding on cricket rights overseas. But how important is sports in this mix?
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [31]
+--------------------------------------------------------------------------------
+Well, I think that the answer to that is we don't know all the answers around what kinds of content are going to work and are not. So we will probably experiment with a number of different things. I do think your point is right, that not all kinds of content can be supported by ads no matter how effective we make that. That said, the current model that we have for at least getting some of the lighthouse content onto the platform is to pay up-front. And what we would like to transition that more to over time and what an increasing amount of the content is revenue shares for ads shown in the video. And as we do better and better on the monetization there, that will support people with higher production costs than doing more premium production and bringing their content to the platform. And we've certainly found on the Internet and YouTube and in other places that there are whole industries around creators with different cost structures than traditional Hollywood folks who can produce very informative and engaging content that a lot of people like and enjoy and that builds communities. And that helps people connect together in a way that definitely can be supported by this ad model. So I think the answer is we're going to try a bunch of things. That's a bunch of what the budget is. I'm very optimistic that a lot of the stuff will be able to be supported long term. But you're certainly right that not all that will be able to be supported by ad models alone.
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Brent Thill, Jefferies.
+
+--------------------------------------------------------------------------------
+Brent John Thill,  Jefferies LLC, Research Division - Equity Analyst    [33]
+--------------------------------------------------------------------------------
+On video, there's been a lot of questions about the ultimate profitability of this going forward. I was just curious if you could share your view. I know it's early, but what your thoughts are there.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [34]
+--------------------------------------------------------------------------------
+Yes. I mean, I think -- look, today, we're talking about the additional investments we're making in terms of the lighthouse content on the Watch Tab. So we are putting a substantial investment behind that. That clearly is going to have implications for margins along with the other big investments that we're making next year. And then even after the -- after we establish a flywheel here and get content being produced for ad revenue share, that's going to have a different margin structure than core News Feed. So even going forward, there's going to be revenue share back to the content creators, so it's going to have a different margin structure than the core business.
+
+--------------------------------------------------------------------------------
+Sheryl K. Sandberg,  Facebook, Inc. - COO and Director    [35]
+--------------------------------------------------------------------------------
+I think it's worth adding that the ad inventory itself is really valuable for marketers and our clients and also works very well with our other ad products. So I'll share a recent one. Visa, with [SocioCode] and BBDO, created 10-second videos with text overlays, showing people making digital payments, and they targeted millennials and early tech adopters. And they ran ads one group for Facebook News Feed only, one group for ad breaks only and one group for News Feed and ad breaks combined. And the best results combined the ad breaks and the News Feed, they had a 7x lower cost per video view compared to News Feed alone. And so one of the opportunities we have here is increasing inventory. And it's particularly good inventory for marketers because we're seeing nice adoption of video views and really nice impact from those sales. And it's also the case that our ad products work together. The ability to show something in News Feed and then show a video in Watch and then show something on Instagram and measure results across the full funnel, we think, are very worthy investments for the long-term health of the business.
+
+--------------------------------------------------------------------------------
+Operator    [36]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Mark Mahaney, RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Stephen F. Mahaney,  RBC Capital Markets, LLC, Research Division - MD and Analyst    [37]
+--------------------------------------------------------------------------------
+A comment and 2 questions. I think this incremental spend or this materially increased spend on security is highly unfortunate, but I think it makes eminent sense. I think most long-term investors realize the community maximization, including security, would lead to long-term profit maximization. So I think makes eminent sense. 2 quick questions. The Watch tab, is there any evidence or any data points you can give us to -- what kind of traction you're seeing with that so far? I was surprised by how many people are on Marketplace. Any relevant data like that for Watch Tab? And then secondly, of all the regions, Europe really stuck out to us as one that showed surprising acceleration. And I know you talked a little bit about that, Sheryl did, about the SMB pickup and traction there. Any other color for why Europe would have accelerated so much in terms of its revenue growth?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [38]
+--------------------------------------------------------------------------------
+Sure. Let me, I guess, hit both of those, and then Sheryl can add any color if she'd like. On the Watch Tab, I think it's just early. So I think it's too early to be talking about any stats there. In terms of Europe, one thing to note is that we did pick up currency advantages there. So it was 56% on a reported basis but 51% on a constant currency basis. Still a healthy growth rate. I think it's a strong economy there. I think the team is executing well there, so I think you've got a variety of factors. And then as Sheryl commented in her prepared remarks, SMB has been particularly strong in Europe. And so I think that's the -- that's one of the key drivers and one of the things we're really happy with.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [39]
+--------------------------------------------------------------------------------
+One clarification on your question, too, is that the 550 million people is across both Marketplace and buy and sell groups, not just the Marketplace tab. So that's the total amount of activity that we're seeing there across both of those things.
+
+--------------------------------------------------------------------------------
+Operator    [40]
+--------------------------------------------------------------------------------
+Your next question comes from the line of Colin Sebastian, Baird.
+
+--------------------------------------------------------------------------------
+Colin Alan Sebastian,  Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst    [41]
+--------------------------------------------------------------------------------
+First, a quick follow-up on safety and security. I guess, I'm wondering why more of the AI machine learning that you've built for product and the ad platform can't be utilized or cross-utilized to help mitigate some of the costs of adding people in technology to handle those issues. And then secondly, related to how much time younger people are spending or not spending on the Facebook app. I wonder if you've looked at over the course of time the trend in usages younger people hit different milestones in life such as graduating from college or getting a job and how their usage of the app changes over that time frame? For example, if you're seeing a steady stream of the users coming to Facebook once they hit those milestones. Any color around that would be interesting.
+
+--------------------------------------------------------------------------------
+Mark Zuckerberg,  Facebook, Inc. - Founder, Chairman of the Board and CEO    [42]
+--------------------------------------------------------------------------------
+Sure. I'll speak to the safety and security investments, and then Dave can speak to the other questions. So we need both technology and people for this. And the best articulation of this that I can make is that today, AI has different strengths than people do, right? So the AI tools that we've built can enable a system to look at millions of pieces of content and make rough assessments on them and figure out what to flag for people. But ultimately, if you want to get those high-quality judgments today on sensitive content and you want to do it quickly when the stakes are pretty high in terms of taking down content or leaving things up, I mean, we take that extremely seriously. You want people to be looking at that. So earlier in the year, when we were working on problems like seeing issues when people were going live, right? There was this really serious issue around people with self-harm and, in some cases, suicide on live. And we made an investment in AI tools and in dramatically increasing the staffing of the team that was working on that and brought the amount of time to review those live videos down through a combination of those things to under 10 minutes now. That might still be a conservative estimate. But -- and we're continuing to work on that. So now what we're trying to do is just increase the SLAs that we have across all of these different types of content and security threats that we might see. So that way, through a combination of the AI tooling that we build and having people to look at these things, we can get it right faster for more of the types of content. And you're definitely right that a lot of the AI research that we do is applicable to multiple areas, but we still need to build those tools. So it takes a lot of engineering investment, and we will be prioritizing that, in some cases, by adding people to teams and, in other cases, by trading off and doing more security work instead of other product work that we might have done. But this is really important and this is our priority.
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [43]
+--------------------------------------------------------------------------------
+Yes. I think on sort of how people use our products in life stages, I would just sort of -- I would say, generally, what we're trying to do is build a variety of different types of social products that can help in a variety of different use cases. So it could be one-on-one messaging with WhatsApp and Messenger. It could be sharing to Groups with the Facebook. It could be the friends that you have on Instagram. So it's -- we're trying to kind of make sure that we flesh out the full range of sharing experiences. And we think that, that has applicability across all the different life stages and depending on the ages people use the products differently, but would not -- we're not showing any specific breakouts on that.
+
+--------------------------------------------------------------------------------
+Operator    [44]
+--------------------------------------------------------------------------------
+Your last question comes from the line of Youssef Squali, SunTrust.
+
+--------------------------------------------------------------------------------
+Youssef Houssaini Squali,  SunTrust Robinson Humphrey, Inc., Research Division - MD & Senior Analyst    [45]
+--------------------------------------------------------------------------------
+Just one question. You guys unbundled the video buy. Can you speak to pricing relative to that 35% average increase in ad pricing? Can you maybe just help us understand the disparity that exists today between pricing on the new video platform and the legacy platform?
+
+--------------------------------------------------------------------------------
+David M. Wehner,  Facebook, Inc. - CFO    [46]
+--------------------------------------------------------------------------------
+So I'm not totally clear on what you mean by the new video platform and the legacy video platform. But I would just say that this is primarily driven by News Feed pricing, and then you have right-hand column pricing as well. So you have impressions on Facebook News Feed, Instagram feed as well as Facebook right-hand column. Ad breaks are really a relatively small -- a very small factor today. So the pricing is really about what are the -- what is the pricing that you're seeing in the overall system primarily given on the feed-based product. So that's really what the driver is. And again, there I would point to the comments that I made about getting better at targeting and driving towards good outcomes for our advertisers as being kind of the reason that we've been able to support higher prices.
+
+--------------------------------------------------------------------------------
+Deborah T. Crawford,  Facebook, Inc. - VP of IR    [47]
+--------------------------------------------------------------------------------
+Great. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again.
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
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exam/original-files/Problem_1_Sample/2017-Oct-13-BAC.N-136999269367-Transcript.txt

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+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2017 Bank of America Corp Earnings Call
+10/13/2017 08:30 AM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian T. Moynihan
+   Bank of America Corporation - Chairman, CEO & President
+ * Paul M. Donofrio
+   Bank of America Corporation - CFO
+ * Lee McEntire
+   Bank of America Corporation - SVP of IR
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Betsy Lynn Graseck
+   Morgan Stanley, Research Division - MD
+ * Glenn Paul Schorr
+   Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst
+ * John Eamon McDonald
+   Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst
+ * Nancy Avans Bush
+   NAB Research, LLC, Research Division - Research Analyst
+ * Michael Lawrence Mayo
+   Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst
+ * Saul Martinez
+   UBS Investment Bank, Research Division - MD & Analyst
+ * Steven Joseph Chubak
+   Nomura Securities Co. Ltd., Research Division - VP
+ * Brian Matthew Kleinhanzl
+   Keefe, Bruyette, & Woods, Inc., Research Division - Director
+ * Kenneth Michael Usdin
+   Jefferies LLC, Research Division - MD and Senior Equity Research Analyst
+ * Gerard S. Cassidy
+   RBC Capital Markets, LLC, Research Division - Analyst
+ * Matthew D. O'Connor
+   Deutsche Bank AG, Research Division - MD
+ * James Francis Mitchell
+   The Buckingham Research Group Incorporated - Research Analyst
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Good day, and welcome to the Bank of America earnings announcement. (Operator Instructions) Please note today's call may be recorded. (Operator Instructions)
+It is now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead, sir.
+
+--------------------------------------------------------------------------------
+Lee McEntire,  Bank of America Corporation - SVP of IR    [2]
+--------------------------------------------------------------------------------
+
+          Good morning. Thanks for joining us this morning for our third quarter 2017 results. Hopefully, everybody's got a chance to review the earnings release documents that are available on the Bank of America website.
+Before I turn the call over to Brian and Paul, let me remind you we may make some forward-looking statements. And for further information on those, please refer to either our earnings release documents, our website or our SEC filings.
+With that, let me turn the call over to Brian Moynihan, our Chairman and CEO, for some opening comments before Paul Donofrio, our CFO, goes through the details. Over to you, Brian.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [3]
+--------------------------------------------------------------------------------
+
+          Thank you, Lee. And good morning, everyone, and thank you for joining us. This was another strong quarter across the board for Bank of America. Responsible growth is delivering for our customers and for you, our shareholders, with strong operating leverage, strong credit results and strong expense management. We earned $5.6 billion or diluted EPS of $0.48 per share this quarter. That is up 17% from the third quarter of '16.
+So thinking back and talking to a lot of you over the last year or so, as we met with you, you asked 3 basic questions: Can Bank of America actually grow while sticking to its responsible growth principles? Can we achieve the $53 billion 2018 expense goal? And can you meaningfully invest in the company at the same time you're reducing the costs?
+So what I thought I would do is use the summary on Page 2 to answer a few of those questions. So on the first question, you can see on Page 2, will responsible growth work? I'd point to several of the metrics there. We've been operating on this model for some time.
+First, if you look at this quarter compared to a year ago, revenue grew 1% on a reported basis. And looking at the core lines of business without other, we grew revenue 4% despite the tough comparison for Global Markets. If you remove the Global Markets, you can see that the core annuity-oriented businesses of Consumer Banking, wealth management and Global Banking grew revenue at 7%.
+If you look at what drives that revenue growth, average loans in business segments grew 6% year-over-year. Average deposits grew 4% year-over-year, led by our consumer business, which grew its deposits 9% year-over-year. The assets under management -- our wealth management business reached $1 trillion this quarter, and flows into the assets under management were $21 billion in the quarter, bringing year-to-date flows to almost -- to $75-plus billion.
+Our mobile usage continues to grow. We had 1.2 billion mobile interactions this quarter alone, up nearly 20% from last year and it's doubled in the last 3 years. Our investment banking fees were up 14% through the 9 months this year. And we did this the right way. With net charge-off ratio still bouncing along decade lows, we are growing with our risk framework and driving a strong risk culture. Nonperforming loans, at the lowest level since first quarter of '08, and our market risk remains low. So we are growing responsibly.
+The second question we get asked is: Can you get to your expense target? In the second quarter of '16, we committed to achieving a goal of approximately $53 billion in total expenses by 2018, and that's all-in reported expense. At that time, our 12 months leading up to that point was running around $56 billion in expense, so that means we had to take out $3 billion in costs. This reduction meant we also had to overcome a couple of years of normal merit increases, revenue-based incentive compensation increases, health care cost increases and other inflationary costs such as lease renewals, et cetera, and we had to do all this while our volume increased because we're doing more with our customers and have more clients and customers to do business with.
+And we remain on track. This quarter, you can see we reported a little more than $13.1 billion in expenses. Our efficiency ratio moved below 60% on an FTE basis. By the way, that is the lowest level of expense since the fourth quarter of '08. That was the last quarter before we bought Merrill Lynch. So we've reduced the costs in our company equivalent to the entire cost structure of Merrill Lynch over those years. Headcount is now down to 210,000 (corrected by company after the call) and is down again this quarter.
+So the third question is: Can you continue to invest in the franchise while reducing those costs? So the first thing to think about there is, for the first 9 months of the year, we spent nearly $2.25 billion on technology initiatives. That's on pure initiatives. Look no further than the branch in your pocket for evidence of that. Customers using our mobile have increased 47% in the past 12 months. Mobile deposits account for 21% of all check deposit transactions. Digital sales account for 22% of all consumer sales.
+In this quarter, Zelle came forward, the latest offering we have in mobile area. Bank of America's volumes alone, our volumes through Zelle this quarter were $4 billion in the third quarter. We processed nearly 14 million transactions, and the growth continues. We recently processed $0.5 billion in a single week. Our customers are using Zelle, and we look forward to further growth in that area.
+We're also continuing to innovate. This -- we're rolling out auto shopping across the country. Home Loans mobile deployment is following that. And as we roll through the next couple of quarters, our AI, our artificial intelligence offering, Erica, will come out.
+We continue also to invest in our physical network by refurbishing nearly all our existing financial centers, which is well underway and will complete over the next couple of years. We have been and we'll continue to open centers in markets where we a have strong commercial banking, wealth management client base but lack financial centers due to historical issues. We continue to enhance our online brokerage offering, benefiting consumer and wealth management clients.
+For our Global Banking customers, we have added the availability of CashPro on our mobile devices. We're using artificial intelligence to efficiently prospect business clients and offer clients receivables -- client receivables management alternatives to our clients. We're investing also in enhanced wholesale credit underwriting operating model. And in our markets business, we are redoing the trading platforms in total.
+In addition to the technology investments, we have added 2,000 primary sales professionals over the past 12 months, whether relationship bankers, financial advisers, commercial and business leaders. So yes, we're doing both, investing and finding ways to be more efficient to pay for it and, therefore, lowering our overall expense.
+Now we did all this in an economic environment that still feels very constructive -- consistent, with growth at 2% plus. We expect moderate economic growth to continue this year, expect to grow -- the U.S. to grow a little faster next year, above 2%; and outside the U.S. as growing a little -- in the mid-3s.
+For the year-to-date, interesting, in our consumer payments, we're seeing consumer activity pickup. Consumers are spending, whether it's checks written, cash taken out of the ATMs, P2P payments and all the different debit and credit cards, 5% more through the first 9 months of 2017 than they did in the first 9 months of 2016. That's a faster growth rate than it has been in prior years. Debit and credit card spending were up 7% for the first 9 months of the year, showing the strong consumer activity.
+Our commercial clients continue to perform well. They continue to remain optimistic. They continue to look forward to continued implementation of a pro-growth agenda, particularly focused on meaningful tax reform. Housing starts, home prices continue to remain on positive trends. Employment is strong, and employers continue to search for skilled workers. So that leaves a solid atmosphere, and we see no near-term indications of any change to it.
+As we move to Slide 3, we show that growing responsibly is not new, and it's showing sustained progress. As you can see on Slide 3, we have delivered positive operating leverage on a year-over-year basis every quarter for the past 3 years. And by the way, not every quarter had revenue growth. In those quarters, we reduced expenses more than revenue decline.
+So that remains our focus, continue to drive growth. But on occasions where capital markets might be slower and there might be less growth in revenue, we have to manage our expenses well, and we have to do all that while we continue to make the investments. That consistent operating leverage shows up in our businesses. All totaled, we earned $15.7 billion for the first 9 months of 2017, up 19% from the first 9 months of 2016.
+On Slide 4, you can see how the businesses contribute to those results. The businesses are driving earnings improvement and returns above the firm's cost of capital, and they continue to drive their efficiency ratios lower. As you can see, Global Market results are actually down year-over-year for the 9 months on a reported basis, but excluding some DVA and a prior-year recovery, earnings would be up modestly on consistent revenue growth despite low volatility and low activity.
+But as you look at the other businesses, beginning with the consumer bank, the years of hard work the team has put in is now clearly showing. The business is driving operating leverage as we optimize our delivery network, continue to digitize the business and follow the customers' behavior as it changes over time.
+In our wealth management business, they -- the teams continue to do a good job, and you see earnings were up 10% on a year-to-date basis. We have industry-leading margins in the business at 27% and the leading brands of Merrill Lynch and U.S. Trust. And ahead of us, we have a lot of work to continue to deal with the industry-wide dynamics and margin pressures. Global Banking has had a record-setting $15 billion in revenue year-to-date and has the company's best efficiency ratio, as you can see.
+So as you think about that, all that sums up in allowing us to return more capital to you, the shareholders. For the first 9 months of 2017, we have repurchased $7.9 billion in common shares and paid $2.8 billion in common dividends. This totals $10.7 billion, comparing to $5.6 billion for the same period in 2016.
+So with that, let me turn it over to Paul to give you some other details on the quarter.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [4]
+--------------------------------------------------------------------------------
+
+          Okay. Thank you, Brian. I'm starting on Slide 5.
+As Brian said, we earned $5.6 billion in Q3, up 13% from Q3 '16; EPS of $0.48 per share, up 17% year-over-year as we reduced diluted shares by 3% over the past 12 months. Revenue of $21.8 billion was 1% higher than Q3 '16 as NII improvement and higher asset management fees outpaced decline in sales and trading and mortgage banking income.
+Expenses of $13.1 billion were 3% lower than Q3 '16. We generated more than 3% of operating leverage; the efficiency ratio of 60% for the second consecutive quarter now, 59% on an FTE basis. Provision expense was $834 million, down modestly compared to Q3 '16, and continued improvement -- we see continued improvement in Consumer Real Estate and energy. Return on assets this quarter was 98 basis points and return on tangible common equity was 11.3%, improving both on a year-over-year and a linked-quarter basis.
+Turning to the balance sheet on Slide 6. Overall, compared to June 30, end-of-period assets increased $29 billion, driven by strong deposit growth that funded an increase in loans to customers, with the remainder invested in securities and cash. Loans on an end-of-period basis were up $10.5 billion from Q2, led by commercial activity, while consumer loan growth was mitigated by the continued runoff of legacy noncore loans.
+On the liability side, long-term debt increased $4.7 billion during the quarter as we took advantage of favorable credit spreads to prefund upcoming maturities. Given that we are now compliant with TLAC requirements, our debt issuance over the next few quarters will likely be more opportunistic. Liquidity remains strong, with $517 billion in global liquidity sources, and our liquidity coverage ratio was 126%.
+Common equity increased more than $4 billion compared to Q2. During the quarter, Berkshire Hathaway converted its Series T preferred stock into 700 million shares of common stock per the terms of their 2011 investment. As a result of this conversion, common equity increased and preferred stock decreased by the $2.9 billion book value of their Series T preferred stock. This issuance does not impact diluted EPS in this or subsequent quarters as the effect of this conversion was already accounted for in diluted EPS.
+The remaining increase in common equity reflects $5.1 billion in net income available to common, partially offset by the return of capital totaling $4.2 billion for both common dividends and share repurchases. Tangible book value per share of $17.23 was modestly higher than Q3 '16 but decreased 3% versus Q2 '17 as a result of the Series T conversion.
+Turning to regulatory metrics and focusing on the advanced approach. Our CET1 transition ratio under Basel III ended the quarter at 11.9%. On a fully phased-in basis, compared to Q2, the CET1 ratio improved 40 basis points to 11.9% and remains well above our 2019 requirement of 9.5%. CET1 increased $4.9 billion to $173.6 billion, driven by earnings and the Berkshire Hathaway conversion. The CET1 ratio also benefited from a modest $3 billion decline in RWA as growth in loans and low RWA density assets was offset by continuing optimization of the balance sheet.
+We also provide our capital metrics under the standardized approach. RWA increased $15 billion from Q2, driven by loan growth, but increases in capital more than offset asset growth, resulting in a CET1 ratio improvement of 20 basis points to 12.2%. Supplementary leverage ratios for both the parent and bank continue to exceed U.S. regulatory minimums that don't take effect until 2018.
+Turning to Slide 7. On an average basis, total loans increased to $918 billion. Note that the sale of U.K. card, which was recorded in All Other, impacted year-over-year comparison of average loans by $9.3 billion. Adjusting for the sale, average loans were up $26.8 billion or 3% year-over-year. Loan growth continue to be dampened by the runoff of noncore Consumer Real Estate loans in All Other. Year-over-year, loans in All Other, including the sale of U.K. card, were down $28 billion.
+On the other hand, loans in our business segments were up $47 billion or 6%. Consumer Banking and wealth management both experienced solid loan growth of 8%. Both businesses continue to see good growth in residential mortgages. Consumer Banking also saw growth in credit card and vehicle loans. Originations of new home equity loans was solid, but overall loan growth continues to be outpaced by pay-downs. In wealth management, growth was also aided by structured lending. Global Banking loans were up 4% year-over-year, led by C&I growth in the U.S. and abroad.
+On the bottom right, note that we grew average deposits by $45 billion or nearly 4% year-over-year. This growth was driven by consumer segments' deposits increasing by $53 billion or nearly 9% year-over-year. Average deposits declined year-over-year in our wealth management segment as clients sought alternatives for their cash within brokerage or AUM. Deposit outflows here largely abated in Q3, and ending deposits were slightly up from the end of Q2. Deposits in Global Banking experienced strong growth in Q3, driven by rate actions taken in the quarter to win and defend relationship deposits.
+Turning to asset quality on Slide 8. Credit quality continues to be solid, with net charge-offs, NPLs and reservable criticized exposure all showing improvement from Q2. Total net charge-offs were $900 million or 39 basis points of average loans, decreasing modestly from Q2. Provision expense of $834 million included a $66 million net reserve release. Provision expense was in line with the prior year but increased $108 million from Q2 as a result of less net reserve releases. Our reserve coverage remains strong, with an allowance-to-loan ratio of 116 basis points and a coverage level 3x our annual charge-offs.
+On Slide 9, we break out credit quality metrics for both our consumer and commercial portfolios. With respect to consumer, net charge-offs were down from Q2. Included in the quarter were recoveries on the sale of some Consumer Real Estate loans. Partially offsetting this recovery benefit was the negative impact of clarifying guidance from the regulators on bankruptcies, which increased our consumer losses this quarter. The net effect of all these pluses and minuses was minimal.
+Consumer NPLs of $5.3 billion were the lowest they have been since Q2 '08. NPLs came down from Q2 levels, and keep in mind, 45% of our consumer NPLs are current on their payments. Commercial losses were up modestly from Q2, driven by a couple of names while reservable criticized exposures and NPLs declined.
+With respect to the impact of hurricanes, first, let me say that our focus has been on those impacted by the storms, including our employees and customers. One decision we made early was to provide a payment deferral to many of our customers in the impacted areas, delaying some potential net charge-offs in Q3. Since then, we have and we will continue to engage with consumers and businesses in the impacted areas to better understand how we can assist them.
+As it relates to credit, we have not seen any material impact. Our overall net reserve release for the quarter did include a modest build related to the storms for losses that are probable, and it goes without saying that we believe we are adequately reserved today.
+Turning to Slide 10. Net interest income on a GAAP non-FTE basis was $11.2 billion, $11.4 billion on an FTE basis. Compared to Q3 '16, which has the same day count and seasonal factors, NII is up $960 million or more than 9%, driven by an improving spread between our asset yields and deposit pricing. The year-over-year comparison also benefited from loan growth and excess deposits deployed in security balances. An additional benefit was higher long-end rates from Q3 '16, which drove lower prepayments and, therefore, lower bond premium write-offs. The full quarter effect of the sale of U.K. card negatively impacted the comparison.
+Focusing on net interest yield. It improved 18 basis points from Q3 '16 to 2.36% after adjusting for the impact of U.K. card. Compared to Q2 '17, NII increased $175 million as the benefits from an increase in short-end rates and an extra day of interest as well as loan deposit growth was mitigated by a number of factors.
+First, we lost the 2 months of interest income associated with the U.K. card book. Second, we raised rates broadly across our wealth management business to offer clients a competitive deposit alternative to cash alternatives within brokerage and AUM. Third, we experienced a decline in long-end rates in Q2 and early in Q3, which impacted reinvestment rates as well as increased the write-off of bond premium as mortgage prepayment speeds accelerated.
+I would note that we also increased deposit pricing for some commercial clients, which had a modest impact on NII in the quarter. Looking ahead to Q4, assuming no change in interest rates, NII growth will be dependent on loan and deposit growth and pricing. If we get a late 4Q hike, as expected by the market, this should mostly benefit NII in Q1 '18. With respect to asset sensitivity, as of 9/30, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3.2 billion over the subsequent 12 months. This is largely unchanged from June 30 and continues to be predominantly driven by our sensitivity to short-end rates.
+Turning to Slide 11. Our teams continued to deliver on cost management. Net interest expense of $13.1 billion is down more than $300 million or 3% from Q3 '16. Productivity improvements were driven by our focus on digitizing processes and lowering our costs to deliver for our customers. Keep in mind that we are seeing these expense declines while investment in technology and new sales professionals remains robust.
+Compared to Q3 '16, in addition to overall operating cost improvements, we reduced personnel expense, which included costs associated with our U.K. card business, as well as non-personnel expense, which included lower litigation expense. Compared to Q2 '17, expense declined by $600 million, with half of that decline driven by a Q2 '17 charge in anticipation of the sale of several data centers. Q3 also included modest declines from lower severance as well as revenue-related incentives. The remaining reduction reflects broad-based improvement as we drive operational excellence. The efficiency ratio hit our 60% target again this quarter.
+With respect to headcount, we are down from the prior quarter and continue to see a shift from non-client-facing associates to primary sales professionals, which now make up more than 21% of our headcount. We have added more than 2,000 primary sales professionals over the past 12 months -- excuse me, over the past, yes, 12 months.
+Okay. Turning to the business segments and starting with Consumer Banking on Slide 12. Earnings were $2.1 billion, growing 15% year-over-year and returning 22% on allocated capital. The business created over 800 basis points of operating leverage on revenue growth of 10%, which outpaced expense growth of 2%. Year-over-year, average loans grew 8%. Average deposits grew 9%, and Merrill Edge brokerage assets grew 21%.
+Revenue growth was led by NII, driven by increases in client balances. Revenue was modestly impacted this quarter by the hurricanes as we took steps to help customers in the impacted areas. We expect the dip in fees and interchange weakness to be temporary as impacted communities begin to recover and rebuild.
+With respect to expenses, through continued efforts to drive operating leverage, the efficiency ratio improved over 400 basis points to 51%. Cost of deposits and rate paid, which when combined represents cost of goods sold from a deposit perspective, remains steady at a combined rate of 163 basis points in the quarter. Consumer Banking credit quality reflected moderate seasoning and portfolio growth, which drove reserve build of $168 million in addition to the $800 million in net charge-offs. The net charge-off ratio declined modestly from Q2 to 1.18% of loans.
+Turning to Slide 13 and looking at key trends. As I said earlier, revenue increased 10% year-over-year. Within revenue, mortgage banking income was the only major category that was lower year-over-year, driven by our strategy of holding more originations on balance sheet instead of selling to the agencies as we like the economics of holding these high-quality originations. In Q3, we retained about 80% of first mortgage production on balance sheet.
+Looking at revenue more broadly. We believe our relationship-deepening Preferred Reward program is improving NII and balance growth while mitigating industry pressures on fees as we reward customers for doing more business with us. This is why we continue to emphasize total revenue as opposed to fees and NII separately. Having said that, spending levels on debit and credit cards were up 7% year-over-year, and new issuance of credit cards was solid at 1.3 million. Spending levels on credit card -- on cards drove revenue increases but were, again, largely offset by the rewards to customers. We saw modest year-over-year improvement in card fees as well as service charges.
+Focusing on client balances on the bottom left. You can see the success we continue to have growing deposits, loans and brokerage assets. With respect to loans, residential mortgage continue to lead our growth, but we also saw good growth in auto as well as better growth in card than we've experienced in quite some time. We remain focused on prime and super-prime borrowers with average booked FICO scores of at least 760. Client brokerage assets were up 21% year-over-year, driven by strong client flows as well as market performance. Net new accounts grew 6% from Q3 '16.
+At the bottom right, you can see deposits broken out. Our 9% year-over-year average deposit growth continue to outpace the industry while the rate paid remained low and stable. Importantly, 50% of these deposits are checking accounts, and we estimate that 90% of these checking accounts are the primary accounts of households. Expenses were up modestly compared to Q3 '16 despite strong revenue growth as optimization and digitalization savings were more than offset by investments in refurbishing branches and technology initiatives.
+Turning to Slide 14. Let's look again this quarter at digital banking highlights as they continue to shape the way we do business with our customers. As you can see, the year-over-year growth in these metric is impressive. We remain the leader in digital banking. We now have nearly 24 million mobile users and another 11 million online with us.
+Within the $639 billion in total payments shown here, note how digital continues to grow as customers move away from cash and check. This migration is helping us lower expenses and reduce operational risk. Further, digital growth of credit and debit card usage is accelerating as e-commerce grows and more payments are taking place within merchant applications like Uber and Starbucks.
+Within total payments, this person-to-person -- and I want to spend a moment on Zelle as Bank of America has been one of the lead banks introducing this P2P capability for customers. Note the steady adoption by Bank of America customers of this online app, which makes it easier to spend, request and even split person-to-person money transfers. Also, note, on the bottom left, the growth in mobile channel usage. This quarter, we saw nearly 1.2 billion log-ins, which is up 19% versus Q3 '16.
+And more than 21% of all check deposit transactions are now done on mobile devices. This represents the volume of 1,100 financial centers. And while important in terms of how we transact with customers, mobile has also become important in terms of how we connect with our customers. One example of that is the reduction in our call center volumes, which are down 13% over the past 3 years.
+And we continue to innovate. This quarter, we rolled out an app in several states for mobile auto shopping, which will soon be followed by a mortgage shopping and fulfillment app -- excuse me, I meant mobile auto shopping, which will soon be followed by a mortgage shopping and fulfillment app that we call Home Loan Navigator.
+Still, even with all this digital activity, it is important to note that we still have 775,000 people a day walking into our financial centers across the U.S. Many of these customers still use our centers to transact, but many use the centers as financial destinations where they can learn more about products and services, work face to face with a specialized professional and generally improve their financial lives. That's why we continue our multiyear branch refurbishment program, and it is also why we continue to add new financial centers in markets where we have never had a Bank of America center but we have a strong presence in other lines of business. This quarter, for example, we opened centers in Denver, Minneapolis and Indianapolis. In addition, we are testing advanced centers which utilize video-assisted ATMs and other videoconferencing capabilities in areas where it makes sense to do that.
+Turning to Slide 15. Let's review Global Wealth and Investment Management. We have produced earnings of $769 million, up 10% from Q3 '16; a pretax profit margin of 27%; and return on allocated capital of 22%. The market and client activity once again provided a tailwind for asset management fees while, at the same time, transaction revenue continues to face headwinds in the industry evolves -- as the industry evolves and adapts to new fiduciary requirements and the increasing adoption of passive investing.
+In all, revenue grew 6% year-over-year, led by NII and a 13% increase in asset management fees, partially offset by lower transactional revenue. We saw nearly $21 billion of AUM flows this quarter, continuing the strength of $57 billion in the first half of the year. Year-over-year, expenses were up 4%, driven by revenue-related incentives. Other expenses were managed well, creating modest operating leverage in this segment.
+Moving to Slide 16. We continue to see overall solid client engagement. Capital balances rose to nearly $2.7 trillion, driven by higher market values, solid AUM flows and continued loan growth. Average deposits of $240 billion were down $5 billion from Q2. The increase in deposit rates at the end of the second quarter helped mitigate the movement of client balances from deposits to other cash investment alternatives within AUM and brokerage.
+The decline in NII from Q2 to Q3 reflects the cost of this rate increase. Average loans of $154 billion grew 8% year-over-year and reflect the continued trend of investment clients deepening their relationship with us. Loan growth remained concentrated in Consumer Real Estate as well as structured lending.
+Okay. Turning to Slide 17. Global Banking earned $1.8 billion. This was a 13% increase from Q3 '16. Return on allocated capital was 17% and stable with last year despite a $3 billion increase in allocated capital. Year-over-year, revenue growth of 5% was driven by improved NII, reflecting solid loan and deposit growth, compounded by rising short-term interest rates. We also grew IB fees modestly year-over-year, led by debt and advisory fees.
+Revenue improvement coupled with lower expenses created operating leverage of 650 basis points and an efficiency ratio of 43%. This expense comparison versus Q3 '16 reflects savings offset by continued technology investment. We also added new bankers while keeping overall headcount relatively flat over the year. We're also deploying more AI capabilities in this business. The focus so far has been on improving client prospecting and more intelligent receivable processing for clients.
+Provision expense of $48 million remains low and is down from Q3 '16 on improvement across most of the portfolio, particularly energy. Global Banking grew loans 4% year-over-year. As Brian mentioned, our loan growth in Global Banking has been pretty consistent over the past 3 or 4 quarters at 4% to 6% on a year-over-year basis. When compared to Q2, I would note an increase in loans near the end of the quarter drove end-of-period balances meaningfully above the average.
+Looking at the trends on Slide 18 and comparing to Q3 last year. Average loans of $346 billion were up nearly $12 billion. With the exception of CRE, loan growth was fairly broad-based, with slightly elevated growth in Asia. Loan spreads were stable compared to Q2 '17 but compressed compared to the year-over-year period.
+Average deposits rose 3% compared to Q3 '16, with most of it concentrated in Q3 given the rate action this quarter. Total investment banking fees of $1.5 billion were up modestly from a strong Q3 '16. Debt underwriting remained strong while equity underwriting was down from a year ago. Growth in advisory fees also benefited the year-over-year comparison. Year-to-date, we remain rank #3 in investment banking fees, with fees of $4.6 billion, which is up 14% from 2016.
+Switching to Global Markets on Slide 19. The business had a solid quarter although it's a tough comparison against a strong Q3 '16 for the reasons you all know. Global Markets generated $3.9 billion in revenue and earned $770 million after adjusting for a modest impact from DVA. Given the tough comparison, we view this quarter as solid despite the fact that sales and trading revenue of $3.2 billion, excluding DVA, declined 15% from Q3 '16.
+Excluding net DVA and versus Q3 '16, FICC sales and trading of $2.2 billion decreased 22%. Within FICC, the decrease was driven by less favorable market conditions across credit products, especially mortgages, combined with lower volatility in rates products in the current quarter. Equity sales and trading was up 2% year-over-year to a little less than $1 billion, benefiting from growth in client-financing activity. Lower volatility also drove lower secondary market activity in equities.
+With respect to expenses, Q3 '17 was 2% higher than Q3 '16, driven by increased technology investment in our trading platform as well as numerous regulatory requirements such as MiFID II, Volcker and UMR, among others.
+Moving to trends on Slide 20 and focusing our attention -- or your attention on the components of our sales and trading performance on a year-to-date basis for just a moment. While the quarter is down from Q3 '16, as you can see in the lower left box, sales and trading revenue has been fairly consistent on a year-to-date basis for the last 3 years at roughly $10.5 billion. And note that we have achieved this stability while reducing VaR and RWA. And just as important, if not more important, this revenue consistency reflects the value to our clients of our diverse product set and sales and trading capabilities in every major market across the globe. Without this strength and diversity, one would have seen a lot more revenue volatility as client activity shifted from a product and market perspective over the last 3 years.
+On Slide 21, we show All Other, which reported a net profit of $217 million. This is an improvement of roughly $400 million compared to Q3 '16. This quarter included lower litigation expense while reps and warranty expense increased a little more than $100 million over Q3 '16. Reps and warranty provision is recorded as contra revenue in mortgage banking income and was a result of advanced negotiations with certain counterparties to resolve several outstanding legacy issues. Also note that mortgage banking income in Q3 '16 included a benefit of roughly $300 million in net MSR hedge results.
+And also remember that this is the first quarter without the U.K. card business, which was sold in June. So in addition to 2 months of approximately $250 million in normal-quality revenue generated from U.K. card, Q2 also included a $795 million benefit from the sale of U.K. card that was mostly offset by tax expense in that quarter. And when making expense comparisons, remember, in addition to lower litigation, Q2 also included a $295 million impairment charge on 3 data centers that we are in the process of selling. Lastly, note that the effective tax rate for the quarter was 29%.
+Okay. Just a few summary points to wrap up. Again, this quarter, we created positive operating leverage by growing revenue while lowering expenses. And as Brian pointed out, this continued the trend of many quarters of positive operating leverage. For years, we have been focused on growing responsibly while improving operating efficiency and making our growth more sustainable. And importantly, we have stuck to and not compromised our clients and risk frameworks while doing so.
+NII growth is benefiting from the value of our deposit franchise and continued loan growth in a modestly improving world economy. Asset quality remains strong as net charge-offs, NPLs and commercial reservable criticized exposure all declined. We continue to invest in new technologies and capabilities while adding sales professionals in certain businesses, and we did all this while nearly doubling the amount of capital we returned to shareholders this year versus last year. This tells us that responsible growth is working and that we are well positioned to continue to invest in and grow with our customers and clients as the economy continues to improve.
+Thank you. And with that, we will open it up to questions.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) And we'll go first to the line of Nancy Bush with NAB Research.
+
+--------------------------------------------------------------------------------
+Nancy Avans Bush,  NAB Research, LLC, Research Division - Research Analyst    [2]
+--------------------------------------------------------------------------------
+
+          Brian, I have a question on digital banking. I guess, right after the crash, when you guys sort of first began to emphasize digital and mobile banking, you were sort of the leader in the industry in that regard. And do you still feel that you have that leadership position? Is it important that you keep it? And what are your thoughts about what you need to do to do that?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [3]
+--------------------------------------------------------------------------------
+
+          I think we have leadership position as told to us by the people and how they rate people in terms of activities and capabilities and things like that. But most importantly, it's how your customers use you and what you see going on. So if you look at the Page 14 that Paul took you through, you can see the growth in transactions and trends in activity. And well, you mentioned the drive after the crisis, but the reality is the drive started before the crisis. And we were one of the first apps available on smartphones, way back to the start of the iPhone, and so that helped us grow quickly. But it is a core platform for us. The question is how do we drive all its feature functionality. The deposits that go through on a daily basis are equivalent to 1,000 branch activity and deposits, to give you an example, so it's moved major amounts of activity. We're excited about the Zelle payment levels because, at the end of the day, we have $5 billion that we spend a year on cash currency, checks moving around our company and the system, that the way we're going to get there is by coming -- digitizing those and eliminating cash and driving that. And so things like Zelle, while they are small numbers compared to all the other payment forms today, the pace that they're growing at with the digital wallets and other things will help drive it there. So we feel we're a leader. We expect to be a leader. The activity grows faster. And I think you put it against any kind of mobile, digital person out there, 1.2 billion customer interactions in the quarter shows you that people believe that this must be pretty good.
+
+--------------------------------------------------------------------------------
+Nancy Avans Bush,  NAB Research, LLC, Research Division - Research Analyst    [4]
+--------------------------------------------------------------------------------
+
+          Is there a direct relationship? Or is there any kind of quantification that you've done of X mobile transactions means Y fewer branches? Is there that direct a relationship?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [5]
+--------------------------------------------------------------------------------
+
+          No, yes, and no. Yes, in the sense that we know the cost of the various things and branch transaction for deposits 10x more than a mobile transaction. But remember, at the same time, we're investing heavily in the high touch side of our house, 2,000 more salespeople, a lot of those in consumer refurbishing all the branches, building out branches and things like that because at the end of the day, 20-odd percent of sales are on digital and mobile, but 80% aren't. And because of nature of the intimate customer discussions, because of nature of what customers want to discuss and have face-to-face help on, the branches are critically important to that. So the real question is you have to have both to be successful. The model doesn't work solely one or the other and the model of having both works in that where you can see the activity growth. Think about the deposit growth year-over-year in consumer $50-odd billion and start to think about that in the context of activity.
+
+--------------------------------------------------------------------------------
+Nancy Avans Bush,  NAB Research, LLC, Research Division - Research Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Okay. And just one quick follow-up for Paul. Paul, you mentioned in Global Banking that all categories of loans grew except CRE. Is that a [self-selection] or could you just expand on that a bit?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [7]
+--------------------------------------------------------------------------------
+
+          Yes, sure. We instituted hopefully a year ago now, if not longer, we pulled back a little bit on CRE. So we're still servicing customers there. We're still making loans, but we're not -- we're just being a little bit more cautious, and so you're not seeing a lot of growth in our CRE balances. And I would point out that, that kind of makes a 4% growth all that more kind of interesting given our stance there.
+
+--------------------------------------------------------------------------------
+Operator    [8]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Glenn Schorr from Evercore ISI.
+
+--------------------------------------------------------------------------------
+Glenn Paul Schorr,  Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst    [9]
+--------------------------------------------------------------------------------
+
+          A little drilling down on your comments on deposit cost drive. So we go from, I guess, 8 basis points last year to 24 this or 11 to 24 over the last quarter. How much of that increase is what you mentioned in wealth management? I heard your comment on bringing them a competitive cash alternative. I'm just curious is it CD versus money market? Is it all coming from current clients?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [10]
+--------------------------------------------------------------------------------
+
+          Mostly in wealth management, and it's -- I wouldn't say it's in 1 place or another. It's cut across a lot of the different deposit products we offer to that community of investors and depositors.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [11]
+--------------------------------------------------------------------------------
+
+          Glenn, if you go to Page 10 of the supplement package, you can see the comparison of the third quarter last year to this year. And you start to think about some of the numbers you were citing. But if you look at the different categories, you're going to see that most of move is in now money market, which is -- that's where the wealth management business is and the $240 billion-odd number in there, about $140 billion of it is really people's invested cash. And so if we make an allocation like we did in the second quarter to less cash and more equities, that actually brings deposits out, and then people are obviously thinking as investment cash. These are accounts that might have $5 million in securities in it and $500,000 of cash. So, obviously, rate structure moves in that. But if you think about it across a year, there's been a 75 basis point increase in Fed funds, and you start to put these numbers against an even wealth management, it's relatively modest in terms of change in the overall. The other thing that drives our profitability is if you look at that page, go down and you remember that's an noninterest-bearing account. The deposits are still 0, and they grew -- there are $436 billion of noninterest-bearing accounts. If you look in the consumer side of that, you know that drives the profitability and that's where it comes from.
+
+--------------------------------------------------------------------------------
+Glenn Paul Schorr,  Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst    [12]
+--------------------------------------------------------------------------------
+
+          Got you, and so there's a competitor too, who had put out some high priced or high rate CDs in an effort to gather new client money. This is more of just compensating clients for being good clients, giving and sharing a little bit of the love with...
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [13]
+--------------------------------------------------------------------------------
+
+          I would not say we're...
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [14]
+--------------------------------------------------------------------------------
+
+          CDs are down $4 billion at Bank of America year-over-year.
+
+--------------------------------------------------------------------------------
+Glenn Paul Schorr,  Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst    [15]
+--------------------------------------------------------------------------------
+
+          I appreciate that.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [16]
+--------------------------------------------------------------------------------
+
+          This is about providing our GWIM clients with an alternative, a deposit alternative if they want to take it since they have options of AUM and brokerage for some of their excess cash.
+
+--------------------------------------------------------------------------------
+Glenn Paul Schorr,  Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst    [17]
+--------------------------------------------------------------------------------
+
+          Okay, cool. And just a curious follow-up on the comment you guys have in the slides on targeted growth and client-financing activities and equities. Is that just growing PB with clients?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [18]
+--------------------------------------------------------------------------------
+
+          We talked about that last quarter where we made a decision to add some balance sheet to our equities business. We see an opportunity there. We've made a lot of investments in technology. We've got great relationships, and there's an opportunity to add a little bit more leverage to that business. We provide some balance sheet. So we did that last quarter, and we continued that this quarter and see now it's having an effect. It's, like I said, it's PB, but it's also synthetic PB in Europe. So it's both synthetic and physical.
+
+--------------------------------------------------------------------------------
+Operator    [19]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of John McDonald with Bernstein.
+
+--------------------------------------------------------------------------------
+John Eamon McDonald,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst    [20]
+--------------------------------------------------------------------------------
+
+          Wanted to ask about expenses. The magnitude of improvement was nice surprise this quarter. I think you were targeting kind of a $100 million year-over-year improvement. You got something closer to $300 million or more. Just wondering where did you kind of outperform your own expectations on expenses this quarter? And is this run rate ballpark kind of a good jumping off point, Paul?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [21]
+--------------------------------------------------------------------------------
+
+          Yes. I would say we feel great about the work we did. We've always talked about expenses not being a straight line, the same line every quarter. This quarter, we did maybe a little bit better than other quarters. You're right. It was down about $300 million year-over-year. And those expense reductions were broad based across personnel and nonpersonnel.
+
+--------------------------------------------------------------------------------
+John Eamon McDonald,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst    [22]
+--------------------------------------------------------------------------------
+
+          And in terms of next year when you think about the $53 billion target, it doesn't look like you might need it, but do you have any expectations that the roll-off of the FDIC special assessment kind of will help you can get to that target? And just maybe a reminder of how much that expense stepped up for you.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [23]
+--------------------------------------------------------------------------------
+
+          Yes. Look, we -- it's a good question. We -- I think the industry was assuming that, that would end at around -- in the second quarter. It looks like it may extend to the third quarter because we're not going to get to the level they need to get to. So that actually hurts us, and that's why we always say we're going to get to approximately $53 billion for full year '18. There's a lot of things that can happen. I don't know the exact amount is. Is it roughly around $100 million quarterly?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [24]
+--------------------------------------------------------------------------------
+
+          Yes.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [25]
+--------------------------------------------------------------------------------
+
+          It's around $100 million quarterly. So it's a material number.
+
+--------------------------------------------------------------------------------
+John Eamon McDonald,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst    [26]
+--------------------------------------------------------------------------------
+
+          Okay.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [27]
+--------------------------------------------------------------------------------
+
+          I think a little more than $100 million, frankly, but I can get back to you on that.
+
+--------------------------------------------------------------------------------
+John Eamon McDonald,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst    [28]
+--------------------------------------------------------------------------------
+
+          Okay. And then, I guess, just on capital return, Brian. With that CET1 growing nicely, anything that you could see now that would stop you from approaching more of a peer capital payout next year? And then can you just remind us what kind of CET1 ratio would be good target for you, knowing what you know now about regulatory minimums?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [29]
+--------------------------------------------------------------------------------
+
+          A couple of things. One, we would expect to keep moving up the ladder in terms of capital management. This year, 88%, I think, is a number and you expect us to keep pushing forward. And, two, on the levels where 9.5, you'd add 50, 75 basis points on top of that. SIFI buffer levels can bounce around on you, but we think about somewhere around 10-10.5%. And if you subtract that from the 12%, that's a pretty good amount of excess capital.
+
+--------------------------------------------------------------------------------
+John Eamon McDonald,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst    [30]
+--------------------------------------------------------------------------------
+
+          Okay. And just one quick follow-up, Paul, on that FDIC expense roll-off. Is that's in the numbers now? You kind of running close to almost the $13 billion per quarter, it's almost at $53 billion annualized. Are you just saying that if you didn't get that step down, it gets a little tougher to get to the target?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [31]
+--------------------------------------------------------------------------------
+
+          Yes. I'm just -- look, the target now goes back to the middle of '16. We said at that time, we would achieve approximately $53 billion for full year '18. So obviously, it's just a little harder if FDIC doesn't roll-off in the second quarter and extends in the third quarter, but we're going to get there either way.
+
+--------------------------------------------------------------------------------
+Operator    [32]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Betsy Graseck from Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Betsy Lynn Graseck,  Morgan Stanley, Research Division - MD    [33]
+--------------------------------------------------------------------------------
+
+          A couple of questions. One, as we go towards the $53 billion, can you just give us a sense as to the source of the improvement, consumer versus corporate?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [34]
+--------------------------------------------------------------------------------
+
+          Betsy, I think if you look at the quarterly progression across all expense category, it comes from everywhere. And so it comes from the data center configurations that we took a charge and move a lot of stuff last quarter. It comes from continuing to shed real estate occupancy costs. It comes from lower headcount. That was down 1,000 this quarter. It comes from taking out the spans and layers for things we called organizational health. But if you think of it more strategically, it comes from basically applying technology in digitizing processes, and so across the -- our wholesale banking and credit underwriting initiative, I talked about, we've been able to save about 20% of the headcount thereby consolidating our activities and bringing their activities together. We'll have another big chunk as we go to apply the technology that we are developing that's not yet deployed. And so it's 1,000 ideas, it's little -- I mean, thousands of ideas. It's literally across the board and the team does a great job of just going after piece by piece by piece and then we can manage the sort of repositioning cost by getting ahead of it and doing it on a rational basis, so that attrition -- we'll hire 8,000 people this quarter to maintain our headcount sort of neutral or down a bit. So we have lots of chances not to hire people and continue to shrink the company when we apply this technology.
+
+--------------------------------------------------------------------------------
+Betsy Lynn Graseck,  Morgan Stanley, Research Division - MD    [35]
+--------------------------------------------------------------------------------
+
+          I'm just thinking about the digital efforts. Obviously, you put a lot of time in the call on the consumer side. Just wondering rate of change on corporate is that where you think the digital efforts are picking up.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [36]
+--------------------------------------------------------------------------------
+
+          Yes, there'll be more -- there will be more there because of like trade finance, we started digitizing more processors. And if those process improve out, we'll drive it. There's a lot in the back-office of the securities clearance capabilities that is going on. So there are -- the numbers are -- consumer always dominates in terms of the numbers in a lot of ways just if you think about it, but GWIM has a bunch of digitization efforts, a bunch that saves statements and we send up 12 statements. If we can get people take e-statements that saves 12 times a year times whatever it costs for that particular statement. So these things are never -- if there's some silver bullet, you could shoot and take care of it all at once, we had a shot at it already, this is just hard work.
+
+--------------------------------------------------------------------------------
+Betsy Lynn Graseck,  Morgan Stanley, Research Division - MD    [37]
+--------------------------------------------------------------------------------
+
+          So then the follow-up is a question I get from people a lot of times, which is we get the expense improvements. Are there any pressures that we should also be making in here when you talk about cash management, fee rate, some of the fintech disruptors, look at these fee pools and say, oh, this is too high. I'm going to go after that. I'm assuming that you're staying ahead of that threat. I'm just wondering is there a fee rate that we should be making sure that we're including when we give you the expense side?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [38]
+--------------------------------------------------------------------------------
+
+          Yes. I mean, I think we've given the guidance on the expense side. If you think about something like in a global transaction services platform, cash management, as people call it, there has always been a loss in revenue that you're fighting against when paper, which people pay us, mode of process turns to digital. We lose revenue, but we save expenses at a faster rate. That has been going through the numbers for last several years. So the revenue growth we see in cash management takes that all into account. So it's more customers, more activity fighting off with the customers are converting cash to digital. So, yes, that's a part of it, but you're seeing in our run rate. There's not -- there's nothing sort of ahead of us that's unusual compared to the quarter-to-quarter sort of picking away at us that goes on in that regard.
+
+--------------------------------------------------------------------------------
+Betsy Lynn Graseck,  Morgan Stanley, Research Division - MD    [39]
+--------------------------------------------------------------------------------
+
+          And then consumer expense ratio of 51%, that as you're getting more people onto your Zelle platform, et cetera, is there a line of sight to that going sub-50 at some point?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [40]
+--------------------------------------------------------------------------------
+
+          I think through both the revenue lift they get as the rate structure rises and good expense management, we'd expect that it should move down below 50 at some point, but we never say to people where do we think it can get to some big target. The consumer teams has set some targets. I said, don't give people targets because then they'll think that that's success. We don't know where it goes. In other words, over -- I'm not talking about next quarter, but over multiple years when you continue to drive the revenue expense play here because the accumulating core transaction deposit account and getting it from $2,000 over the last 8, 10 years to $6,000 per account is a tremendous revenue lift by focusing primary counts as the number of accounts actually fell by 10%. And so that dynamic is what we're after. So, yes, it will move down, but I wouldn't -- we never put that success because then people quit working.
+
+--------------------------------------------------------------------------------
+Operator    [41]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Mike Mayo with Wells Fargo Securities.
+
+--------------------------------------------------------------------------------
+Michael Lawrence Mayo,  Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst    [42]
+--------------------------------------------------------------------------------
+
+          Your branch count continues to go down, I guess, down 3% year-over-year, but deposits are up 4% year-over-year. And I'm trying to get a distinction between retention of deposits when you close branches, a retention of customers because according to your 10-K in 2015 and 2016, the number of accounts declined by about 2% but at the same time, deposits continue to grow just like the entire decade. So my question is what is your retention rate of deposits? And what is your retention rate of customers when you close a branch today and why the difference?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [43]
+--------------------------------------------------------------------------------
+
+          The deposits to consumer just, Mike, which are more -- and small business, which are more related to your thing, are actually up 9% year-over-year and up 4%. That's the all-in corporate level, including GWIM and commercial. But if you look at it across time, it really depends on where you're closing the branch, obviously, and what's nearby, but the retention rates continue to go up. The -- over time because the physical plant becomes less dominant and relevant to the customer, and so what we're doing is fine-tuning the branch count and often consolidating into a bigger branch, and we've invested heavily into the quality of the branch itself with the numbers of people there. So our branches are getting bigger in terms of numbers of people in them and smaller in terms of count. When you think about it, the customer fall off in terms of numbers of accounts, was really continuing to focus on that primary account. So as we do that, the balances are up twice in the accounts, I think, over the last 7 years or something like that and account numbers are down from 34 million to 31 million. That was all given by our view that we had to get to the primary account because that's where the profit can be made and the core transaction capabilities are there. So we closed a lot of people -- people runoff who were using us as a secondary or third bank just because they loved our distribution of ATMs and things like that and basically we have emphasized primary account sales.
+
+--------------------------------------------------------------------------------
+Michael Lawrence Mayo,  Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst    [44]
+--------------------------------------------------------------------------------
+
+          I'm not sure if you disclosed this. So what is the retention of deposits when you close a branch today? And what was it a few years ago?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [45]
+--------------------------------------------------------------------------------
+
+          We don't disclose it separately, Mike. That's all in there. So in that 9% growth is every thing we did so...
+
+--------------------------------------------------------------------------------
+Michael Lawrence Mayo,  Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst    [46]
+--------------------------------------------------------------------------------
+
+          Okay. And just last question. You've mentioned -- I mean, digital banking is up. Global Banking is up. You mentioned 1,100 branches that's equivalent of it. That's good. So have you reached the [chipping form] where you can go from 4,500 branches down to 3,500 branches or 4,000. How far can you go?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [47]
+--------------------------------------------------------------------------------
+
+          That always depends on the customer behavior and other factors. We are deploying new branches, hundreds of them over a multiyear period into places we didn't have branches before, located more strategically given circa 2017 and beyond banking. So we don't put -- again it's not another number, we target a number. What we target is a more and more efficient system. And so each day, 3/4 of 1 million people come into our branches and our teammate serves them well, and our scores of those branches are all times high in terms of satisfaction, and 80% of sales go on in that space. So I wouldn't want to cut them back at one branch more than the customer wants us to do it by evidence by their behavior.
+
+--------------------------------------------------------------------------------
+Operator    [48]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Steven Chubak from Nomura Instinet.
+
+--------------------------------------------------------------------------------
+Steven Joseph Chubak,  Nomura Securities Co. Ltd., Research Division - VP    [49]
+--------------------------------------------------------------------------------
+
+          I had a follow-up question regarding the discussion earlier about GWIM deposit competition and just some of the efforts that you cited to compete with other cash alternatives. I was hoping you could qualify the actual magnitude of deposit price increase that we saw in the quarter and maybe just give a little bit more context as to what prompted the action. And, Paul, I know you gave some color here. I'm just trying to get a better understanding as to whether this is really driven by increased competitive pressures or is it more a function of the DOL, which actually requires that some clients receive reasonable compensation on some of their assets, including cash.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [50]
+--------------------------------------------------------------------------------
+
+          I don't think it's -- it's not a function of the DOL. It's function of our desire to give our customers an alternative to leave their money in a deposit account at Bank of America as opposed to seeking other alternatives within our AUM and brokerage platforms. So that's what's driving this. It's a meaningful increase, but it's nothing when you think about the 100 basis points that we've seen here. It's not a significant amount.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [51]
+--------------------------------------------------------------------------------
+
+          Just philosophically, we said our team, "You got to maintain the operating leverage given relative pricing against the rate curve because the rate curve, we got to zero fullers for so long." And so they have to grow faster than the market 4% or 5%, at least you've got to grow deposits, then you've got to maintain the pricing discipline. What happens at GWIM, frankly, is they got a little behind the curve and they had to move in a single quarter, and they did. And so what you see in the period-end deposits, even though the average I think is down. Period end actually is up, and so they were able to shut down some of the runoff as Paul just described, but it's really localized in the GWIM business, and it's really driven by a subset of those deposits, which are in asset management accounts and in brokerage accounts that are a part of an investment strategy that is different than transactional checking accounts and things that are driving both in our commercial business in our consumer business. And so that's why you see if you go look at Page 10 and kind of sort throughly, you'll see there's differences and it's really narrowly in the area that has to do with really investment cash rather than transitional and transactional cash.
+
+--------------------------------------------------------------------------------
+Steven Joseph Chubak,  Nomura Securities Co. Ltd., Research Division - VP    [52]
+--------------------------------------------------------------------------------
+
+          And so my understanding then is that if we do see rate hikes from here because much of this increase was a function of your efforts to catch up with the competition, that should we see the NIM trajectory increase? Or how should we think about the outlook from here? If we get additional rate hikes?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [53]
+--------------------------------------------------------------------------------
+
+          Well, first, let me say that our outlook on NII absent to any change of rates is going to be dependent on loan and deposit growth offset by deposit rate pay, which is mostly going to be driven here by competitive factors. So if we get a 25 basis point rate hike in December, again, most of that will see in the first quarter, the benefit, and it's going to depend on what our customers need and want and what the competitive dynamic is. I mean, that I don't know how else to answer that question. We don't know yet what we're going to do. We have to see how the market develops.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [54]
+--------------------------------------------------------------------------------
+
+          But secondly, in the $3.2 billion for 100 basis points is modeled in a rate of change relative to that interest rate change for deposit pricing. We have better that and because of the power of the franchise and other things, and we'd expect to continue to maintain that discipline.
+
+--------------------------------------------------------------------------------
+Steven Joseph Chubak,  Nomura Securities Co. Ltd., Research Division - VP    [55]
+--------------------------------------------------------------------------------
+
+          Got it. And just one more for me on the credit side. The trends there continue to be quite positive. You appear to be doing a lot better than many of your peers in that regard. I know the guidance that you've given previously at least in the near term was that provision should approximate net charge-offs. We did begin to see those in healthier building consumer. I'm just wondering how we should think about the near-term provision trajectory from here?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [56]
+--------------------------------------------------------------------------------
+
+          We still think provision is expected to roughly match net charge-offs. You could see some modest increase as we bounce around the bottom with respect to net charge-offs in commercial and as we build allowance in support of loan growth, however, these factors may be offset by the release of noncore consumer real estate and energy as we sort of have been experiencing here over the last few quarters. So no change there.
+
+--------------------------------------------------------------------------------
+Steven Joseph Chubak,  Nomura Securities Co. Ltd., Research Division - VP    [57]
+--------------------------------------------------------------------------------
+
+          Okay. It means, this $900 million as like a charge-off run rate at least in the near term a reasonable expectation?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [58]
+--------------------------------------------------------------------------------
+
+          Over the last 5 quarters, the average has been $900 million.
+
+--------------------------------------------------------------------------------
+Operator    [59]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Matt O'Connor from Deutsche Bank.
+
+--------------------------------------------------------------------------------
+Matthew D. O'Connor,  Deutsche Bank AG, Research Division - MD    [60]
+--------------------------------------------------------------------------------
+
+          I was wondering if you could just elaborate a bit in terms of what you're seeing on the loan demand side, both on the commercial corporate as well as the consumer and, obviously, the industry has slowed down overall. Would you make some comment about seeing more activity in pockets of consumer? And then along with that, just your outlook for loan growth in the near term here.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [61]
+--------------------------------------------------------------------------------
+
+          Look, we've been experiencing a solid loan growth in consumer and GWIM and in -- on the wholesale side in Global Banking. You saw that again this quarter. We don't -- so we talk about loan growth for the whole company being driven by deposit growth, and so if you think about our deposit growth and the size of our deposits relative to our loans, every quarter we grow deposits, and we put as much of that to work as we can in loan growth and whatever doesn't go to loans and client growth goes into the investment portfolio or cash. So if you're growing deposit sort of mid-single digit, that means you're going to grow total loans low single digits. We don't think that's going to change given the current economic environment. But as you've seen, because we have a significant runoff portfolio in All Other, that has translated into mid-single digit loan growth in our business segments, and that's what we're comfortable with.
+
+--------------------------------------------------------------------------------
+Matthew D. O'Connor,  Deutsche Bank AG, Research Division - MD    [62]
+--------------------------------------------------------------------------------
+
+          And then as we think about the deposit growths driving the balance sheet growth, you've got this side of yield curve and some people -- my personal view is if we get additional increase in the short end, you might have further flattening. I'm just wondering about the thought process to keep building the securities book and the mortgage book. You're seeing some banks shrinking the securities book and building cash instead. And obviously, there's a cost of doing that, but just a thought process to keep building securities here as the curve has flattened pretty meaningfully.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [63]
+--------------------------------------------------------------------------------
+
+          Yes, look, we are always, always thinking about the trade-off between earnings liquidity and capital where we have a risk framework that we operate in with respect to the securities portfolio. But remember, when you're growing deposits in consumer 8%, those are, we believe, high-quality deposits. So they have a meaningful duration. And you've got to find investments on the asset side to match what you believe the duration of those deposits are. So we're very thoughtful about it, and we think about it all the time. We haven't made a lot of changes into how we're operating. We're operating within our risk framework, and we feel good about kind of what we're doing there.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [64]
+--------------------------------------------------------------------------------
+
+          I think one of the things to remember is that as you think about deposits, in our $1 trillion plus of deposits, we have significant more consumer personal deposits than anybody else does, which then if you think through the resolution planning and how those are treated and all that stuff, those deposits are extremely valuable. If you think of the consumers, it was 4 basis points last year and 4 basis points this year. You're going to continue to grow those because unless the curve flattens in the way that would be below 4 basis points plus the FDIC, you'd start to think of -- which no one thinks it is going to do. It's still a very valuable idea to generate more customers and generate more deposits. But we continue to really push that with -- its almost $900 billion in deposits in our GWIM and consumer businesses, which are tremendously valuable in terms of what drives this franchise's profit. So there's no way we're turning down more customers with good core deposits.
+
+--------------------------------------------------------------------------------
+Matthew D. O'Connor,  Deutsche Bank AG, Research Division - MD    [65]
+--------------------------------------------------------------------------------
+
+          Yes, just a point I was getting at is, you're paying up a little bit on the deposit side in the wealth management business, you're paying up a little bit on the Global Banking side, and on the one hand, you can afford to pay up to help out the customers and keep them in your products, but at the same time, with the flattened yield curve, just makes it less economical to do so I think.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [66]
+--------------------------------------------------------------------------------
+
+          Yes. But we -- I mean, if you think about the all-in cost, then it's still much -- it's still very advantage cost of $600 million a quarter for the $1.2 trillion in deposits in total. These numbers -- think about that a second, and you think that there's a lot of advantage in any yield curve.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [67]
+--------------------------------------------------------------------------------
+
+          Portion is, obviously, focused on the right thing, is focused on the economics, but remember these are our customers and we want to make sure that they have the right alternatives for them to make good decisions about whether they want to keep the deposit or whether they want some other alternative.
+
+--------------------------------------------------------------------------------
+Operator    [68]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Brian Kleinhanzl from KBW.
+
+--------------------------------------------------------------------------------
+Brian Matthew Kleinhanzl,  Keefe, Bruyette, & Woods, Inc., Research Division - Director    [69]
+--------------------------------------------------------------------------------
+
+          Yes. First question was on the first mortgage production that you mentioned. You said that you're putting most of that on the balance sheet. Can you just give kind of a description of the type of paper that it is? Is it just 3-year conforming? And then what does that do to the duration of the loan book for the consumer?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [70]
+--------------------------------------------------------------------------------
+
+          These are our customers who are originating mortgage either through purchase or refinancing, and we like the risk profile. We know them. We're focused on primes and superprime, and we -- so it's mostly nonconforming, but there is some conforming in there. We still are selling some through the agencies and, obviously, that would -- that adds duration to the asset side to the extent that it starts getting a lot, but we'll manage that, and remember we're adding deposits.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [71]
+--------------------------------------------------------------------------------
+
+          Also don't think that we don't manage -- we manage that rate risk through a whole bunch of things, including derivatives and stuff, too. So it's not like we just sit there and throw the long assets on and leave them there.
+
+--------------------------------------------------------------------------------
+Brian Matthew Kleinhanzl,  Keefe, Bruyette, & Woods, Inc., Research Division - Director    [72]
+--------------------------------------------------------------------------------
+
+          Okay. And then you didn't call out the hiring of the sales staff of about 2,000 year-on-year. I mean, how do we measure the success of those hires? Is -- how much of that is already in the run rate? I mean, was it an opportunity to take market share? Or were you understaffed in certain areas? I mean, how should we think about the increase in sales staff?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [73]
+--------------------------------------------------------------------------------
+
+          Well, we have a -- how you should think about is that you can't grow in a business which is largely driven by face-to-face interaction for the wealth management business and the commercial business in total and a large part of the consumer business. If you don't grow in your sales force, you can't grow your production. If you don't grow your production, you can't grow your balances. And so all those balances were growing loan balances and deposit balances and are all driven by having more sales capabilities. And so unless you assume your team isn't working hard, which is absolutely not the truth. The Bank of America team works very hard. You got to add more capacity and to serve the customers, we have tremendous opportunities. So whatever metric and you can stun yourself with the opportunity. The number of customers who have their banking accounts that are in a wealth management business with other banks, hundreds of billions of dollars of bank deposit balances and loan balances, the amount of middle market Investment Banking goes to competitors from our middle market clients is 70%, 80% of their activity, which we should be capturing a lot more of. So we added middle market investment banker. So that capacity is a requirement. If we look at all the markets, 92 markets in the U.S., we look at the relative market shares, we look at what we should be able to do, we look at how our team works together and we deploy those people in units and between 6 -- 5 or 6 core business of operating markets to make sure building markets so they can play off each other and then they work to get business together and refer business back and forth. So without that sales force build, you won't have growth in the future.
+
+--------------------------------------------------------------------------------
+Operator    [74]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Ken Usdin from Jefferies.
+
+--------------------------------------------------------------------------------
+Kenneth Michael Usdin,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [75]
+--------------------------------------------------------------------------------
+
+          Paul, I wanted to follow up on the customer credit. There's been last day or so a lot of concern about card. Your card losses have been up a little bit, but very manageable, but I did notice you did -- and you mentioned you built a card reserve to now 3.5%. I'm just wondering what kind of normalization are you expecting on the card losses to follow -- to start, sorry.
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [76]
+--------------------------------------------------------------------------------
+
+          Yes. So we've been growing our card book. We have a back book that is well seasoned. We have a front book that we're growing and that is seasoning like any other normal portfolio card. And you're seeing, I think, that across the industry. So we feel really very good about our card portfolio. We're focused on again prime and super prime. We're focused on our customers. We did see a modest pickup in NCOs year-over-year, but that was fully expected and planned for. So nothing here from our perspective unusual.
+
+--------------------------------------------------------------------------------
+Kenneth Michael Usdin,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [77]
+--------------------------------------------------------------------------------
+
+          Okay. So just expected gradual seasoning, and you're not expecting any kind of vintage major shift in the recent growth?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [78]
+--------------------------------------------------------------------------------
+
+          No. If you think about the whole card business, we reshaped it over the last 10 years, quite frankly, has been a move to more and more relationship customers whose credit statistics are relatively consistent over time. And so while we have a year-over-year increase in card charge-offs, linked quarter, it fell back down. And so you should expect this thing to bounce around in these rates, but it's because of the nature of the way we originate the cards to its core relationship customers and then our focus is not necessarily getting a lot more cards out there. It's really get people to use their card as the primary card out of their wallet, the Bank of America customer, the Bank of America card and using it and that's where we're driving the business. So I don't think you expect the strategy is responsible growth. So the balances grew $1 billion or $1.2 billion, a couple of billion here over the last year, but we do -- it's going to be steady to go and drive it. So you shouldn't see major changes in terms of nominal dollars of charge-offs.
+
+--------------------------------------------------------------------------------
+Kenneth Michael Usdin,  Jefferies LLC, Research Division - MD and Senior Equity Research Analyst    [79]
+--------------------------------------------------------------------------------
+
+          Understood. And then as a follow-up to that in terms of the new Preferred Rewards card, how will that work through? Will there be any type of amortization of rewards cost, et cetera, that we should think about in terms of the card fees line? How -- or is that just also kind of already been as part of the spending you've been doing?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [80]
+--------------------------------------------------------------------------------
+
+          Yes. So let me just take a step back as lot of people are in the call and just review what we did. So we did launch it last month. It's a card that we launched because we're listening to our customers, and we want to design a card that rewarded them. We rewarded those customers who wanted to deepen their relationship with us even further, and importantly, we also wanted to give them the flexibility to use their rewards the way they wanted to use them. Similar to all our other cards, we are very careful to balance the customer value with the shareholder value rewards that are very clear and transparent. We've got enough from fee in this card that we're not waiving. So we've been very mindful of the profitability of the product, and we don't expect any significant impact at this point anyways. We'll see how it goes, but at this point, any significant impact to card income from existing upfront.
+
+--------------------------------------------------------------------------------
+Operator    [81]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Jim Mitchell with Buckingham Research.
+
+--------------------------------------------------------------------------------
+James Francis Mitchell,  The Buckingham Research Group Incorporated - Research Analyst    [82]
+--------------------------------------------------------------------------------
+
+          Maybe quick question on rate sensitivity. It looks like it didn't change despite absorbing another rate hike this past quarter. Is that sort of indication that you've gotten slightly more asset sensitivity -- asset sensitive as the quarter went on? Or how do we think about your -- the flat rate sensitivity?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [83]
+--------------------------------------------------------------------------------
+
+          I mean, if you look at rates at the end of last quarter, you look at rates where they are now. There really wasn't -- hasn't been a lot of change. So that's -- it's the rate structure both existing at the end of the quarter versus existing then plus what the forward path look like at both those points that drives that asset sensitivity disclosure, and they were kind of similar at both points.
+
+--------------------------------------------------------------------------------
+James Francis Mitchell,  The Buckingham Research Group Incorporated - Research Analyst    [84]
+--------------------------------------------------------------------------------
+
+          Was there any change in the short versus long-end sensitivity?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [85]
+--------------------------------------------------------------------------------
+
+          Not really. It's still around 2/3 short end.
+
+--------------------------------------------------------------------------------
+James Francis Mitchell,  The Buckingham Research Group Incorporated - Research Analyst    [86]
+--------------------------------------------------------------------------------
+
+          Okay. I mean, maybe just a broader question on consumer credit. I mean, I think this has been a big issue. I heard your comment in cards, but maybe just taking -- looking at the consumer as a whole, do you feel like there's any stress points out there that gives you some pause. I think that's really what's going on in the industry or at least in a lot of investors' minds worrying about is this the start of a new upward cycle in consumer credit costs? And how do you think about that?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [87]
+--------------------------------------------------------------------------------
+
+          Look, we -- again, we're focused on prime, superprime. We're focused on our customers, and we're just not seeing it in that group. I'm looking at a page here, it's (inaudible) on it. And after you adjust for the OCC bankruptcy and the repossession if you look at card, if you look at auto, if you look at consumer vehicle lending and you make an appropriate adjustment net charge-offs, they haven't really gone up, linked quarter or versus Q1. So we're just not seeing it yet in our net charge-offs.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [88]
+--------------------------------------------------------------------------------
+
+          That's been a multiyear discipline. This is not something that happened this quarter. This is multiyears of changing the underwriting standards and sticking to it and not varying those standards as we move through time. So we changed the mortgage underwriting standards in '07 and '08. We changed the card standards about the same time. The auto standards have always been high. We've always made that a business that we took very little credit risk in, and so when you think about it, we just don't see it, but it's -- a lot of it is just sticking to the knitting over the years into the responsible growth strategy and the team finding the growth in the customers. And so the debate has always been, "can you grow?" and answer is yes. But you've got to grow in a rationale, responsible basis. So -- and that's what's playing out, and that's this quarter relative to other people, I think.
+
+--------------------------------------------------------------------------------
+Operator    [89]
+--------------------------------------------------------------------------------
+
+          We'll go next to the line of Gerard Cassidy with RBC.
+
+--------------------------------------------------------------------------------
+Gerard S. Cassidy,  RBC Capital Markets, LLC, Research Division - Analyst    [90]
+--------------------------------------------------------------------------------
+
+          You'd mentioned, Brian, on the call about going into different markets with de novo expansion of your retail branches. Can you give us some color on how long it takes to get to those branches to break even? And then second, how long does it take to get them to a level of profitability that's similar to your legacy branches?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [91]
+--------------------------------------------------------------------------------
+
+          Well, I think the -- it takes a lot to build them up to the level of deposits, obviously, but what we've seen so far, and that's going to be one of the things you test every quarter is that some of the branches will be opened in Denver, quickly moved into the top 10% of sales and a lot of stuff. Now why is that different than the de novo branching? A, we have a nationwide brand; B, we have wealth management and commercial businesses in all these markets; C, we have card customers and mortgage customers in these markets that were -- that we had for years. And so a lot of times, you're converting a deepening proposition as opposed to I'm opening a store and seeing what comes in. And the fourth is, we strategically locate them near where the rest of our teammates are and drive it. So they're getting up to speed faster. I won't give you the exact date that we target and things like that because it's proprietary, but you should assume they're getting up to speed faster. You should assume that we're smart enough that we're not going to build them if they don't work.
+
+--------------------------------------------------------------------------------
+Gerard S. Cassidy,  RBC Capital Markets, LLC, Research Division - Analyst    [92]
+--------------------------------------------------------------------------------
+
+          Very good, and then second, we're all familiar with the treasury white papers that have come out about where they think regulation as you go through the banks. When you guys review what has come out? What are the top 1, 2 or 3 items that when you sit down with the new Vice Chairman of the Fed, Quarles, what are you going to talk to him about? And as part of that answer, can you share with us your thinking on where is your operational RWA? And is that a big issue for you to talk to the regulators about changing in the future?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [93]
+--------------------------------------------------------------------------------
+
+          Sure. So on the first point on the white papers and all the other stuff, that you've been seeing, it looked -- as an industry, I think it goes without saying that we really have a vested interest in regional regulation that also promotes safety and soundness. So we are very focused on that. I would say that we are for regulatory refinement that promotes economic growth while protecting your financial stability. There's been a lot of discussion out there, a lot of white papers, a lots of great points that are being made in those papers, but we would be in favor sort of generally in the type of refinement that allows us more access and control over our capital liquidity in support of responsible growth that we've been talking about all throughout this call in support of the economy and the communities where we live and work and for lending and for capital return. We've talked about how large our buffer is. We'd also like to see a little bit more efficient regulation driven by harmonization across the regulatory bodies. So we're going to work with whatever parties we can to see some of this get refined in a responsible way. On your second question was on RWA -- oh, on operational risk capital, yes, one of our favorite subjects. Yes, look, we have -- 1/3 of our advanced RWA is operational risk RWA. It's a floor that's been given to us by regulators. That $500 billion is 33% more than our next closest competitor has in operational risk RWA. That $500 billion is more RWA than just about all the European banks have in total RWA. So we'd like to make progress on that. The advanced approach is something we used to manage risk of the company. So it's important to have an accurate amount of RWA as we think about how we're managing the company. Having said all that, I would point out that at least in the United States with the Collins amendment, we have to have an amount of RWA that is the higher of standardized and advanced. And as we continue to make progress on optimizing how we deliver for customers and clients, we are optimizing our advanced RWA, and it's getting closer and closer to standardize. So at some point, standardize will likely become our binding constraint. That doesn't mean that the operational risk capital is not -- operational risk RWA is not important, it is. But standardize, at some point, will become our binding constraint and make that a little bit move.
+
+--------------------------------------------------------------------------------
+Gerard S. Cassidy,  RBC Capital Markets, LLC, Research Division - Analyst    [94]
+--------------------------------------------------------------------------------
+
+          Very good, and then just finally, Paul, you mentioned that, I think, on the call about the higher rep and warranty expense. Can you guys kind of frame for us what's left there? And, obviously, I'm assuming we're towards the tail end. But do you guys know about what's left?
+
+--------------------------------------------------------------------------------
+Paul M. Donofrio,  Bank of America Corporation - CFO    [95]
+--------------------------------------------------------------------------------
+
+          Look, we don't really go through them line by line. I think, you guys know all the big ones. I'd be happy to sort of list a couple of those if you want. What I would say is if you look at our disclosures, we still have $2 billion in reserves for reps and warranties, and we've got another $2 billion at least as of the end of the second quarter in the RPL for reps and warranties. So we're going to work through these things, and we're going to see over time how all of that plays out.
+
+--------------------------------------------------------------------------------
+Operator    [96]
+--------------------------------------------------------------------------------
+
+          We'll take our final question from the line of Saul Martinez from UBS.
+
+--------------------------------------------------------------------------------
+Saul Martinez,  UBS Investment Bank, Research Division - MD & Analyst    [97]
+--------------------------------------------------------------------------------
+
+          I want to ask about a follow-up on efficiency in cost performance beyond 2018. And where you think your efficiency ratio can go to? So you've, obviously -- you've brought down your efficiency ratio to 60%. If you get to the $53 billion, whenever that is, '18 or whenever you get there, around '18, can you drive down your efficiency ratio even further to $57 billion, $58 billion? So you're pretty close to sort of your competitors, despite the fact that your business mix is one that has more wealth management and which has a higher efficiency ratio. So how should we think about your ability, the opportunity set to continue to drive positive operating leverage over a multiyear period and get your efficiency ratio down even further to the mid- to low 50% range? And I know it's a difficult question to answer, and it depends on a lot of things. But with technology and AI and cognitive computing and digitization and mobile banking, can we see efficiency ratios that maybe a few years ago we wouldn't have even thought about for a bank like Bank of America?
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [98]
+--------------------------------------------------------------------------------
+
+          Well, I think a number of things. Number one, you've got the general picture, right, which is we're getting it down to $53 billion. That puts us in a level we have a higher position of wealth management, which has revenue-related compensation that obviously is a 27% pretax margin. You flip that around 83% efficiency ratio, and it's a meaningful amount of dollars, but it's a great return on capital business. And last thing you want to do is not grow it. So that creates a dynamic around the aggregation of all these numbers, and you look at the other ones in there, 50-ish type of numbers across the board. So we're going to drive that. When you think about in the future, the way we talk about is the $53 billion is the '18 target. We try to hold it flattish after that, fighting to apply technology, all things you talked about more digitization and the early callers -- the early questioners talked about and using that to offset the fact that medical care premiums go up 6%, 7%. Something else goes up, rents go up and things like that and pay for all that and merit increases and bigger bonus pools because our teammates are doing a good job. So all that, you're fighting that and if you keep it flattish and then the question of what scenario you're playing into, your rates rise a little bit that, of course, is the bottom line and that's we told you guys before, and that's what we'll tell you in the future there's no additional cost to that. If it comes through wealth management fee generation, it's going to have more expense attached to it. So there's a little bit of a debate -- little bit of what's your scenario you're playing into. But we don't target -- the efficiency ratio is a result of all the hard work that goes in to keep expenses flat down to $53 billion and flattish after that. That will then produce the efficiency ratio based a little bit on the revenue scenario, which will be good on the economics and what's going on out there. But you should rest assured after $20 billion of expenses in the last 5 years taken out of this company that there's no team that is more focused on this than the team that works for me.
+
+--------------------------------------------------------------------------------
+Operator    [99]
+--------------------------------------------------------------------------------
+
+          We would like to turn back over to Mr. Moynihan for closing remarks.
+
+--------------------------------------------------------------------------------
+Brian T. Moynihan,  Bank of America Corporation - Chairman, CEO & President    [100]
+--------------------------------------------------------------------------------
+
+          Thank you, operator. Let me just wrap up quickly. Thank you all for being on the call today, and thank you and look forward to talking to you next quarter. As you think about Bank of America over the quarter 3 of 2017, it's pretty straightforward: responsible growth. It's evidenced across the company in all different fashions, whether it's -- we've got to grow no excuses. You saw that in balances and revenue. We've got to do with the right customer focus, we've got to do with the right risk and we've got to do it and be sustainable. When we say sustainable, that means we've got to do it and keep investing in the future, and you saw us do that also. When we do that right, we can take more capital and deliver back to you through dividend and share buybacks. And as we told you earlier, we'll nearly double that year-over-year. So thank you. We look forward to talking to you next quarter.
+
+--------------------------------------------------------------------------------
+Operator    [101]
+--------------------------------------------------------------------------------
+
+          I'd like to thank everybody for their participation. Please feel free to disconnect at any time.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
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+
+EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
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+
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exam/original-files/Problem_1_Sample/2017-Oct-26-AMZN.OQ-140695336667-Transcript.txt

@@ -0,0 +1,376 @@
+
+
+Thomson Reuters StreetEvents Event Transcript
+E D I T E D   V E R S I O N
+
+Q3 2017 Amazon.com Inc Earnings Call
+10/26/2017 05:30 PM GMT
+
+================================================================================
+Corporate Participants
+================================================================================
+
+ * Brian T. Olsavsky
+   Amazon.com, Inc. - Senior VP & CFO
+ * Dave Fildes
+    - 
+
+================================================================================
+Conference Call Participiants
+================================================================================
+
+ * Heath P. Terry
+   Goldman Sachs Group Inc., Research Division - MD
+ * Eric James Sheridan
+   UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst
+ * Jason Stuart Helfstein
+   Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst
+ * Ross Adam Sandler
+   Barclays PLC, Research Division - MD of the Americas Equity Research and Senior Internet Analyst
+ * Justin Post
+   BofA Merrill Lynch, Research Division - MD
+ * Mark Stephen F. Mahaney
+   RBC Capital Markets, LLC, Research Division - MD and Analyst
+ * Brian Thomas Nowak
+   Morgan Stanley, Research Division - Research Analyst
+ * Ronald Victor Josey
+   JMP Securities LLC, Research Division - MD and Senior Research Analyst
+ * Mark Alan May
+   Citigroup Inc, Research Division - Director and Senior Analyst
+ * Scott W. Devitt
+   Stifel, Nicolaus & Company, Incorporated, Research Division - MD
+ * Douglas Till Anmuth
+   JP Morgan Chase & Co, Research Division - MD
+
+================================================================================
+Presentation
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q3 2017 Financial Results Teleconference. (Operator Instructions) Today's call is being recorded. For opening remarks, I'll be turning the call over to the Director of Investor Relations, Dave Fildes. Please go ahead.
+
+--------------------------------------------------------------------------------
+Dave Fildes,   -     [2]
+--------------------------------------------------------------------------------
+
+          Hello, and welcome to our Q3 2017 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO.
+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. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2016.
+Our comments and responses to your questions reflect management's views as of today, October 26, 2017, 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 and subsequent filings. During this call, we may 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.
+Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC.
+Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements. It's not possible to accurately predict the demand for our goods and services, and therefore, our actual results could differ materially from our guidance.
+With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.
+
+
+================================================================================
+Questions and Answers
+--------------------------------------------------------------------------------
+Operator    [1]
+--------------------------------------------------------------------------------
+
+          (Operator Instructions) Our first question comes from the line of Justin Post with Merrill Lynch.
+
+--------------------------------------------------------------------------------
+Justin Post,  BofA Merrill Lynch, Research Division - MD    [2]
+--------------------------------------------------------------------------------
+
+          Great. I guess I'll just start with, can you give us your thoughts on the Whole Foods integration? How you see that contributing to the bottom line over time? And then on a quick balance sheet note, we obviously saw the strong AWS results, but unearned revenue doesn't seem to be growing at the rate it was in the past. Maybe comment a little bit on the unearned revenue growth on the balance sheet, why it might be slower than the past?
+
+--------------------------------------------------------------------------------
+Dave Fildes,   -     [3]
+--------------------------------------------------------------------------------
+
+          Yes, thanks, Justin. This is Dave. I'd also point you to beyond the balance sheet. There's some disclosure around additions to unearned revenue as part of the cash flow statement. So when you look at that, for the 3 months ended, you'll see that up around 34%, 35% versus the same time last year.
+And historically, what we've seen with unearned revenue is big and leading contributor to that is Prime memberships. The example is a customer signing up, paying $99 upfront and having that amortize over the 12 month period. That continues to be the biggest absolute contributor to what you see there. The other one area that's been growing over the past few years is Amazon Web Services, features like reserved instances where those customers can pay for services upfront, in some cases and receive discounts over a multiyear period. What we're seeing and more recently, I think, is on the Prime piece, we launched month-to-month Prime last year, and if you think about how that works, customers are paying $10.99 per month as they go. So there's less that's deferred. So, that's I think one of a number of factors. There's obviously other mix factors going in there besides the pieces that I just mentioned. But we've seen monthly Prime has been a good driver of getting more members into the program. So that's part of what you're seeing.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [4]
+--------------------------------------------------------------------------------
+
+          And your question about Whole Foods, yes, we're really excited to have them as part of the team now after the acquisition in late August. What you see in the financial results for this quarter is a -- it's shown actually in the new physical stores, revenue component $1.3 billion of revenue, $21 million of operating income. And that's where you'll be seeing Whole Foods revenue showing up. In addition, that is -- that class of revenue, physical store's revenue is going to be where we are going to book any sales that where a customer physically select an item in a store. So it also -- it does include our Amazon Books. If you step back on Whole Foods, again, I think we've had busy months since we've joined forces, offering lower prices on a range of key grocery items in the stores. Launching the private-label -- Whole Foods private-label products on Amazon, we've got technical work to make Prime the Whole Foods customer rewards program, and we'll have that coming out in the future. We've added Amazon Lockers to select Whole Foods stores. So lots of activity, lots of energy and we're real excited to show customers what's possible when we join forces here.
+
+--------------------------------------------------------------------------------
+Operator    [5]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Mark Mahaney with RBC Capital Markets.
+
+--------------------------------------------------------------------------------
+Mark Stephen F. Mahaney,  RBC Capital Markets, LLC, Research Division - MD and Analyst    [6]
+--------------------------------------------------------------------------------
+
+          Guess I'll ask 2 as well. The first one is, that was a bit of a usual upside to your guidance, even stripping out Whole Foods. Is there -- what would you -- what's most surprised you in the quarter? You've been pretty consistent to how you reported versus your guide. So something unusual happened or somewhat unusual happen? What would you attribute that to?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [7]
+--------------------------------------------------------------------------------
+
+          Sure. In Q3, yes, I would say we had a very strong Prime Day. As you know, we talked about that on the last call, but it really carried into the quarter. We had a record day for sign-ups for free trials for Prime and Prime Day globally. Had a very strong Prime Day in particular internationally. So it really got a lot more traction in this, the third year that we've had it. So I would point mostly to those factors. There's also very strong quarter for AWS, revenue growth was the same as Q2 and now we're at an $18 billion run rate. Whereas last quarter, when I had this call, we were at $16 billion. So very pleased with the customer response in the AWS business as well. And usage growth is actually growing a lot higher than revenue growth. So particularly pleased with the new customers that we've added and the additional workloads that we've picked up from existing customers.
+
+--------------------------------------------------------------------------------
+Mark Stephen F. Mahaney,  RBC Capital Markets, LLC, Research Division - MD and Analyst    [8]
+--------------------------------------------------------------------------------
+
+          And then briefly on the international retail, that growth also by itself was intrinsically stronger than you've seen in a while. Any particular markets geographic markets, you would call out there?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [9]
+--------------------------------------------------------------------------------
+
+          Yes, it was pretty strong across the board. We had the impact of Souq, obviously this quarter internationally and the Diwali holiday in India was a few days earlier, which maybe pushed some sales into Q3 versus Q4. But generally, it was the strength of Prime Day internationally and it carried through the quarter. So it's -- but generally, I would point to the increase selection, a lot of the building blocks we've been working on. All the Prime benefits, advancement and free shipping offers or faster shipping offers, the Prime benefits that drive engagement, of course, adding selection, adding Fulfilled by Amazon partners and the selection that they bring. So again, I wouldn't point to anything other than the Prime Day pickup, but stronger than -- it was stronger than probably I anticipated.
+
+--------------------------------------------------------------------------------
+Operator    [10]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Brian Nowak with Morgan Stanley.
+
+--------------------------------------------------------------------------------
+Brian Thomas Nowak,  Morgan Stanley, Research Division - Research Analyst    [11]
+--------------------------------------------------------------------------------
+
+          I have 2. Just on Whole Foods again, I was wondering, could you talk about 1 or 2 of the biggest surprises you've seen so far? And then maybe just a strategic opportunity, as you see, of having a brick-and-mortar presence as you look to continue to grow your overall business? And the second one on the subscriptions revenue, you accelerated to 59%, could you just talk about which countries or which regions are driving that? And maybe talk a little bit about the growth or the cadence of what's happening in the U.S., your oldest market?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [12]
+--------------------------------------------------------------------------------
+
+          Sure. On Whole Foods, I would say it is early. August 28 was the close date and -- what I could tell you is, I've been in meetings with John Mackey and his team and they're very like-minded with us, customer-obsessed, ready to work together to continue their mission then expand on their offerings that we can offer customers. The other things I mentioned, price reductions early on, selling products on -- their products on Amazon.com and also installing Amazon Lockers. I think over time, you'll see more cooperation and working together between AmazonFresh, Prime Now and Whole Foods, as we can explore different ways to serve the customer. So that's kind of the earlier report on Whole Foods. So far so good, and we're thrilled to finally be working together after the summer of closing the deal. On subscription revenue, let me just remember your question there. We had essentially 59% growth, you said, 600 basis points higher than Q2. In this line item is certainly the fees associated with Amazon Prime and also it's where a lot of our subscription services from digital music, digital video, audio books, eBooks. So there's some moving parts in there. The growth in Prime has been fairly consistent over the last recent quarters in Prime memberships. And as I said, we had a great -- the largest new Prime -- new sign-ups on Prime Day for the Prime program. The monthly program is gaining traction. It's an attractive option for a lot of people. And again, on this -- on the other subscription services, music especially, it works just so well with our Echo device that we're seeing a lot of growth in that area as we increase the number of Echo devices and customers using the Echo devices.
+
+--------------------------------------------------------------------------------
+Operator    [13]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Eric Sheridan with UBS.
+
+--------------------------------------------------------------------------------
+Eric James Sheridan,  UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst    [14]
+--------------------------------------------------------------------------------
+
+          In the comment in the release on seasonal workers, that looks roughly flat year-on-year. I wanted to know if you could understand a little bit more about the trajectory around the workers needed to fulfill seasonal holiday demand and what that might also mean for automation or efficiency benefits you're getting inside your fulfillment centers.
+
+--------------------------------------------------------------------------------
+Dave Fildes,   -     [15]
+--------------------------------------------------------------------------------
+
+          Yes, Eric. This is Dave. I think we put out a release saying earlier this quarter talking about 120,000 operations folks to bring into our fulfillment centers this year. So we're continuing to hire and hire across a number of locations. We talked earlier this year about expecting to see a greater than -- roughly greater than 30% square footage growth in an operations, so we're certainly hiring to support that. More of these facilities do have Amazon Robotics and certainly that helps with the efficiencies there, but it requires tremendous effort from a number of our folks as well. And so we'll continue to hire there.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [16]
+--------------------------------------------------------------------------------
+
+          While we're on this subject of headcount. Headcount grew 77% year-over-year in the quarter. That includes the impact of the Whole Foods and Souq acquisitions. Without those -- without that headcount, the base Amazon grew 47%, which is still up from 42% in Q2. So a lot of the additional pickup in Q3 was tied to our ramp for the holidays. We continue to hire a lot of software engineers. We continue to hire a lot of sales reps, and it's tied directly to our major investment areas of AWS, Prime Video and devices.
+
+--------------------------------------------------------------------------------
+Operator    [17]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Douglas Anmuth with JPMorgan.
+
+--------------------------------------------------------------------------------
+Douglas Till Anmuth,  JP Morgan Chase & Co, Research Division - MD    [18]
+--------------------------------------------------------------------------------
+
+          Brian, I was hoping you could help us understand how at this point you're prioritizing expansion into new product categories. In particular, there's a lot of talk now about potentially using Whole Foods stores for physical pharmacy presence and also that you've perhaps got an approvals across multiple states in that category. Can you just help us understand the approach in general to new categories and pharmacy, in particular?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [19]
+--------------------------------------------------------------------------------
+
+          Yes, I can't confirm or deny any of the rumors related to pharmacy or anything else. I will say we do see a lot of opportunity with Whole Foods. As I said, there will be a lot of work together between Prime Now, AmazonFresh, Whole Foods, Whole Foods products on the Amazon site, Lockers at the Amazon -- excuse me, Amazon Lockers at the Whole Foods stores. So there'll be a lot of integration, a lot of touch points and a lot of working together as we go forward. And we think we'll also be developing new store formats and everything else just as we've talked about in the past with before Whole Foods, amazon Bookstores, Amazon Go and the opportunity that technology presents. We have campus -- on-campus bookstores. So we're experimenting with a lot of formats. I think that Whole Foods really gives us a vast head start on that and a great base and a great team to work with who has a lot of history, and a lot of -- they probably have 10 to 20 years of learnings that we don't have and wouldn't have. So we're really excited about that. And I think working together will bring our different strengths to the table and really be able to build on behalf of customers.
+
+--------------------------------------------------------------------------------
+Operator    [20]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Mark May with Citi.
+
+--------------------------------------------------------------------------------
+Mark Alan May,  Citigroup Inc, Research Division - Director and Senior Analyst    [21]
+--------------------------------------------------------------------------------
+
+          The other category which includes advertising accelerated 58% in the quarter. I think the common view there is that's a fairly high-margin business, certainly higher than corporate average. Is there any reason why that isn't the right assumption to make? Essentially what impact is the growth in the ad business having on the company's overall profitability? And in terms of the increased losses in the international retail segment of the business, can you provide some color around how much of that's being driven by Amazon launching into new markets, which I know you continue to do, versus investing more heavily in existing markets?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [22]
+--------------------------------------------------------------------------------
+
+          Sure. Let me start with the revenue. So you're right. Other revenue grew 58% in the quarter, and that includes advertising services and other things such as our cobranded credit card agreements. Advertising revenue continues to grow very quickly, and its year-over-year growth rate is actually faster than the other revenue line item that you see there. But I would say generally, we're very pleased with the advertising business. Our goal here is to be helpful to consumers and help them make better shopping and selection choices. We'll also provide in giving them targeted recommendations. So making it helpful for customers rather than intrusive. And then we believe that by creating that (inaudible) and engaging advertising experience with the customers, it will also maximize success for our advertisers. So it's an important part of the flywheel and the -- so it's -- the traffic and the customers, especially the Prime customers that come to the site, are really the ones that we can use to help them select items and use advertising to help make their decisions more informed when they're picking products.
+On the international, yes, I can't split it, the effects. But I'll tell you again, it is international expansion in -- primarily in India where we're continuing to add benefits, and we launched Prime there a year ago, if you remember, and we've had more Prime members joined in India than in any other country in the first 12 months. We have free shipping on 10 million items there, and we're continuing to add benefits: Prime Video, Amazon Family, we've had a first Prime Day there this year, Prime Music. Amazon business is also expanding in India. So a lot of positive momentum and investment going on in India. Very pleased with that. We also recently announced Echo and Alexa are available in India. So that -- that should be well received by the Indian consumer base. But excluding India and Souq, the rest is the Prime benefits and the continued growth in the other countries that we've been in for a while, continue to roll out Prime Now and AmazonFresh. In Video, we launched -if you remember in Q4 of last year, we launched Prime Video in 200 -- over 200 countries globally, continue to build up not only the offerings but also the engagement that we see from those Prime customers. So becoming more engaged, and we're also doing the basic blocking, tackling of adding selection, especially FBA selection, increasing free shipping offers and also speed of shipping offers. So there's a lot of -- a lot of different influences there. You saw the growth rate. It's, we believe, it's resonating with customers. So we will continue to invest and think that we have a good path forward.
+
+--------------------------------------------------------------------------------
+Operator    [23]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Ross Sandler with Barclays.
+
+--------------------------------------------------------------------------------
+Ross Adam Sandler,  Barclays PLC, Research Division - MD of the Americas Equity Research and Senior Internet Analyst    [24]
+--------------------------------------------------------------------------------
+
+          Two questions. There's been some news flow recently about Brazil expansion. Can you just talk about how Brazil compares to maybe some of the other international markets that you're investing in? What level of investment should we expect in Brazil maybe relative to like in Australia or in India? And then the follow-up on the Whole Foods. So do you feel like the store footprint at 460-odd stores is adequate? Or any color on plans to expand either the Whole Foods store footprint or the Amazon bookstores or those other ones you mentioned?
+
+--------------------------------------------------------------------------------
+Dave Fildes,   -     [25]
+--------------------------------------------------------------------------------
+
+          Yes, Ross. Thanks for the question. This is Dave. On Brazil, just briefly, yes, we did recently expand and add an electronics category there in Brazil. It's a third-party marketplace offering. You may recall we've been in Brazil for a number of years now, initially launched with really a Kindle and eBooks offering without the sort of physical categories and more recently added physical books again, a third-party marketplace offering. So I think we're excited about the electronics that are getting out there. There's a wide variety of products included in that category: Smartphones, tablets, cameras, TVs, what have you. So I think, really excited to get that technology out there for Brazilians. And I think beyond that, really just focus on those categories and growing selection there, but I can't speculate on what we might do in the future there.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [26]
+--------------------------------------------------------------------------------
+
+          And on Whole Foods, yes, I believe the total is 465 stores or thereabouts. And we have 12 bookstores now. We are adding a few more in the near future in California, Washington D.C. and Austin. So yes, you will see more expansion from us. We're not ready to announce any, what that will look like, and we're working with the Whole Foods team on what maybe what they will -- how many more stores we might have in that area. But still early. So, those plans will develop over time.
+
+--------------------------------------------------------------------------------
+Operator    [27]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Heath Terry with Goldman Sachs.
+
+--------------------------------------------------------------------------------
+Heath P. Terry,  Goldman Sachs Group Inc., Research Division - MD    [28]
+--------------------------------------------------------------------------------
+
+          I understand you can't comment on rumors one way or the other, but curious as you think about categories like health care and obviously you guys are already in health care to some degree through Amazon Business, can you give us a bit of a status update on what you do have out there now? And particularly how the company and management thinks about entering more regulated businesses over time? How you would approach that versus a standard category that you might go into? Or maybe again, I know you can't comment on rumors, how you have approached to that in the past or in other market? And then to the extent that we are thinking about AWS growth in the fourth quarter, you guys are lapping the price cuts from last year and obviously have about an 800 basis point easier comp Q3 to Q4, taking those 2 things into consideration, how should we think about AWS growth through the end of the year?
+
+--------------------------------------------------------------------------------
+Dave Fildes,   -     [29]
+--------------------------------------------------------------------------------
+
+          Yes, Heath, this is Dave. I'll take that first question in relation to health care. I think where you're seeing us do some work on that, I think is in the areas of Amazon Business, and that's really just from the standpoint of there are many different types of businesses that we can serve with that offering, and we're in our third year now. And so there's a lot of different sectors, whether they're hospitals, educational institutions, labs, government agencies. I mean there's a lot of different shapes and sizes across industries that we can serve with that. And so I think what you're seeing us do is really focus on services that meet those businesses, multiuser accounts, improving approval workflow tools, and just more recently, we introduced Amazon Business for Business Prime shipping, which we think will be a great way for our businesses use multiuser -- Business customers that have multiuser accounts, and that's in the U.S. and in Germany. So I think it's part of that offering, and we really have to see how that evolves. And the other side, too, is certainly health care is one of many sectors as part of Amazon Web Services that are important customers that we're focusing on and building tools for. So probably nothing specific to call out on that one, but that's a lot of what you're seeing from us today.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [30]
+--------------------------------------------------------------------------------
+
+          Yes, on AWS, we don't provide segment level estimates, but we did consider in our guidance the impact of the price cuts last year. You're right, we had a number of price cuts on (inaudible) time to -- about around December 1 of last year that certainly had an impact on Q4 of last year. But again, price cuts and not only price cuts, but new products that have lower average costs and can cannibalize more expensive products is pretty much a part of our business all the time in AWS. So we're looking forward to a strong Q4 and re:Invent is in December, so that's -- the end of November, early December, so that is also an exciting time of year for the AWS business.
+
+--------------------------------------------------------------------------------
+Operator    [31]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Scott Devitt with Stifel.
+
+--------------------------------------------------------------------------------
+Scott W. Devitt,  Stifel, Nicolaus & Company, Incorporated, Research Division - MD    [32]
+--------------------------------------------------------------------------------
+
+          I had 2, please. The first, Prime Now, Fresh Prime Pantry and Whole Foods, they're all distinct offerings, but it does seem like there's natural overlap with the potential to be further connected. And I was just wondering if you could just speak to how we should think about those 4 as distinct product offerings in the future versus being more integrated and possibly even, in some cases, eliminated to remove overlap from a customer experience standpoint? And then secondly, given the recent management changes in video, Brian, I was just wondering if you could speak to any strategic shifts in Video or changes in the pace of content portfolio build in coming years?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [33]
+--------------------------------------------------------------------------------
+
+          Sure, let me start with Video, and I just want to be clear, we are going to continue to invest in video and increase that investment in 2018. And why are we going to do that? It's because the Video business is having great results with our most important customer base, which is our Prime customers. They continue to -- it continues to drive better conversion of free trials, higher membership renewal rates for existing subscribers and higher overall engagement. We're seeing engagement go up year after year in video and also music and a lot of the other Prime benefits. We also know Prime members who watch video also spend more on Amazon. And we have a lot of data. We're -- that's the advantage we have is that we see the viewing patterns and we also see the sales patterns, so we can tie the 2 together and understand which video resonates with Prime members, which video doesn't, and make midcourse corrections. So we always do that, the -- we're always changing the emphasis and looking for those more impactful shows, more shows that resonate better with our customer base and things they want to see. And -- so that will always be an important part of our Prime offer, and we'll continue to use the data that we have to make better and better decisions about where to invest our dollars in Prime Video. So we're very -- we remain very bullish on the Video business, and we're looking forward to a lot of interesting new projects back end of this year and also lined up into next year. On the -- sorry, the second comment was, the overlap. Yes, so Whole Foods, I think I mentioned this earlier, but we definitely see commonality and overlap with the Whole Foods business as well as Amazon in total, but specifically, Prime Now, and also, AmazonFresh. And we're going to work to see how we expand those offerings, and in some cases, combine them. We're not sure how it will play out, but we're going to cooperate across those different customer touch points and trying to make them better for customers. We know customers are going to buy just like in the physical world, sometimes you go to a convenience store, sometimes you go to a supermarket, sometimes you go to a superstore. Sometimes you need things within an hour, sometimes you can wait days for shipment. So there's no one paradigm for all customer engagement, and we're looking for the ones that resonate best with customers, and we're going to continue to work on those.
+
+--------------------------------------------------------------------------------
+Operator    [34]
+--------------------------------------------------------------------------------
+
+          Our next question comes from the line of Jason Helfstein with Oppenheimer.
+
+--------------------------------------------------------------------------------
+Jason Stuart Helfstein,  Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst    [35]
+--------------------------------------------------------------------------------
+
+          I'll actually ask 2 if I can. Just any way you can comment on the increase in Whole Foods traffic after the close? And then second, talk about your desire to have an ad-supported business on Fire TV or through Prime Video?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [36]
+--------------------------------------------------------------------------------
+
+          I think I'll start on traffic. So we're not disclosing traffic figures. Whole Foods will be issuing a final 10-K at the end of the -- early next month, so you'll see a better perspective on the entire quarter. The quarter -- the 4-week period that you see running through the Amazon P&L this quarter is pretty hard to draw conclusions on other than revenue at this point. But Dave, do you have more on the...
+
+--------------------------------------------------------------------------------
+Dave Fildes,   -     [37]
+--------------------------------------------------------------------------------
+
+          Yes, Jason, this is Dave. On the ad-supported question, I think what you've seen to date is really particularly as you're looking as a customer as a Prime Video member and watching content, we view that as you paid into that service and able to watch those shows ad-free. There may be instances where you're viewing a first episode and there's an ad leading into that if it's the first free episode, but generally like to have that as customers have paid into that program and they'll be able to enjoy that without interruption.
+
+--------------------------------------------------------------------------------
+Operator    [38]
+--------------------------------------------------------------------------------
+
+          Our final question comes from the line of Ron Josey with JMP Securities.
+
+--------------------------------------------------------------------------------
+Ronald Victor Josey,  JMP Securities LLC, Research Division - MD and Senior Research Analyst    [39]
+--------------------------------------------------------------------------------
+
+          Just wanted to ask about delivery, in just over the last several months, we've seen a lot of announcements in products around delivery options between Lockers, testing the Kohl's partnership, Whole Foods, obviously, Amazon Key came out recently. I just wanted to better understand this investment. Is this a result of -- or the thesis that more options could drive, obviously, more sales on the flip side? Do you think you're losing some sales by not having those options?
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [40]
+--------------------------------------------------------------------------------
+
+          Probably a little of both. We think that, especially as we get into more and more Amazon Logistics deliveries, we're going to experiment with different ways to deliver things that make it easier on consumers, things that cut down on potential theft on doorsteps, but really it's mostly about increasing convenience for them.
+
+--------------------------------------------------------------------------------
+Dave Fildes,   -     [41]
+--------------------------------------------------------------------------------
+
+          Yes, I think that's right, in terms of overall investments there.
+
+--------------------------------------------------------------------------------
+Brian T. Olsavsky,  Amazon.com, Inc. - Senior VP & CFO    [42]
+--------------------------------------------------------------------------------
+
+          And the other investments, obviously, are maybe the bigger-ish things are like planes and transportation capacity in general. And there our philosophy is, again, we're going to watch out for our customers, we're going to build capacity that gives them great service 12 months a year but particularly at holidays, by investing in those transportation options, we do so at same costs or cost parity, I would say, at the very minimum, but it also allows us to do interesting things like extend cutoff times for customers, enable Sunday delivery, enable better weekend delivery. So we're seeing a lot of benefits, just the ability to stretch the order cut off from what once was 3 p.m. in the afternoon to midnight, has huge benefits both for the customer and also for Amazon. It results in incremental sales, it also builds that trust that when you need something, Amazon's going to be there for you. And I need to remind you that the Thursday Night Football game will start in 2 hours and 20 minutes so.
+
+--------------------------------------------------------------------------------
+Dave Fildes,   -     [43]
+--------------------------------------------------------------------------------
+
+          On that, thanks for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon and look forward to talking with you again next quarter.
+
+
+
+
+
+
+
+--------------------------------------------------------------------------------
+Definitions
+--------------------------------------------------------------------------------
+PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
+Transcript has been published in near real-time by an experienced 
+professional transcriber.  While the Preliminary Transcript is highly 
+accurate, it has not been edited to ensure the entire transcription 
+represents a verbatim report of the call.
+
+EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
+editors have listened to the event a second time to confirm that the 
+content of the call has been transcribed accurately and in full.
+
+--------------------------------------------------------------------------------
+Disclaimer
+--------------------------------------------------------------------------------
+Thomson Reuters reserves the right to make changes to documents, content, or other 
+information on this web site without obligation to notify any person of 
+such changes.
+
+In the conference calls upon which Event Transcripts are based, companies 
+may make projections or other forward-looking statements regarding a variety 
+of items. Such forward-looking statements are based upon current 
+expectations and involve risks and uncertainties. Actual results may differ 
+materially from those stated in any forward-looking statement based on a 
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+contemplated in the forward-looking statements will be realized.
+
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+--------------------------------------------------------------------------------
+Copyright 2017 Thomson Reuters. All Rights Reserved.
+--------------------------------------------------------------------------------

exam/original-files/Problem_1_template.py

@@ -0,0 +1,371 @@
+# -*- coding: utf-8 -*-
+"""
+Created on Sat Jul 30 15:20:32 2022
+
+@author: Alexander Hillert, Goethe University
+"""
+
+# import packages
+import re
+
+# define working directory
+# adjust it to your computer
+directory = "YOUR DIRECTORY"
+
+
+# =============================================================================
+# Part A: Creating an Overview File on the Call Participants
+# =============================================================================
+
+# Create output file
+output_csv_file=open(directory+'Problem_1_Overview_Calls.csv','w',encoding="utf-8")
+# Write variable names to the first line of the output file
+# 1) Call-ID
+# 2) Filename
+# 3) Fiscal Quarter
+# 4) Fiscal Year
+# 5) Date of the call in the format YYYYMMDD
+# 6) Time of the call, e.g., 05:00 PM GMT
+# 7) number of non-corporate call participants
+# 8) the names of all corporate participants and their positions -> each item 
+#    should be written in a seperate column
+output_csv_file.write('ID;Filename;Fiscal_Quarter;Fiscal_Year;Date;Time;\
+#Analysts')
+# There can be up to 4 corporate particiapnts
+for i in range(1,5):
+    output_csv_file.write(';Name_'+str(i)+';Position_'+str(i))
+output_csv_file.write('\n')
+
+# Open the overfiew file "Overview_File_Problem_1.csv" to call the earnings calls
+overview_file=open(directory+'Overview_File_Problem_1.csv','r',encoding="utf-8")
+overview_text=overview_file.read()
+list_earnings_calls=overview_text.split("\n")
+# The last line is empty -> drop it
+while list_earnings_calls.count("")>0:
+    list_earnings_calls.remove("")
+
+
+
+# iterate all earnings conference calls
+for i in range(1, len(list_earnings_calls)):
+    
+    # reset the variables
+    fiscal_quarter=""
+    fiscal_year=""
+    date=""
+    time=""
+    
+    # we split the entire transcripts into three parts
+    # its header
+    header_text=""
+    # the list of non-corporate participants
+    participants_text=""
+    # the list of corporate participants
+    corporates_text=""
+    
+    # the number of analysts joining the call
+    number_analysts=0
+    
+    # variables for manager name and position
+    manager_name=""
+    manager_position=""
+    manager_position_edited=""
+    
+    # a list of manager names for part b)
+    manager_name_list=[]
+    
+    # get the filename of each earnings call
+    call_information=list_earnings_calls[i].split(";")
+    call_id=call_information[0]
+    filename=call_information[1]
+    
+    # open the call transcript
+    call_file=open(directory+'Problem_1_Sample/'+filename,'r',encoding="utf-8")
+    call_text=call_file.read()
+    
+    # Get information on the call
+    # FOr example:
+    # Q1 2013 Bank of America Corporation Earnings Conference Call
+    # 04/17/2013 08:30 AM GMT
+    
+    # the header ends where the list of corporate particpants starts
+    match_corporates=re.search(TO BE COMPLETED,call_text)
+    if match_corporates:
+        header_text=call_text[TO BE COMPLETED]
+
+    
+    # get the fiscal quarter and year from the header text
+    match_fiscal_quarter=re.search(TO BE COMPLETED,header_text)
+    if match_fiscal_quarter:
+        fiscal_quarter=match_fiscal_quarter.group(0)
+    match_fiscal_year=re.search(TO BE COMPLETED,header_text)
+    if match_fiscal_year:
+        fiscal_year=match_fiscal_year.group(0)
+
+    # get date and time of the call
+    # date
+    match_date=re.search(TO BE COMPLETED,header_text)
+    if match_date:
+        date=match_date.group(0)
+        # the date in the output file should be formatted as YYYYMMDD
+        # so, you need to rearrange the date text
+        year=date[TO BE COMPLETED]
+        month=date[TO BE COMPLETED]
+        day=date[TO BE COMPLETED]
+        date_formatted=year+month+day
+    # time
+    match_time=re.search(TO BE COMPLETED,header_text)
+    if match_time:
+        time=match_time.group(0)
+    
+    
+    # count the number of analysts
+    # the relevant text part starts with, for example,
+    # ================================================================================
+    # Conference Call Participiants
+    # ================================================================================
+    # 
+    # * Chris Mutascio
+    #   Keefe, Bruyette & Woods - Analyst
+    # * Thomas Laturneau
+    #   FBR - Analyst
+    
+    # and ends with the beginning of the presentation
+    # ================================================================================
+    # Presentation
+    # --------------------------------------------------------------------------------
+    
+    match_participants=re.search(TO BE COMPLETED,call_text)
+    match_presentation=re.search(TO BE COMPLETED,call_text)
+    # if you find both boundaries
+    if match_participants and match_presentation:
+        # get the text in between
+        participants_text=call_text[TO BE COMPLETED]
+    
+    # split the text of the participants that you have just identified
+    # in a way that each element refers to one analyst.
+    analyst_list=participants_text.split(TO BE COMPLETED)
+    # depending on how you split, you might need re.split()
+    
+    # check whether you get empty elements and/or elements that do not refer
+    # to analysts -> remove them
+    while TO BE COMPLETED>0:
+        TO BE COMPLETED
+        
+    # after these steps and checks, the number of analysts is the length of your analyst list
+    number_analysts=TO BE COMPLETED
+    
+    
+    # get the names of the corporate participants and their position
+    # remember that you already have the beginning of corporate participants
+    # see above at around line 90
+    # the corporate participants come before the list of non-corporate participants
+    corporates_text=call_text[TO BE COMPLETED]
+    # like before, split this text such that one element refers to one corporate participant
+    corporates_list=corporates_text.split(TO BE COMPLETED)
+    # check whether you get empty elements and/or elements that do not refer
+    # to corporate participants -> remove them
+    while TO BE COMPLETED>0:
+        TO BE COMPLETED
+
+        
+    # write the call information to the output file
+    output_csv_file.write(str(call_id)+";"+filename+";"+fiscal_quarter+";"+fiscal_year+";"\
+                          +date_formatted+";"+time+";"+str(number_analysts))    
+    
+    # now, we need to add the information on the corporate participants
+    # go over all corporate participants
+    for j in range(len(corporates_list)):
+        # depending on how you split the text of corporate participants,
+        # one element of your list could contain the name of the mangager in the first
+        # line and their position in the second line.
+        # ADJUST THE FOLLOWING COMMANDS IF YOU USED A DIFFERENT SPLIT.
+        
+        # split each element of the list of corporate participants further 
+        # into name and position
+        manager_entry=corporates_list[j]
+        manager_entry_parts=manager_entry.split(TO BE COMPLETED)
+        manager_name=manager_entry_parts[TO BE COMPLETED]
+        
+        # for part b) of the problem it is helpful to have a list of all
+        # manager names. With this list, we can identify whether a statement
+        # comes from a managers (-> answer) or from an analyst (-> question)
+        manager_name_list.append(manager_name)
+        
+        
+        manager_position=manager_entry_parts[TO BE COMPLETED]
+        # Like before, the template assumes a very specific type of split here
+        # So depending on your approach, you might need to change the commands below.
+        # the position is just the text part after " - "
+        # For example
+        # Bank of America Corporation - CEO
+        # the position is "CEO"
+        manager_position_edited=re.TO BE COMPLETED
+
+        # write the manager names and positions to the output file
+        output_csv_file.write(";"+manager_name+";"+manager_position_edited)
+        
+    output_csv_file.write("\n")   
+    
+    
+    print("For earnings call "+str(i)+" part a) has been completed.")
+    
+    # =========================================================================
+    # Part B: Extracting the Call Segments
+    # =========================================================================
+    
+    # set variables
+    presentation_text=""
+    qanda_text=""
+    qanda_list=[]
+    question_text=""
+    answer_text=""
+
+    
+    # identify the presentation
+    # the begin of the presentation has already been identified above
+    # see at around line 140
+    #
+    # the presentation ends where the Q and A part begins
+    # ================================================================================
+    # Questions and Answers
+    # --------------------------------------------------------------------------------
+    match_qanda=re.search(TO BE COMPLETED,call_text)
+    presentation_text=call_text[TO BE COMPLETED]
+    
+    # drop operator statements
+    # search for the beginning of an operator statement
+    match_operator=re.search(TO BE COMPLETED,presentation_text)
+    while match_operator:
+        match_operator_start=match_operator.start()
+        # search for the end of the operator statement
+        # Hint: search only after the beginning of the operator statement
+        # Hint 2: remember to keep track of your coordinates (.start() and .end())
+        match_operator_end=re.search(TO BE COMPLETED,TO BE COMPLETED)
+        
+        # keep the text before the operator statement and the text after
+        # the approach is similar to removing tables (see Problem 4 and 5 from class)
+        presentation_text=presentation_text[TO BE COMPLETED]
+        
+        # check whether there is another match
+        match_operator=re.search(TO BE COMPLETED,presentation_text)
+
+    # sometimes there are technical remarks like "(inaudible)", "(corrected by company after the call)",
+    # or "(technical difficulty)" -> drop those
+    TO BE COMPLETED
+    # there are several ways to approach this editing step (e.g., re.sub())
+        
+    
+    # drop information on the speakers, e.g.,
+    # -------------------------------------------------------------------------
+    # Deborah Crawford,  Facebook, Inc. - Director of IR    [2]
+    # -------------------------------------------------------------------------
+    match_speaker=re.search(TO BE COMPLETED,presentation_text)
+    while match_speaker:
+        # the task is similar to the Operator statement but be careful
+        # to only remove the speaker name but NOT the text of the speaker.
+        presentation_text=presentation_text TO BE COMPLETED
+        # check whether there is another speaker name
+        match_speaker=re.search(TO BE COMPLETED,presentation_text)
+        
+    
+    # write the text of the presentation to an output file
+    # make sure that the folder "Problem_1_Conference_Call_Segments" exists.
+    output_file_presentation=open(directory+'Problem_1_Conference_Call_Segments/call_'+str(call_id)+'_presentation.txt',"w",encoding='utf-8')
+    output_file_presentation.write(presentation_text)
+    
+    # Close file
+    output_file_presentation.close()
+
+
+    # -------------------------------------------------------------------------
+    # identify questions and answers
+    # -------------------------------------------------------------------------
+    # you already have the start of the Q&A section (see at around lines 235)
+    qanda_text=call_text[match_qanda.end():]
+    
+    # the earnings call transcript ends with definitions
+    # remove these/keep the text before the definitions
+    match_definitions=re.search("\n-{1,}\nDefinitions\n-{1,}\n",qanda_text)
+    if match_definitions:
+        # keep the text before
+        qanda_text=qanda_text[TO BE COMPLETED]
+        
+    # split the Q and A part by speaker
+    qanda_list=re.split(TO BE COMPLETED,qanda_text)
+    
+    # variables to count the number of answers
+    answer_counter=1
+    # and questions
+    question_counter=1
+    
+    # go over all speakers/statements that you obtained from the previous split
+    # you now have to decide whether the speaker is an analyst (-> question)
+    # or a corporate participant (-> answer)
+    for k in range(TO BE COMPLETED):
+        
+        # identify the speaker name to check whether it is a corporate participant.
+        # For example
+        # --------------------------------------------------------------------------------
+        # Bruce Thompson,  Bank of America Corporation - CFO    [3]
+        # --------------------------------------------------------------------------------
+        #
+        speaker_text_part=qanda_list[k]
+        # split the text part of the kth speaker
+        # into his*her name and the rest
+        # NOTE: re.search() and re.sub() are also nice ways to accomplish the goal
+        speaker_text_sub_parts=re.split(TO BE COMPLETED,qanda_list[k])
+        # get the name of the speaker from the previous split
+        # in the example above, we need to get "Bruce Thompson"
+        speaker_name=speaker_text_sub_parts[TO BE COMPLETED]
+        # depending on your split, you might need some further editing to
+        # get onyl the name ("Bruce Thompson") without any additional information.
+        
+        
+        # the second part of speaker_text_sub_parts is (probably) the statement
+        # of the speaker (again, it depends on your split)
+        text=speaker_text_sub_parts[TO BE COMPLETED]
+        
+        # sometimes there are technical remarks like "(inaudible)", "(corrected by company after the call)",
+        # or "(technical difficulty)" -> drop those
+        text=TO BE COMPLETED
+        # there are several ways to approach this editing step (e.g., re.sub())
+        
+        # check whether the speaker name is in the manager list from part a) (see at around line 195)
+        if speaker_name in manager_name_list:
+            # the name of the speaker is in the list of corporate participants
+            # -> it is a management answer
+            
+            answer_text=answer_text+"Answer_"+str(answer_counter)+":\n"+text+"\n"
+            answer_counter=answer_counter+1
+            
+        else:
+            # it is either an analyst question or an operator statement
+            # be careful to check the condition below. depending on how your
+            # speaker names look like, you may need .count() and/or re.search() instead of .startswith()
+            if speaker_name.startswith("Operator") or TO BE COMPLETED:
+                pass
+
+            else:
+                # it is an analyst question
+                question_text=question_text+"Question_"+str(question_counter)+":\n"+text+"\n"
+                question_counter=question_counter+1
+                         
+    # write the texts to output files
+    # make sure that the subfolder exists.
+    output_file_answers=open(directory+'Problem_1_Conference_Call_Segments/call_'+str(call_id)+'_answers.txt',"w",encoding='utf-8')
+    output_file_questions=open(directory+'Problem_1_Conference_Call_Segments/call_'+str(call_id)+'_questions.txt',"w",encoding='utf-8')
+    output_file_answers.write(answer_text)
+    output_file_questions.write(question_text)
+    
+    # Close files
+    output_file_answers.close()
+    output_file_questions.close()
+    call_file.close() 
+
+
+# Close files
+overview_file.close()
+output_csv_file.close()
+
+print("Problem 1 completed.")

exam/original-files/Problem_2_3_Sample_QandA/10_answers.txt

@@ -0,0 +1,148 @@
+Answer_1:
+
+          There wasn't anything particularly noteworthy in terms of one-time events. It was really quite broad particularly in derivatives.
+In cash the performance was I would say solid year over year because we saw strength in the Americas this year but we had strength in Europe last year. And I think the first-quarter 2014 wasn't particularly strong, so I think we were flatter a little bit with a relative comparison but it was a really strong absolute and we think probably strong relative performance.
+
+Answer_2:
+
+          Yes, this is where it would be. I wouldn't say it's a driver, but we are as you said and the whole industry is looking to work with clients to optimize the use of the balance sheet and improve returns.
+So we've seen some of that. But I wouldn't say it was a key driver.
+
+Answer_3:
+
+          It is more of the same. Obviously G-SIB took on a slightly heightened focus when we had some doubling happen in the proposal in December.
+So we've always been measuring and monitoring and tracking G-SIB at a very granular level. But we are obviously on a path now to aggressively manage it which means that we are going to be just a little bit more focused on that constraint, not uniquely also with advanced capital, standardized limits, balance sheet caps, the like. So it's more of the same, honestly, than just a heightened focus on this given the US proposal and given the impact of at least at this point FX translations.
+
+
+          And different than RWA it affects certain products more than others. And we pointed out nonoperating deposits, stuff like that. Certain businesses more than others we've pointed out clearing and certain clients more than others we've pointed out financial institutions.
+So it's just kind of a multi-variant theme. It's not mystical and we're actually already starting to reprice some of these businesses to get an adequate return on G-SIB capital. And we're seeing other people do that too.
+
+
+          That's right. We may be in a different position with G-SIB but others are leverage constrained. And just generally speaking we are starting to see a lot more discipline around balance sheet and pricing is following somewhat generally.
+
+Answer_4:
+
+          So again assuming for a second that rates don't rise until the backend if not the end of the year and we can come back to that if you like we would expect our NII dollars to be stable to slightly up because we're still seeing growth in our interest-earning assets. Obviously this quarter we were down some on day count, it was a big chunk of the quarter-on-quarter reduction.
+So we're really going to see the biggest lift in NII when we do see interest rates rise and we'll see when that is. And similarly on our NIM we would expect NIM to be stable particularly given as we talked about what we've seen dilute our NIM more particularly over the course of the last year or two has been this significant increase in cash and we're going to see some of that at least stabilize and turn as we start to reduce nonoperating deposits. So we should see our NIM relatively stable and again start to rise when rates rise.
+
+Answer_5:
+
+          Okay, so taking your first point, Erika, obviously I don't know the next time we're going to in all likelihood get CCAR instructions including the rules and the minimums is likely to be some time towards the end of this year for the next CCAR cycle as we get prepared to deliver that. So all I can say is what you know which is clearly the door was left open for the minimum to be increased or potentially to include some element of the surcharge.
+We're hopeful that that won't be the case because we would say the surcharge should be carried in baseline times to be used in stress and to have all firms end up well-capitalized afterwards. But I have no more insight than that for you.
+With respect to the dialogue with the Fed look, it's definitely much, much further progressed than it was two years and three years ago and every year it gets better in terms of the bilateral conversations and it's constructive. I don't think, however, you could today or will likely ever be able to characterize it as transparent and clear, maybe potentially by design in terms of understanding or being able to reconcile exactly what their models do and what their results are driven by. So I won't be able to clarify for you what changed in their results or what differs between ours and theirs but the dialogue itself is definitely more constructive and more bilateral and more continuous.
+
+Answer_6:
+
+          Look, I think that the best way to answer that is that we are still firmly with our guidance of adjusted expenses being $57 billion plus or minus by the end of the year or for the year, sorry. Obviously we will always try and outperform that but I wouldn't characterize one quarter as a change in that guidance at this point.
+
+Answer_7:
+
+          So look the most important thing obviously in all of that is that we were delighted to be able to partner with the large company on their strategic transformation and that's the most important thing about that transaction for us. I'm not going to comment specifically on whether or what JPMorgan would be interested in in terms of asset purchases. We're much more focused on partnering strategically with the company.
+
+Answer_8:
+
+          No, we haven't given any specific guidance, Chris.
+
+Answer_9:
+
+          In the context of the CCAR we just had?
+
+
+          We expect our -- it's a little complicated this year and we sort of articulated it at Investor Day because we're going to move at some point whether it's the third of the fourth quarter to have standardized RWA be our binding constraint. So 11% plus or minus is our target on CET1 and that's all we've said.
+
+Answer_10:
+
+          There's a couple of different things. One was a little specific.
+We had a portfolio of loans that we held for sale and have subsequently exited from the balance sheet which drives some of it. But in addition just generally a competitive environment and lower demand particularly in Asia.
+
+Answer_11:
+
+          Not specifically, no. I will tell you that while we are obviously delighted with the performance it was a relatively strong market and there were some larger transactions so we're happy with the gains. I can't specifically comment on where it came from.
+
+Answer_12:
+
+          Yes, it's definitely more the latter. So basically if you think about our E&P portfolio in particular when we think about the redetermination somewhat semiannually of the borrowing base and looked at those companies on a client-specific name by name basis there was some contraction in the borrowing base and therefore some downgrades that drive our reserving methodology.
+It doesn't mean that we feel that those companies are necessarily in significant difficulty but that's the way the reserving methodology works. And as I said we do this on a client by client basis, we're comfortable with our exposures and clients are looking to manage their own defensive position. So it's not clear that they will necessarily be realized in losses; in fact, if the implied curve rather than flat to long oil prices is in fact how things play out it's possible that there will be very little in the way of credit loss we'd experience.
+
+Answer_13:
+
+          Both. Both.
+
+Answer_14:
+
+          Yes, so first of all just on the contraction in spend driven by oil prices it's pretty typical in this part of the cycle that you would see lower energy prices in the first instance drive savings rates up and you see consumer spend for the energy dividend so to speak lag back. So the fact that we saw that happen in the first quarter is not atypical and it doesn't mean that we don't expect the spend to grow and for that energy dividend to ultimately translate into higher spend going forward. So it's more of a normal timing phenomenon is our expectation but with respect to other activity, yes we saw active equity capital markets with some defensive issuance and generally I think it's a positive overall for the businesses and for the economy.
+
+Answer_15:
+
+          Not readily but we can get back to you.
+
+Answer_16:
+
+          Yes, nothing specific to call out in the second half of the year. And we should hit 11% if not a little better, yes.
+
+Answer_17:
+
+          Look, I would say seven weeks or six weeks or whatever it is after Investor Day that the messaging hasn't really changed which is we have every intention of aggressively managing the score, doing it as we talked about earlier in a very granular way. And we're already working on that and you see that in the most obvious place which is in the reduction already to date in nonoperating deposits.
+But we continue to work on all of the things so derivative notional compression, level III assets, financing, obviously we're still thinking about what the response should be in terms of risk intermediation and clearing. And so I think six weeks on from Investor Day the story is the same, we feel we are fully committed to ensuring that we are safely within the 4.5% bucket and we may not stop there but we're only a few months into this.
+
+Answer_18:
+
+          Yes, I was obviously you noted it from a small base so that's notable. There are two specific transactions or two specific exposures that were moved to nonaccrual.
+One of them was moved on a somewhat of a technicality, a sovereign downgrade which we fully expect to recover on. But that is just the way we have to present it and the other smaller piece was one other isolated exposure.
+So I wouldn't overthink it right now. It's two exposures and it's $200 million in total.
+
+Answer_19:
+
+          The first the sovereign downgrade was did have oil and gas underlying exposure but again it was on a technicality rather than on the fundamentals of the Company. And we fully expect to recover on that.
+
+
+          Focus on the very, very small number.
+
+Answer_20:
+
+          No, I would just say that overall our sense is that the market is neutral relative to the event. We happen to be able to benefit a little from it. Some others will be more neutral and some may have lost.
+As these happen regular way in trading businesses and it just happens to be the case that that event and the volatility it drove is good for our client franchise. And I think it really just goes to show you that we're in a business where expertise matters and risk discipline matters and we were able to capitalize on both of those not just for the Swiss franc but also for the other macro events in the quarter.
+
+Answer_21:
+
+          No, I wouldn't even characterize them as one-time gains. I would characterize them as one of a number of items that drove our performance in the business.
+
+Answer_22:
+
+          Yes, so overall the total firm the reserve build that we took was a little over $100 billion, 4/5 of which was in the Commercial Bank. So we did experience -- we do all of this on a name-by-name basis, so we did it across our portfolios but the majority was in the CB E&P portfolio.
+
+Answer_23:
+
+          It was $100 billion.
+
+
+          $100 billion.
+
+
+          No worries. $100 billion, I mean look at the end of the day you can see that over the course of the last since whatever the third quarter of 2012 our cash balances grew by a couple hundred billion dollars and that has been a very large contributor to the compression in our NIM, not the only one.
+So as we push out the nonoperating deposits we would expect to see that help but remember we're still growing retail deposits. So if you look at this quarter in particular even though we reduced our nonop deposits related to client actions by about $20 billion, the majority of that $24 billion, we have flat deposits so we're continuing to grow the good retail deposits. So I would say it would be a tailwind but it would be a tailwind to a stabilizing and slightly improving NIM outside of rate rises.
+
+Answer_24:
+
+          No, I'm sorry of the top of my head can't remember the number you're saying. But no, our legal expenses, forget the legal expense that relates to reserves that we've taken and settlements that we reached, our regular way expense for third parties in legal isn't down substantially quarter on quarter or year on year at this point, although at some point it will be.
+
+Answer_25:
+
+          So specifically with respect to the quarter I would say that the wholesale parameter update -- wholesale credit parameter updates model benefits is about half of the RWA reduction with the other half coming from regular way portfolio run off as well as some reductions in market risk associated with market risk positions, reductions in private equity, reductions in commitment. So some position reductions rather than driven specifically by FX.
+Look, we're running above $1.5 trillion now and we said we're going to manage both the advance and standardize to that number over the course of the next couple of years. So if FX or if the currency translation is a tailwind then we would hope to do better but at this point let's get there.
+
+Answer_26:
+
+          So at the moment our CET1 ratio launching into CCAR was below 10%, not the 12% that we expect to run at once we have built our capital to our target level. And so you are right that right now under CCAR Tier 1 leverage was our binding constraint both last year and this year.
+And so a combination of our capital strategy around how we think about the issuance of preferred together with balance sheet actions will be how we think about mitigating that limitation in the short to medium term. But ultimately it doesn't change the fact that once we get to our target assuming that is the 12% that we articulated at Investor Day that again we don't think we should be leverage constrained, so yes we're going to work on that obviously and we are continuing to build capital but when we launched into CCAR we weren't at that level.
+
+Answer_27:
+
+          To give you a little perspective I also spoke in that the banking system is much stronger to start with and every bank in the system is much stronger. So just trying to think through what are the effects of some of these things and we look at it is kind of a warning shot across the bow. What I worry about more is what happens in a stress environment and I think people are paying attention to what's going on in the markets and if there has to be changes down the road there might be some changes that are relevant to that.
+
+Answer_28:
+
+          I think the best way to think about it is through the cycle target that Doug Petno put out at Investor Day which is 18%. So that doesn't mean to say that we will benefit when rates rise in this business and it is very competitive and spreads are compressing and there's a lot of factors going on but through the cycle 18% so we're some years below and some above.
+Just the question on core growth and security services outside of presentation changes and client exits is currently in the low single digits. So obviously a little bit muted because we're working on the balance sheet optimization but certainly growing and in the low single digits and in terms of looking at advisory and who we are gaining share from principally European banks.
+Okay, no more questions?
+

exam/original-files/Problem_2_3_Sample_QandA/10_questions.txt

@@ -0,0 +1,119 @@
+Question_1:
+
+          Hello there. Just one quick clarification question on the performance in equities was great. You mentioned pretty much across the board, do you think there's any seasonality, any one-time events, block trades, anything like that that would lift such good performance in the quarter?
+
+Question_2:
+
+          And maybe this is a related question but I'm not sure which line it would flow through. From what I understand you guys and others have been pushing or talking with your prime brokerage clients to help improve ROAs in the business. Is part of that flowing through and just better equity performance, more business with clients?
+
+Question_3:
+
+          Okay, switching gears in Jamie's letter he talked about mentioning the need to push the new G-SIB rules to the product and the client level. And it piqued my curiosity.
+I'm just curious, how different is that from what you've already done? In other words each step of the way you've been early in adopting and pushing out to the desk level higher capital charges. Does this just mean more of the same meaning, higher capital charge, higher capital charge or is there something different there that you need to do?
+
+Question_4:
+
+          Hi, good morning Marianne. I was wondering on net interest income, do you have an outlet for how the net interest income dollars could trend from here? Assuming that you don't get much help from higher rates what are the key drivers and what's your outlook for NIM and NII dollars for the year?
+
+Question_5:
+
+          Good morning. On the CCAR do you expect any potential surcharges on the CCAR to come out when the US final rules on SIFI buffers come out?
+And in addition to that have you learned anything from the CCAR in terms of the transparency of the process? Is there progression in terms of the back-and-forth with the regulators as you go through the CCAR process and their expectations?
+
+Question_6:
+
+          Good morning. The drop in the adjusted expenses I think about 3% year over year came in a little bit better than we were thinking while revenues were also a little bit better. Obviously you've got a lot of cost-saving programs underway that you mentioned earlier in the call and at Investor Day but should we think that maybe you're running ahead of schedule or that the cost saves could be more or is it just lumpiness as we go quarter to quarter?
+
+Question_7:
+
+          Okay, and then just separately obviously a big company out there announced it's exiting most of its banking assets and just wondering if there's any interest or appetite within your Commercial Bank to bulk up the acquisition there in terms of asset purchases versus a complete company?
+
+Question_8:
+
+          Hi, this is Chris Spahr on behalf of Mike Mayo. I just have a question relating to your CET1 ratio guidance. Do you give any kind of guidance on the Tier 1 leverage ratio by the end of this year given your CET1 of 11%?
+
+Question_9:
+
+          Do you think there is any way you will be able to kind of manage that ratio higher in the context of this year's CCAR?
+
+Question_10:
+
+          Thank you and good morning. Marianne you mentioned that Treasury Service revenues were down due to the trade finance revenue area. And I noticed on the balance sheet the trade finance outstandings have dropped meaningfully on a year-over-year basis. Can you share with us what's going on in that line of business?
+
+Question_11:
+
+          And then second you mentioned that you obviously had a very strong advisory business in the quarter and you gained marketshare of 150 basis points. Do you have a sense of who you took the marketshare from? Was it European investment banks or US?
+
+Question_12:
+
+          Thanks and good morning. I just wanted to follow-up on your energy comments.
+Could you help us understand what events it was that led to the reserve building? Was it company-specific events in the form of bankruptcies or just something else in your internal ratings migration?
+
+Question_13:
+
+          And just on that last point your view on that is because of a recovery in prices rather than restructuring actions or things that your clients are undertaking. Is that fair or is it a bit of both?
+
+Question_14:
+
+          Hi, good morning. I just wanted to see if I could just follow-up on the energy point.
+Obviously you have the reserving and then you mentioned the 200 basis point impact on spend. I'm wondering if you'd just expand the discussion of energy, are there positive offsets that you're starting to see in the businesses elsewhere, either in terms of whether it's credit or borrowing or investment banking opportunities that may be popping up? Can you summarize the benefit if at this point you can see any positive offsets?
+
+Question_15:
+
+          And my follow-up question is just with respect to the security services business you mentioned the change in presentation and then there was the client loss. Is there a way you can help us understand just what the organic growth rate of the business is adjusted for the reclassifications whether it's on a sequential-quarter or a year-over-year basis?
+
+Question_16:
+
+          Good morning. Maybe just go back to the capital ratio issue for a second. You noted that standardized you're at 10.8% and that you still feel that will be your constraining factor by the end of this year.
+So if you're already at 10.8% and your target is 11%, I know it's plus or minus, but it does seem like you got three quarters you hit 20 basis points. So is there anything unusual that you're expecting in the coming quarters or is it just you can never know quarter to quarter but all else being equal it looks like you can probably hit 11% if not better. Is that a fair way to think about it?
+
+Question_17:
+
+          And as you've looked at the surcharge, at the G-SIB surcharge more the proposal is do you feel better or worse, you feel is there any areas where you think you can pull the lever more significantly to improve that ratio or lower the charge?
+
+Question_18:
+
+          Thank you. Marianne, going back to the reserve build which obviously was done for the oil and gas as you mentioned can you share with us in the Corporate & Investment Bank I know on a total dollar amount relative to the corporation it's not significant but there was a big increase in the nonaccrual loans from 110 to 251 in the quarter. Can you give us some color on what drove that?
+
+Question_19:
+
+          And again that was not oil and gas related obviously, it's in the CIB area that was in the Commercial Bank?
+
+Question_20:
+
+          Good morning. You highlighted the Swiss franc is a tailwind for FICC. Could you may be size that for us?
+
+Question_21:
+
+          Sure. I know that the higher volatility of course would drive higher volumes, I was just talking about the event specifically and if there was some one-time gains involved in that so that we can adjust for a core figure here?
+
+Question_22:
+
+          Okay, fair enough. And then on the energy front a lot of the focus was on the CB and the energy exposure there but you all mentioned that there's exposures in CIB, too. Can you give us may be an update if there was any changes in any of those exposures or loans this quarter?
+
+Question_23:
+
+          Yes, thank you very much. On your deposit discussion about pushing out I think you said during your Investor Day that you would like to get about $3 billion of noncore deposits off the balance sheet and I know you said you hope to make progress in the second quarter. How should we model that out and what type of benefit have you modeled out to the NIM with that $3 billion of deposits?
+
+Question_24:
+
+          And then real quick on your professional services, professional services was down from $2 billion to $1.6 billion. Is that mainly due to some of that legal cost maybe starting to go away from the crisis?
+
+Question_25:
+
+          Hi, good morning. So Marianne I was hoping that we could dig into the RWA progress that we saw in the quarter and specifically was hoping that you could disaggregate how much of the sequential decline that we saw was a function of the planned mitigation actions and model benefits that you've cited versus actual FX driven declines?
+Because assuming that the US dollar strength persists all else equal one could surmise that we should expect RWAs in a long-term context actually coming out below that $1.5 trillion target that you've cited in the past.
+
+Question_26:
+
+          Okay, fair enough. And another question on capital but relating to CCAR. Marianne you've noted on this call and in the past that you don't expect CCAR to be JPMorgan's binding constraint longer term but just given the reduction that we saw in the ask or the need to use the Mulligan in the last exam I was just hoping you could cite some of the planned mitigation actions that you expect to take so that we could see you guys get on the path towards delivering on that 55% to 75% net payout target.
+
+Question_27:
+
+          Good morning. Jamie you warned in your annual letter about the possibility of another flash crash. Yesterday I think Simon Potter at the Fed warned about it and cited HFT as one of the issues.
+Larry Summers warned about it about a week ago. Are these warnings going anywhere, are they being translated into action anywhere in the system?
+
+Question_28:
+
+          Secondly, Marianne a question about Commercial Banking. The returns in Commercial Banking have remained in sort of the high teens over the last number of quarters and it's certainly respectable sort of 17% to 19%. Is there any way those returns improve materially or as rates go up or does that get offset by competitive factors and are we at a normalized level for that business?
+

exam/original-files/Problem_2_3_Sample_QandA/11_answers.txt

@@ -0,0 +1,284 @@
+Answer_1:
+
+          So to -- obviously we don't have any particular insight. I think the comments you're referring to were comments about the support for evaluating the possible inclusion of some or all [of it]. And so really it hasn't changed relative to previous comments and the door has clearly been left open for that, but we have no further information. And so far it's evaluating the possible inclusion of some or all of the surcharge, so we're just going to have to I suppose and see.
+Meanwhile, as you know, we are -- and by the way, if it happens for us it would happen for everyone. We have shown you before -- not that that's a good outcome, but we've shown you before that we think that regardless the competitive peers set that we have is going to cluster at or around similar capital levels. And so if everybody has to increase their minimum, it is going to be a similar position for everyone.
+Meanwhile, we are continuing to execute on everything that we've already told you we are going to do to optimize our capital. Our commitment is to go to firmly within the 4.5% bucket for the surcharge, and if we believe we can do it and it's economic and it's not going to hurt our clients, we may go further. So we will respond when we see the rules and we are not going to stop continuing to do the best we can to optimize our returns based on scarce resources.
+
+Answer_2:
+
+          We actually haven't really changed our point of view since the investor day and previously about the fact that we are expecting retail deposit -- and there are other people who have slightly differing views. But we are expecting retail deposits to reprice higher and faster in this cycle than in previous rising rate cycles, given the competition for good, high-quality, LCR-compliant retail deposits; given the advancements in mobile banking; given the awareness in the general environment around low rates and the desire to participate in rising rates. So when we think about our sensitivity and our reprice, we model it in assumption that it's going to be higher, somewhat higher.
+
+Answer_3:
+
+          Obviously, when you talk about trading, when you have two months to go in a quarter you don't know the exact number and repricing is a complex issue. I'll give you some very specific things and then I'll tell you why it's hard to figure out exactly what shows up.
+Clearing, we've definitely seen people start to charge for clearing and effectively charge the balance sheet 25, 50 basis points. It's a small business so I don't think it's going to dramatically affect those lines. Prime broker, we've seen similar type of thing.
+Repo, it seems that people are charging pretty much for repo. We need to get a return on it. Exotic derivatives, which are again very small, are being repriced to, I would say, full capital and liquidity. Muni credit has probably been repriced a little bit. Again, it's a small market.
+If you go to credit and trading, so credit we've really not seen any repricing effectively in commercial credit. You've seen a little bit in mortgage to make up for the extra costs in mortgage. You've seen a little bit in auto; it got more aggressive, not less aggressive. So trade finance you've seen a little bit of repricing, and I know these are not all trading numbers.
+What you don't see, Mike, is that in a lot of cases, while you may have repriced a little bit, you're also shedding business so that you have -- as you are protecting your margins by -- because of AML costs you are going to not do certain types of business anymore. In FHA the lifetime cost of servicing, you cut back on FHA volumes, etc. So you're protecting your margins, but you're actually shrinking your revenues in some cases. That's happening a little bit in clearing and prime broker and stuff like that; you want your best clients.
+In other categories clients are -- like deposits, we haven't seen repricing effectively, I don't think, in non-operating deposits. On the other hand, some clients are saying let's restructure our relationship; it makes more sense for you, JPMorgan. I'm willing to give you other business which is not credit sensitive, etc.
+It's kind of a whole of the amount of things taking place in there, but the goal is to get a proper return on your capital, not necessarily to show revenue growth in that line item. It's very easy to show revenue growth.
+
+Answer_4:
+
+          Mostly what you see in trading is just volume related and spread related, etc. Even in trading, spreads are narrow but breadth is also very low, which means spreads get gap out pretty quickly, which eventually could be good for trading. So it's unclear (multiple speakers).
+
+Answer_5:
+
+          I'm talking about basis points, 20 basis points, 15 basis points, 10 basis points. That's all you need in some of these things to get an adequate return on capital as we currently look at capital.
+
+Answer_6:
+
+          So what I said, and hopefully it was clear, is that we actually exceeded our commitment. We actually shrunk our non-operating deposits by more than $100 billion and not just through our consumer deposits, but we are also able to grow wholesale operating deposits. So we had a good mix shift both in consumer versus wholesale, but also within wholesale and so we feel really great about that.
+There are two priorities after that. The first is protecting that position and making sure that we are able to not have inflows of those deposits as the industry continues to absorb them. But the second is we will likely look to potentially push a little farther, but it gets harder and harder each margin, the next $5 billion or $10 billion, as you get more and more closely aligned to operating accounts and operating business. And we've always said that we want to do this for the right reasons, for capital efficiency, but not do it in a way that's going to materially harm our clients. So that's the lens.
+
+
+          The [product] has also been made in the Level III assets: derivative receivables, certain balance sheet items, RWA. So the effort to optimize the balance sheet for G-SIFI, etc., is not going to stop; that we are going to continue to do.
+
+
+          But you know what, I don't anticipate us launching another and announcing another program. We've already done a little better. We will continue to try and do a little better.
+In terms of revenue impact, not very much right now, as you might very well know, because you can see that the balance is much more on a spot basis that on an average basis. But the equation looking forward will be much the same math we said at investor day, approximately 25 basis points revenue on approximately $100 billion average for a half a year, but there would be some expense benefits on FDIC costs, etc. So not a very big number.
+I think that was the question?
+
+Answer_7:
+
+          A little bit, yes.
+
+Answer_8:
+
+          Yes, so let me do this in two parts, and I'm going to start with the consumer businesses, where the commitment is actually a couple of years old and we are sort of well, well on our way to delivering against that -- the commitment $2 billion dollars in 2017 versus 2014. It's not exactly linear, but you can consider it to flow through time.
+And if you look at the CCB page on whatever page that is, I think we show that for the first half of the year our expenses are down over the first half of last year by $0.5 billion. So that gives you a sense for how we are tracking. On the CIB, obviously the commitment is somewhat newer; at investor day this year $2.8 billion in 2017 versus 2014.
+I would characterize that in two parts. $1.5 billion is business simplification. The majority of business simplification -- not all, but the majority -- will come out of our run rate in 2015. And you've already seen that in the first and second quarter when you've seen the $300 million, $400 million expense reductions in each of the quarters on business simplification.
+The other $1.3 billion, which is all the reductions in technology and operations and headcount, is going to be things. We are working on it actively -- we have programs, we have people -- but it's going to be more of a 2016 and 2017 benefit. If I was to look at the first half of 2015 versus the first half of 2014, take the $500 billion in consumer and business simplification in the CIB space -- that's probably the right way to size it, about a quarter so far this year.
+
+Answer_9:
+
+          Yes.
+
+Answer_10:
+
+          RWA, advance RWA is down $36 billion, $37 billion; [one five three six]. We said a little greater than $1.5 trillion. We are still on track to be $1.5 trillion or a little greater, $1.5 trillion advanced at the end of the year. Standardized right now is at $1.5 trillion, $1.5 trillion, so pretty close to $1.5 trillion against the target at the end of the year of $1.55 trillion.
+That's a little better, but obviously on the standardized you have some upward pressure as we continue to grow those really great loans that we are growing. If you look to our investor day targets, we are still hoping to maintain the discipline around both of those at approximately $1.5 trillion through time.
+
+Answer_11:
+
+          Of course. I'll do it in three parts. First of all, it is growing pretty solidly or strongly, so either in-line or in many cases better than the industry across most of the product categories. The one that's growing the most strongly because of the way we are portfolioing loans is mortgage, so that's driving some of that outperformance. And the one that is most challenging, but still growing, is middle market. Fiercely competitive; everybody is chasing that sector.
+But you can go through the businesses. We had 6% loan growth, 8% loan and lease growth in auto; 6% business banking; 19% core in consumer; 4% in commercial, so 3% core in card. So it's solid to strong pretty much across the board; most competitive in middle-market and flattered by portfolio and mortgages.
+
+Answer_12:
+
+          What I said earlier is not inconsistent; it's entirely consistent with what we said last quarter. We built reserves modestly for oil and gas last quarter on the back of the spring redetermination of borrowing base. We feel another modest reserve this quarter.
+And we said we don't -- we might expect more reserves in the second half of the year. There's another redetermination cycle in the fall and it's I'm not going to say likely, but it's possible we will be selectively downgrading some clients. If none of that is out of our expectations, it's completely normal levels considering the cycle and how we think about the credits, we are still very happy.
+And we are not going to make any comments on regulators.
+
+
+          Those reserves do not mean we're going to have losses.
+
+
+          Correct. We are reserving for downgrades; doesn't necessarily mean that they are going to be cash losses.
+
+Answer_13:
+
+          So credit, like charge-offs, have been very benign across the whole sales base. They have reverted to somewhat more normal levels in auto, so I'm not expecting there to be a big step changes in the underlying charge-offs in the wholesale space. We continue to see improvements at a slower pace in mortgage, but at 21 basis points we are sort of getting down there.
+And card, while it is slightly above -- 2.6% above our 2.5% is also pretty much getting there. It's one of the reasons why we've said expect the second half to look like the first half in terms of order of magnitude and expect net-net low for long.
+
+Answer_14:
+
+          I would say in the non-credit -- sorry, just to clarify the comment on oil and gas; we said they will not necessarily translate into losses. We are not going to predict which ones will or won't.
+On the reserves, for non-credit-impaired portfolio we are continuing to see improvements in charge-offs as well as home prices, albeit a little bit more gradually. So I would still expect there to be more reserve releases over the course of the next 18 months in hundreds of millions of dollars in total; not billions any longer, of course. We have $1.8 billion reserved right now.
+In the post-credit-impaired space clearly that's life-of-loan model and so we will continue to evaluate that model against parameters that we have in it and expectations, so that will be what it is at the time. And in card we're not expecting any significant reserve actions.
+
+Answer_15:
+
+          So you are absolutely right; all the underlying phenomenon are still there. We are still seeing spread compression, but we are seeing very strong growth in spend. We aren't quite lapped yet on new accounts going through the revenue rate. We will eventually be, but it's a good thing to be adding these new accounts that will drive strong spend in the future.
+So I would say our near-term guidance is that we are expecting our revenue rate to be at the lower end of that 12%, 12.5% range. And, yes, over time as spread compression abates and we continue to drive strong growth with the quality of our products and our partnerships we would expect that to start to edge up.
+
+Answer_16:
+
+          Yes. We told you we would hope to drive core loan growth in the card space low single digits and this quarter it was 3%.
+
+
+          I just want to emphasize -- Marianne mentioned it, but emphasize; Chase Paymentech, which is seeing really good growth, probably 50% faster than the industry, but we are also signing people with Chase Paymentech combined with ChaseNet. We are running real volume across it and we are signing up a lot of folks for that and ChasePay. So the strategy of ours is kind of coming to fruition and we hope it will be a good driver; happy customers and good growth for the next 10 years.
+
+Answer_17:
+
+          Obviously we don't give you lots of details on our issuance plans. You are right; one of the drivers for us to issue in part, not exclusively, was it's not -- as you know, we were Tier 1 leverage constrained in CCAR and so as a result of issuing this we not only helped TLAP, but we help our CCAR stress capacity. And we are about 164 RWA. So we are not going to talk about forward issuance but we've made progress.
+
+Answer_18:
+
+          So to start with Volcker, we aren't expecting Volcker to have an impact in the near-term trading outlook. We've been talking very consistently over an extended period of time about the fact that we've reshaped our business through time to be compliant in substance and in form with Volcker. And so while that was real reshaping of the business, the last 18 months have been really focused on getting operationally ready around the reporting and the metrics; it's been hard work and we are ready.
+So I don't expect it to have a direct impact on our near-term trading. Clearly over time we need to continue to evolve the feedback loop with regulators, but that will be entirely gradual.
+With respect to the trading, it is too early for us to say anything specific about the second quarter -- sorry, the third quarter -- except to say we are -- all other things equal, we would expect to see normal seasonality from the market. Nothing has changed that fundamentally wouldn't have us expecting normal seasonality in the third quarter.
+
+
+          I just want to point out that trading, if you look at it over a long period of time, has been -- we've become very consistent. I think in 2014 we had no trading loss days and even this year there were only a handful of trading loss days. Obviously some areas are up and some are down, but our shares are high. I think we are doing a great job servicing clients.
+We are adopting all the new rules. Like [50%] of interest-rate swaps are on SEF today and I think it's 95% of FX trading by transaction is electronic. You can do a lot on your mobile phone or iPad now, so the business is actually doing fine. The returns on risk are very good. We used to report that, but kind of return on VAR are very good. It's become a much more stable business that clients need overtime.
+
+
+          Right. And just to add to that, I would say that we also talked about, in the period of transition towards a more normal economy and rising rates, you might see some shocks like this. We've weathered both the EMEA bond sell off and China well, and it just speaks to the strength of our risk management discipline. And we generally do pretty well in more difficult markets.
+
+Answer_19:
+
+          So with respect to -- we saw a stronger seasonal purchase market. We actually gained a little share in the purchase market in the quarter and refi held up pretty well because of pipelines coming into the quarter. But we are expecting that to grow seasonally in purchase and in refi to pull that down to smaller levels in the third seasonally. And no direct impact from the disclosure requirements.
+
+
+          Part of the quarter is the reserve takedown, so don't double count that. That may not be there next quarter.
+
+
+          Right.
+
+Answer_20:
+
+          The way I would think about it is normal tax rate for the year is 30%, plus or minus. Just given the way tax reserving is it's usually biased to being fairly conservative and so, as you know, we have seen discrete tax gains periodically, some of them not insignificant, resulting from completion of settlements and audits with tax authorities. Not to say that you should necessarily model in directly 30%, but we don't predict or forecast the tax benefits.
+
+Answer_21:
+
+          It's definitely the latter and I think it's perhaps a little too early to tell on the former.
+
+Answer_22:
+
+          Jumbo.
+
+
+          Yes. So over half are jumbo, the other are conventional performing fee plus.
+
+Answer_23:
+
+          We have a fairly large securities portfolio and our decisions around that are in part driven by our overall interest-rate risk positioning, but with respect to the mortgages it's fundamentally a better execution decision for us. We will portfolio or loan where it makes economic sense to do it relative to distributing it, other than jumbo where, clearly, they will always go on our balance sheet.
+
+
+          If you can put a jumbo on a higher ROE than a Fannie/Freddie, you would do that. And part of the investment portfolio is for liquidity and obviously, because non-operating deposits are down, proportions of that will come down too.
+
+Answer_24:
+
+          There's been a lot of press and reports, including recently, on market liquidity and there are a number of factors playing into it. It's true that liquidity, in some cases, has dried up quite quickly when there's been extreme volatility and it fed on itself. But the reality is that we've talked about the fact that that was likely to be a phenomenon that happened more frequently as we transition to a more normal environment.
+We are very disciplined about how we trade and support our clients and generally we've been able to weather them very well, as has generally the community. Not that we know, but we haven't got any stories or horror stories around (inaudible) a bond sell-off or other things this quarter. So I think it's definitely an issue; one that we need to watch, one that has multiple root causes, and one that we are generally taking in our stride.
+
+
+          And look at the big picture and we pointed it out, the financial system -- like in the United States banks are much more sound. Trading books have more capital liquidity. The whole system is better off. So you can't look at one piece and say what will that do.
+The second is that these -- obviously there's less liquidity in the marketplace and it's a whole bunch of factors. It's hard to tease out exactly which one, but trading books have more capital and more liquidity. I think people are a little worried about potential Volcker rule violations, so they are being a little more cautious.
+There are obviously structural changes in electronic trading, HFT, and each business is slightly different. So not every -- I wouldn't say everyone is affected exactly the same. It's also true that the system is pretty resilient to what happened with the currencies and treasury, and that's a good sign.
+I think what we are going to be really cautious about is when markets aren't that good. JPMorgan is fine. We are not talking about whether or not JPMorgan is going to have a hard time with liquidity. We are not. The question I really would have is, when markets are tough, will there be a feedback from -- these violent markets, will there be more volume or less volume.
+Someone was quoted the other day saying markets always pull back when there are tough times; that is true. The question is will be harder and worse, will it feed back into the real economy. It's not will there be lack of liquidity.
+During the crisis they were two market makers out there and we were one of them and so you need them a little bit, but it doesn't stop markets from gapping out. We are not saying this is a terrible thing, just being very cautious about it. And we are always trying to be very cautious.
+
+Answer_25:
+
+          So I can tell you that obviously we took the feedback from the regulators as the industry did exactly as you would expect, entirely seriously; put loads of resources and effort to bear in making as much progress as we thought was humanly possible over the course of the period. And we feel that we made very, very -- I would agree with you; the industry, but JPMorgan specifically, made very, very significant progress in addressing the feedback between getting it and the July submission date. And obviously we feel like we have a credible plan.
+That's not to say that we won't continue and some of our plans, and you saw it in some other disclosures. We are going to continue to work very hard at simplifying our legal entity structure over the next few years and interconnectedness and operational resiliency and all the things -- and reporting readiness, all the things that are going to make it even better.
+So we think we made very, very significant progress. We think our plan is credible. We don't know exactly when we will get feedback, probably in the fall.
+
+
+          And we respond to every single thing regulators raise with the huge resources to meet their needs. It will probably be iterative over time about they'll make more demands this year, etc. and --. By the way, I think there is a 50-page public part that you can actually read and it shows you. That's a 50-page summary of I think a 200,000 page detailed report.
+
+Answer_26:
+
+          It's very broadly competitive and we compete obviously with big banks, regional banks, and non-banks. It's not that we are losing loans and deals most often on price. It's normally on size of holds or non-bank taking whole deals or on structures, but it's very, very competitive. Everybody likes the sector for growth and everybody likes -- so everybody is trying to make progress.
+We are being very, very disciplined, and as a result of that, slightly lower growth than the industry average. And you might not always want us to always grow at the industry average. You want us to hold true to discipline.
+
+
+          Remember, we looked at the whole relationship. I forgot the exact number, but if you look at the middle market relationship, I think something like half, maybe even a little bit less, of the revenues are from the lending.
+
+Answer_27:
+
+          The way I would characterize it is we had a period of time following the Wampum merger where we were in new markets and we didn't have the right distribution footprint where we were building. We said about a year and a half ago that we felt like we had the right footprint as a macro matter, about 5,600, and that now we are around perfecting that, which is about consolidating certain branches where it makes sense but building new ones where makes sense. Consolidating them together where it makes sense.
+You will see I think Gordon said approximately 150 net down in each of the next couple of years and that's probably still the right way to look at it, but it's really perfecting the network. Moving branches to the areas we like where there's a high density of affluence. And then, as you know, really looking at the nature of branches: so the footprint, the way we are using them, the way we are staffing them, importantly, moving them to more advice and less transaction, more automation.
+Definitely responsive to the evolution in customer preferences. And mobile and online is not only a fantastic customer experience evidenced in our experience stat, but it's also a lower cost to serve, so we are also improving the profitability of the very highly transactional customers. I think Gordon used the word omnichannel. We have a place for everything in our suite and branches are very important. We're just going to be evolving them to continue to meet customer needs.
+
+
+          One add is that we are thinking about attacking a new city for the first time, like in a major way, because we want to see how that works out.
+
+Answer_28:
+
+          In the non-operating deposits within the wholesale deposits, the majority is the CIB, but not quite two-thirds. And then you've got the commercial bank and you've got a little bit in asset management. So it is the majority of the number, but there are still sizable numbers, particularly in the commercial bank in the financial (inaudible) space.
+And then, when you look at our overall balance sheet, you see cash going down because of the deposits. You see securities going down, but strong loan growth offsetting, and then small reductions in trading and secured financing.
+
+Answer_29:
+
+          Are you doing year-over-year?
+
+
+          You're starting in the wrong time period.
+
+
+          Are you starting at the year-end or year over year?
+
+Answer_30:
+
+          Well, we are getting more operating deposits, too.
+
+
+          We talked about the deposit reduction is overachieving in non-op and improving mix in operating. So, trust me -- and I'm not looking at what you're looking at, so I do trust you -- but trust me that 60%-ish of it is CIB.
+
+Answer_31:
+
+          We will clarify off this line because (multiple speakers).
+
+Answer_32:
+
+          The M&A -- we don't think Greece has affected the M&A dialogue very much, because it's been very active pretty much around the world. And when I say around the world, it's also like European companies coming to America and American companies going to Europe, etc., and those conversations continue.
+
+
+          A lot to Europe, yes.
+
+
+          A lot to Europe, yes. So Greece had no real effect on that. Greece is a very, very small percent of the Eurozone in total, so economically it's not a driving factor for most of the companies there. Psychologically maybe it's going to affect some people, but I don't see why a company that has its own ambitions is going to change them because of Greece.
+
+
+          And would just -- with respect to the backlog, I would say it's very good.
+
+
+          We did see a tremendous amount of something that we've almost never seen before, of American companies financing in euro because it was cheaper to do that, even if you swap back to dollars. So you saw a lot of American companies going to Europe to do that.
+
+Answer_33:
+
+          I think if you go back to last quarter, Brennan, and take a look at the remarks from last quarter, we talked about the change in presentation of some expenses versus revenues for the ADR business that drove a reduction, but just a classification issue. And then in addition we did lose a large client at the end of last year and that is having an impact. I think if you go back and look at the second quarter, hopefully that will make it clear.
+And so the guidance, when we did those -- when we made that presentational change and obviously we talked about the client exit a few quarters ago, the guidance was, given those, we would expect the revenues to run between $950 million seasonally. And this is obviously a strong season and, therefore, it at through $950 million and $1 billion seasonally and, therefore, it's at the $1 billion.
+
+
+          So Marianne gave you all very specific guidelines, which we don't normally do, on treasury services, investor services, and expenses in the commercial bank because a lot of you have your models wrong. And Sarah finds it very frustrating that you can't get it corrected quarter after quarter, so we've said here is the number that is actually our best guess. So, please, put it in your third- and fourth-quarter models.
+And mortgage revenue was another one which has been ongoing to us. And what's the other one so we can just get it on the table whatever it is?
+
+Answer_34:
+
+          Nancy, it's really important -- when we talk about these numbers, by the way, RWA and branches, we are not making commitments to anybody. That's our best guess knowing what we know today, but we reserve the right to change that on a moment's notice for whatever reason that makes sense for the Company and the clients.
+And so branches -- it is very important that you look at branches city by city until you have the right footprint. So if you remember, the old A&P which never changed its locations and it never changed sizes and it failed. Any retail business should always be adding in new communities, subtracting in some; having the branches to adjust to a new reality, whether it's getting bigger or getting smaller.
+In our case it's getting smaller, but again we are not getting smaller because we are guessing at this stuff. We are getting smaller because of the less need for operations and branches now. People are doing far more on mobile phones like that.
+So we actually do it city by city. You don't set an overall guideline and say you have to do X, Y, or Z. It's city by city. And so, for the most part, in the WaMu footprint, I think Florida and California for the most part, city by city we went in and added what we thought we should have.
+Wampum -- remember we also added on top of that small business, private banking, some middle-market, other businesses that WaMu wasn't even in. It was part of the expansion of those businesses, too. And so when I said a new city, I'm talking about what we've never really done -- I was talking about this way back to BankOne and the stocks when we did the merger with JPMorgan -- is going into a city de novo that we never been in. There you've got to look at how many branches you are going to open, how long is it going to take. And so we do want to do one of those and that will have nothing to do with WaMu because they are also places that WaMu wasn't.
+
+Answer_35:
+
+          No. I don't think there's been a retreat from open markets there either.
+Remember, we've always said about China is you got to look and plan for the long run, which we do in all businesses. McKinsey has a report that shows that they are going to have 25% or so of some of the Fortune 1000 in I think it was 10 or 12 years. Enormous growth in their companies. Their companies are going overseas. Their companies are doing more M&A.
+We did that one unique transaction where ChemChina bought Pirelli in Italy. Obviously, when we have a unique network, we can help a Chinese company and an Italian company at the same time, so we are building there for the long run.
+As a risk management tool we've always said that the way we treat that is we will be prepared for very tough times and I think it's a mistake not to grow because you're going to have tough times. I have never seen an economy that didn't have tough times. If you went back to the United States, when J.P. Morgan was building JPMorgan back in 1850 and 1860, look every single time that you panic because America had a recession there would be no JPMorgan. So we are not going to change.
+What we've seen with the officials in China is that they are very responsive to changes, and you can argue whether they should have gotten that involved in the stock market. You can't manipulate stock markets. But they are very responsive to lending.
+They've changed their reserve policies, their RMB policies, the QFII policies, the Hong Kong Shanghai Connect. Not everything they do is going to work, but they still seem very committed to more and more market reform, more and more of taking SOE -- rationalization of SOEs and taking them public, so some market discipline there. Creating more of a consumer society.
+And what we've always said -- and I think they have the wherewithal to meet their short-term objectives of growth, but we expect that they will have bumps in the road. We expect that and we are going to look right through that. The fact that their -- I also remember their market went from $4 trillion value -- so it's a $10 trillion economy. It went from $4 trillion market value to $10 trillion; now it's back to $6 trillion. I think those are the numbers.
+The American stock market has done that roundtrip a couple times itself and so the American economy is $18 trillion. I think our stock market is $25 trillion, so there will still be huge opportunities there. If they ever completely reverse what they are talking about doing, you will see it in far more significant ways than them getting involved in the stock market.
+
+Answer_36:
+
+          Marianne, you showed a NIM thing that NIM would go back to 265 to 275. And, remember, when we say deposit beta it is by product, by --and it's got gamma, so the first 25 basis points, the second are a different 25 basis points, they are different than the third 25 basis points. It's a pretty intensive analysis to try to get accurate; that's what we're trying to do. And it's all in that number that was presented and we don't think that's changed dramatically.
+As Marianne said, we are assuming that whatever happened in the last cycle, this one will be worse. In other words, you will gather less of the benefit from rates going up than we have in the past.
+
+Answer_37:
+
+          Listen, there's a unique --.
+
+
+          Yes, (multiple speakers).
+
+
+          It is a unique circumstance when you're at zero. There are a lot of things that happen when rates grow to 25 basis points that there will be -- you will pass very little of that also. And we also see that -- we will see that in money market funds. We will see that in some forms of deposits, etc.
+The beta gets much higher as rates go up. If I had to guess, I would say we are conservative, not aggressive.
+
+Answer_38:
+
+          Yes, the credit downgrades included oil and gas and we called it out just because in total oil and gas was $140 million of our total net $250 million reserve build. But also I said that there were select names, it's like a dozen names, so it's not really like there's another sector, just very discrete names.
+
+Answer_39:
+
+          No, we are not going to give you that. We disclose -- when you say mortgage duration, obviously we build into all of our models mortgage duration. You guys can calculate that yourself by looking at disclosures in the 10-K that show mortgages at 3%, 3.5%, 4%, 4.5%, etc. And obviously we can change that at will with our investment portfolio and things like that.
+It's all in the NIM already. So obviously we have negative convexity in our portfolio.
+

exam/original-files/Problem_2_3_Sample_QandA/11_questions.txt

@@ -0,0 +1,160 @@
+Question_1:
+
+          My first question is the capital progress has currently been solid this quarter; last week, however, there seems to have been more support in the Fed in terms of including the SIFI surcharge in the CCAR test. And I guess the question is in two parts: one, what do you think the chances are of the -- any or all of the CCAR surcharge or the CET1 surcharge to be included in CCAR; and two, what are the next steps in terms of business model adjustments, if that did pass?
+
+Question_2:
+
+          Got it. And just the second question is you've clearly made also progress in terms of your deposit mix. As we potentially anticipate a rising rate environment for the back half of the year, given what the regulators have done in terms of saying, okay, here are the good deposits, here are the not-so-good deposits, how should we expect the pace and magnitude of retail deposit repricing or pass-through if the Fed does raise rates in the second half of this year?
+
+Question_3:
+
+          I see your markets revenue are down 1% year over year the way you look at this, but I'm trying to reconcile that with Jamie's comments two months ago at a New York conference where you said there is repricing in rates derivatives, prime brokerage, clearing, and trade finance. I'm guessing it's just risk off.
+Can you shed more light on what type of repricing you are seeing with any specific examples, because the transparency for us on the outside is pretty weak?
+
+Question_4:
+
+          And just one follow-up. When you say (multiple speakers)?
+
+Question_5:
+
+          When you say a little repricing, is it bigger than a breadbox? Are we talking about basis points or 1% or 5%? What are you talking about here?
+
+Question_6:
+
+          Question on the deposit shrinkage. You obviously finished the program you announced at investor day. Just wondering if you're going to take it further; what the impact on revenues has been. And do you expect that the full benefit to NIM is already in 2Q or -- in the 2Q numbers or we are going to see more benefit in 3Q from the actions you took?
+
+Question_7:
+
+          Yes, and the NIM benefit should flow into 3Q as well?
+
+Question_8:
+
+          Marianne, was wondering if could remind us about the timing of your expense reduction targets in the consumer and investment bank. Specifically, if you hit the $57 billion in adjusted expenses for 2015, how much of the ultimate cost saves does that $57 billion target for this year incorporate? How much would you have achieved already in 2015 and any thoughts on the trajectory for remaining saves after this year?
+
+Question_9:
+
+          A quarter of the total?
+
+Question_10:
+
+          Okay, great. Then a quick follow-up is on RWA. Any update to your year-end RWA targets and thoughts about how we should think about potential RWA levels longer term?
+
+Question_11:
+
+          I'm just curious in terms of your core loan growth; you mentioned that that's up about 12% year over year. Can you give us a sense as to where that's growing the strongest and where you're seeing a bit more weakness? Within the core loan growth, specifically.
+
+Question_12:
+
+          Okay, Marianne, and for my follow-up I noticed I guess you were quoted in an earlier meeting today suggesting that there could be further provisions for the oil and gas portfolio. There's been some media reports prior to this week about regulators potentially looking a bit more carefully at your portfolio as well as a number of other banks.
+Can you give us a little more color as to how you are thinking about the potential trends there and any comment you might want to give in terms of where the regulators are focusing?
+
+Question_13:
+
+          Marianne, just wanted to follow up on that last point. Your commentary about credit, for the second half, is in line, you're $4 billion plus and you've got $1 billion of charge-offs this quarter again. So on that point just one question about where you continue to see underling improvements. Card obviously is still above your guidance, but can you give us some of the thoughts about where any existing improvement can come from?
+
+Question_14:
+
+          And then to your point about not expecting to be much loss from the energy provisioning and that we could see energy provisioning, plus this quarter you had a nice $300 million release from the NCI portfolio, is this kind of it for reserve release and can you talk about your outlook there?
+
+Question_15:
+
+          Maybe we could just ask a question on card fees? That's been an area where growth in card fees have been pretty flat for a while as you ramp up reward spending. We saw a pretty nice jump quarter over quarter; some of that is seasonal, but it was a little stronger than what we saw the last couple of years.
+Are we getting to a point where you are lapping some of these higher reward costs and growth in new accounts and we should start to see that revenue line track more closely with spending, or is this something unusual this quarter?
+
+Question_16:
+
+          Okay. And on the card loan side it seemed like you saw a decent uptick this quarter. You are starting to get past some of the runoff and it seemed more of a core driver.
+
+Question_17:
+
+          So first question on capital. I just want to get a sense as to how we should be thinking about preferred issuance plans going forward now that you've met the 150 basis point RWA target.
+
+Question_18:
+
+          Okay. And then just a follow-up regarding, Marianne, your comments about the trading outlook for at least in the near term, recognizing it's still very early days in the quarter. Since the very start we've seen, or at least we've experienced, a number of global shocks and on the regulatory front we do have the Volcker implementation deadline, which is looming. So taking all those factors into consideration, how should we be thinking about the near-term trading outlook?
+
+Question_19:
+
+          You guys had a very decent mortgage banking quarter in the second quarter with rates going up. We know that the refis have started to come down, but the purchase market has been stronger I think than people expected in the second quarter. What do you see going into the third and fourth quarter, especially with the new regulations coming out with the disclosures with (inaudible)?
+
+Question_20:
+
+          (multiple speakers) Can you talk a little bit about the tax --? My follow-up question on the tax rate. Should we be modeling in 28% to 30% going forward; is that 25% just an outlier?
+
+Question_21:
+
+          The equity trading has been very strong the last couple quarters, both for you and for others, assuming it continues the rest of this earnings season. As you step back and think about some of the drivers there, you mentioned some repricing; we've obviously seen some deepening of some markets, increased volatility. Can we think about there being potentially a long-term secular recovery in the equities trading, or do you think it's more just stocks are going up, just global QE, or too early to tell?
+
+Question_22:
+
+          Okay. And then just separately, what type of mortgage loans are you adding? Are these jumbo? Are they fixed rate?
+
+Question_23:
+
+          Okay. And I guess are you choosing to add some mortgage loans instead of securities? Because you've got a smaller securities book than a lot of peers and it seems like there's capacity to add there.
+
+Question_24:
+
+          I just want to follow up on the conversation in fixed income, and I agree with you; it seems like you weathered the whole Greece and China storm pretty well. The thought on the lack of liquidity in the fixed income markets gets a lot of attention. You guys have the most market share; have the lowest standard deviation in the business. As a liquidity provider that's a good thing for you.
+But curious on how you are thinking about preparing for what seems to be a pretty serious issue and how serious of an issue do you think it is in terms of the potential disruption?
+
+Question_25:
+
+          Speaking of cautious, the last one I have is on living wills. I know we have a little bit of time before we hear anything, but if you look at the comments from the previous year, what they wanted you all to address, it seems like there was a massive amount of progress made. I'm not sure what you can tell us, but curious your thoughts on progress made and then maybe timing on when we might hear regulators thoughts.
+
+Question_26:
+
+          Marianne, you mentioned a couple of times about the competitiveness in the middle-market lending space. Can you give us some color on what you are seeing, whether it's underwriting standards, and what kind of product type in the middle market that is most competitive?
+
+Question_27:
+
+          You guys have made great progress with the penetration of the mobile banking app that you've created as well as online banking. You showed us that your branch count is down over 100 branches on year-over-year basis. What do you see for the branches as you go forward? Is that trend line likely to continue as you continue with the increased penetration from the mobile app?
+
+Question_28:
+
+          I was just curious about the reduction of the non-operating deposits and I would have expected that to come mainly out of the corporate and investment bank. But when you look at the disclosures on your average asset level, it's essentially been $850 billion plus/minus each of the last five quarters. Where is the shrink really happening, or how do we see it?
+
+Question_29:
+
+          But when I look at total assets in the CIB, it's 845 this quarter versus 846 last year. It just doesn't look like a whole bunch came out of there. It looks like it all came out of the --.
+
+Question_30:
+
+          Well, if you go linked quarter it's 865 to 845. I'm just curious; it doesn't seem to mesh up to --.
+
+Question_31:
+
+          Okay. When you see it in your public disclosures it all looks like it's coming out of corporate and other, which is down more than 100 linked quarter, so I was just kind of curious how it all works. Because if --.
+
+Question_32:
+
+          Just following up on the markets discussion. Curious whether or not you have seen some of the drama around Greece impact M&A discussions in Europe this quarter and maybe an update on the IB backlog at this point.
+
+Question_33:
+
+          Okay. Thanks for that. And then on security services, I know that you all highlighted that it's up quarter over quarter on the seasonal strength for the dividend season, but it was down year over year. Can you help us reconcile the year-over-year decline?
+
+Question_34:
+
+          Jamie, you made a comment about attacking new markets and that sort of tags on to what I was going to ask, which is whether there are any of the old WaMu markets where you've not been able to expand as aggressively as you've wanted to and that you might be thinking about exiting. So I'm just wondering, can you just tell us how you feel about individual markets right now?
+
+Question_35:
+
+          Okay. Another geographic question. I get that Greece is not that important to the Eurozone and the events of the past couple weeks seem to have been a lot of theater, frankly. But the events in China in the last couple of weeks have been somewhat worrisome. Have your plans for China changed at all, given what seems to be a retreat from open markets there?
+
+Question_36:
+
+          Just a quick follow-up. Marianne, earlier on you were talking about deposit betas and, for a lot of very good reasons, expecting that deposit betas will be a little bit faster this time around. But could you round out the conversation as to how you are thinking about how your NIM is going to traject in a rising rate scenario? Because I got a few questions on whether the deposit betas being a little faster means that the NIM trajectory is likely to be different from last time rates rose for you guys.
+
+Question_37:
+
+          Okay, because the last time rates rose your NIM didn't move up that much.
+
+Question_38:
+
+          This is actually Steve dialing in for Gerard. Just two follow-ups. You had mentioned the credit downgrades; I believe you said oil and gas. Were there any other sectors, and if there were, just some figures on them?
+
+Question_39:
+
+          Okay, great. Thank you. And just a second follow-up. Can you just give us your mortgage duration and how far you are willing to take it?
+

exam/original-files/Problem_2_3_Sample_QandA/12_answers.txt

@@ -0,0 +1,175 @@
+Answer_1:
+
+          Yes. 
+
+Answer_2:
+
+          There are a couple of different questions in there and maybe I'll try and separate them. My comments about the seasonality in the fourth quarter were most particularly towards Markets revenues and less so towards the IB revenue space. With IB revenues, it's a mixed story. Talking now about the sort of Banking revenues rather than Markets revenues. So the pipeline for M&A remains very constructive and really pretty good, so we're expecting to continue to have strength in M&A in the fourth quarter. 
+With ECM you saw obviously a pretty sharp falloff in activity in the third quarter. We have seen the pipeline in ECM to the degree that that shows you visibility into the fourth quarter which is somewhat limited. We have seen that build up and so there is possibility that we'll be able to pull through some of that into the fourth quarter. But that will depend upon how the markets behave. 
+With respect to DCM, our sort of guidance there was a commentary really mainly to the strength of the fourth quarter last year and on relative basis, the pipeline is down. And it's really to do with normal refinances are slowing and the maturity wall is smaller but it's still healthy. It's just not going to be at the same levels that we saw last year. 
+
+Answer_3:
+
+          Look, the situation for us in markets was one where there was volatility, regardless of you how you want to characterize it, and people were acting -- our clients were acting on the back of that. We were able to capitalize on that flow. We were able to intermediate for our clients, put our capital [at risk and make] some money. We did pretty well where there was volatility. Where there wasn't, it was more about, to your point, more about low levels of activity, people on the sidelines. It was tougher to make money because less was happening rather than anything else more significant than that. So far in the fourth quarter we're two weeks in, it's too early to say, but there's not been a tremendous change in the landscape. 
+
+Answer_4:
+
+          Looking at the revenue rate, the guidance, remember our guidance previously had been you should expect our revenue rate to be at the low end of the 12% to 12.5% range. The most important thing we want you to take away from talking about our co-brand partners is that we feel great about having signed up United Airlines and Southwest Airlines and partnering with them again for the medium term. 
+And the economics of those deals on a standalone basis are still really very good. But the co-brand space is very competitive and when any of those contracts are going to be renegotiated at this point, they're going to be renegotiated to competitive levels. And so, it's really the fact that we're seeing that is going to come through in our revenue rate in the fourth quarter which is going to push it down to below 12%. It doesn't change the fact that the ROE target for the business is still 20% and that the economics of those partnerships are still good. Remember, these -- 
+
+
+          Just given the numbers, it's $200 million a quarter for four quarters until it lapse. 
+
+Answer_5:
+
+          So I would say, first of all, we gave some expense goals in Investor Day for both Consumer Businesses as well as for the CIB. And those were I think pretty sizable goals, $2 billion in 2017 versus 2014 for the Consumer Businesses and $2.8 billion in 2017 versus 2014 for the CIB. And we are working through that. We are on track in both of them. I think I said earlier that adjusted, the Consumer Businesses in the three quarters so far are $700 million down year-over-year in expenses. So against the $2 billion target, we're certainly getting there. 
+And on the CIB, we expected 2015 to be mainly about forcing out those business simplification expenses and we've essentially done that too. So we're on track. We're pushing hard. We still have work to do. We are always going to be diligent on our expenses and generally speaking at Investor Day we also said we're going to be on or down which is actually pushing hard to keep them down but not at the expense of good investments in the business. So obviously we are going to respond appropriately to the revenue pressure but not overreact. 
+
+
+          I've spoken my whole life about good expenses and bad expenses. Bad expenses are waste, things you don't need. You don't have [to trade through] processing, things like that. We want certain expenses to go up. When we find marketing opportunities in Card, we're going to spend it. If the Investment Bank does better, the comp accrual is going to go up. That's how we run the Company. That's not ever going to change. 
+
+Answer_6:
+
+          So Mike, thanks for that. So $700 million, if you adjust for legal expense in the Consumer Businesses year-to-date, we'll do some more in the fourth quarter. And year-to-date on business simplification, which I think for in total was about $1.5 billion, we've done $1.3 billion. In total, that's $2 billion so far. Obviously more work to do in 2016. With respect to the adjusted overhead ratio, it speaks a bit more to seasonality of revenues than anything else. 
+
+Answer_7:
+
+          I'll start. Jamie, you can yes or no at the end. Mike, we would say that the US economy is doing pretty well there. We're seeing good demand for loans in the Consumer space and reasonably good sentiment in the Business Banking space and our core loan growth numbers do show that. There's nothing particularly funky in the loan growth numbers. We do our very best to show them in the right light. 
+I would take a slightly different perspective on the jobs report on the non-farm payrolls. And not to sort of over think it, but while I know it was somewhat lower than people were expecting or possibly hoping for, it's still at around 140,000, almost two times what would be required to have stable unemployment. So it's only one report too. You can't overreact to it. It's not that we're seeing anything that's causing us any concern and our outlook for the fourth quarter is pretty solid I think. Jamie, anything? 
+
+
+          Nothing to add. 
+
+Answer_8:
+
+          We did better than we had targeted on our non-op deposits. We worked very, very hard but we told you we would on derivative notionals, compressionals, so our level 3 assets. It is absolutely the case, not to diminish the amount of work we've done and the progress we've made, that we obviously went after the most impactful -- least impactful to the client franchise, most impactful to the ratio with a less revenue [give-up] first. We made great progress. It becomes increasingly, not exponentially, but increasingly more difficult for every net basis point. 
+That's not to say, by the way, that we aren't continuing to work very hard at it and optimize and that we won't push further. But we're not at a place right now where we're going to target anything structurally below this, except for over the longer term just continuing to work through it. And our overall capital target, we're at 11.4% now. Our overall capital target still in the short to medium term is still 12%. 
+
+
+          I just want to add, in the new world we have to obviously monitor and push down to all the business levels, GSIB, CCAR, Basel, LCR and SLR, and we want to optimize all of them. So we're only living with this for a couple years now. As we embed it in our systems, we'll have a better way to track it and monitor it. Over time, I would expect the GSIB will come down a little bit. It only comes down in lumps. You got to make a big difference to go from 4% to 3.5% but imagine over time, I'm talking about years. I'm not talking about anything you'd see this quarter. We are very comfortable where we are today. Over years, you might have to change some of your business strategies but I think it's a better thing not to be an outlier in GSIB. 
+
+Answer_9:
+
+          It has nothing to do with next year, Betsy. When I say over time, it just happens that JPMorgan built a global corporate investment bank. 70% of it is financial institutions, 30% corporate. We easily could have been built the other way around, we focused on it over time. When I say over time, it might be quite easy for us to say that over five to six years let's focus more on corporates and less on financials and that will affect your GSIB fairly substantially. That's what I'm talking about. It has nothing to do with CCAR for next year or anything like that. 
+
+
+          A couple of really small points on CCAR for next year for what it's worth is we were constrained in CCAR by leverage. We have issued $6 billion of preferreds in the year. We are reacting to try and make sure that we are managing our binding constraints or our most binding constraints. So we're working on that. 
+The other thing to note is that we're at 11.4% as we sit here now. So we're not gliding a long way from where we need to get to. Both of those things together, with obviously our profitability, should mean that we have incremental opportunity. But our range is 55% to 75% and we hope to be in that range. 
+
+Answer_10:
+
+          So just a couple of things. First of all, I think the [FSB] thing was a sort of leak. So it's as good as it is. I will tell you that the news on structured notes was not strongly positive but we hadn't banked on it being. So not entirely pleasing but not disappointing relative to our models and expectations. 
+Other things to pay attention to anyway are there's no change to the internal TLAC assumptions. The clean holding Company rule is one that we're watching out for. But fundamentally -- and then there was the timing. Is there going to be a substantially elongated transition period? I would call it all fairly marginal. It hasn't changed the overall picture for us. We're at around 16% and we'll figure out the FSB proposal that's leaked out wasn't shockingly different and we'll see how the Fed responds. 
+
+Answer_11:
+
+          So with respect to the fourth quarter, we are expecting our loans to grow and overall net-net [rotation out], cash and securities to loans would be supportive of NII. But remember, the biggest boost to our NIM was associated -- or was a big boost to our NIM was associated with changing the mix, reducing our overall cash balances. So, a few things going on. 
+The outlook for the fourth quarter being relatively flat was associated with market implied rates which are relatively flat. And so in the law of big numbers, that plus or minus a few basis points is what we're expecting. With respect to looking out to 2016, obviously we don't know what's going to happen with the rate curve. If rates stay very flat we should still have upward pressure on our NII associated with the change in mix of our balance sheet. 
+So the fact that we've got a smaller interest earning asset base and more loans and less cash and less securities should be supportive even on flat rates. We don't know when rates will rise but if market [implies] are followed or if the Fed [dots] or anything like realistic, then that will be even more constructive. Remember in the first year, we get the biggest benefit from short end rates and the first 50 basis points of them. 
+
+
+          No, unfortunately not. 
+
+Answer_12:
+
+          So I would say that first of all, with respect to purchased credit impaired, with this release we did on the $375 million, that's our baseline expectation for that portfolio. Our baseline expectation is no material incremental reserves. Obviously if things improve and they're sustained, then there may be more reserve releases. But I wouldn't try and model those. 
+With respect to the noncredit impaired portfolio we talked about, you've seen our charge-offs at normalized 14 basis points. Our portfolio quality is really getting quite high. We're cycling through most of the significant risks. Reserve releases will be more modest and a little bit more periodic and several hundred million dollars next year, maybe $300 million plus or minus but not significantly more than that. 
+
+Answer_13:
+
+          Look, our efficiency target at 55% was over three years or so and we still will be driving to get to around that level. But it does, as you quite rightly mention, include not just rates rising but a fair degree of normalization in rates. We'll see what happens in 2016. Obviously it's possible but we're not going to call an outlook on rates next year. 
+
+Answer_14:
+
+          Okay. So we've taken some large reserves in the last few quarters and our overall reserve number obviously is consistent with our expectations based upon the outlook for oil prices. There was a redetermination cycle that we reserved for in the first quarter and so there will be another one in the fall. We've been as forward leaning on that as we can be. Obviously I'm not saying that there may not be any net incremental reserve build but we're not expecting them to be significant. A lot of companies have tried to adjust their expense bases and otherwise help their position. So if energy prices stay around these levels and recover slowly, we're expecting, net, not to have material incremental reserves in the next quarter. We may see some. 
+
+Answer_15:
+
+          Let me deal first of all with production quarter-over-quarter revenues. Margins are down. Margins are down for two principal reasons. Remember, quarter-over-quarter, at least on a closed loan volume, we were at a consistent level. Margins are down because we moved a mix shift towards correspondent from retail towards purchase from re-fi as well as capacity in the industry, more capacity in the industry and therefore less constraints. So the production quarter-over-quarter revenue is more of a margin number than anything. 
+With respect to year-over-year, I do want to make this clear. With respect to the guidance year-over-year that we should expect non-interest revenue for the mortgage Company in totality to be down $250 million. That brings our total year-over-year NIR down around $1 billion, maybe a little more, which is what we guided to at Investor Day. And it's more off the back of lower repurchase reserve releases, lower gains on Ginnie Mae sales and [XI] gains, non fee-based revenues that are to do with our third party UPB as well as run off in the UPB. So it's consistent with our guidance. It wasn't fully reflected in everyone's models. 
+I think there was a third part to your question but I have to say I've -- oh, expenses, yes. Thank you. On expenses -- we continue to work very hard on our expense equation, both in terms of managing down the -- particularly in the servicing space by the way, managing down the default inventory in a number of different ways but also investing in our operating model. So in technology, to improve the production operations cycle process, also in our site strategy. So no, we are not done. We continue to work very hard at it. We have made great progress but we continue to work hard at it. 
+
+Answer_16:
+
+          Obviously, we're not going to comment on anything specific. We would be willing to take and we do take a look at things when they come up and if we are able to price for the risk and it's in a client segment or an entry we like we might be interested. But there's no -- we have no special comments on it. What we're really interested in is growing our underlying core loans with our customers that we can continue to do business with. 
+
+Answer_17:
+
+          Not as defaults happen. It's to do -- depends on whether it's reserve based lending or whether it's not. But as companies are either downgraded or as they are experiencing financial -- change in financial condition or the borrowing base is redetermined, we will act accordingly. We try to be as forward-leaning on that as is possible. We don't have perfect insight until some of that information becomes clear. That's the process. 
+
+
+          And the reserve base lending, you basically take essentially current prices, you discount at a discount rate, you assume expenses, you [active real engineer] your force and things like that, and you see if you can make rollover the loan at a sound -- I'm going to call it 65% LTV and we think it's pretty good. That's what we're here for is to lend to clients particularly in tough times. You can't be a bank that every time something goes wrong you run away from your client. 
+We also do things like stress test down to $30 oil, maintain $30 for 18 months and say, how much more reserve do you have to put up? I think I said somewhere, you can correct this number, Marianne, we're not in the same room, that if that happened, we think we're going to have to put up another $500 million or $750 million in reserves. Which is just not something we worry a lot about. 
+
+Answer_18:
+
+          Good evening. 
+
+Answer_19:
+
+          So it's obviously a really great question. Unfortunately we really don't guide to our forward-looking issuance. You're right, we are above 150 basis points right now and we're also working on our leverage balance sheet. So we're working the dials exactly what you would expect us to, but we're not going to make any comments about forward issuance. 
+
+
+          Yep, I got it. 
+
+Answer_20:
+
+          The pipeline for 2016 is building up, so we don't have perfect visibility yet. We think obviously the deals that were being done in 2015 were skewed toward larger deals and we think there may be more flow in 2016 but it looks pretty healthy to us so far, but it's building up. 
+
+
+          Thank you. 
+
+Answer_21:
+
+          I think over the last several quarters, forgive me if I'm slightly wrong but I don't think I'm entirely wrong, our sort of C&I growth has been broadly in line with the industry. Remember that over the course of 2013 and 2014, we did a lot of work on simplifying our businesses and that had an impact on the pace of our loan growth. But our mature markets are performing well. We're seeing growth in our expansion markets. We're adding new clients. We're culling our prospects. So everything is set to continue to see growth more going forward than we have in the past. 
+
+Answer_22:
+
+          There was about -- in CIB, there was about $47 million of metals and mining, about net-net $20 million of BAU growth and then just a few other normal BAU puts and takes, downgrades, upgrades. Other than those three things there was no one specific call out. 
+
+Answer_23:
+
+          Thanks, Chris. 
+
+Answer_24:
+
+          Of the $19 billion that we put on our balance sheet, around $10 billion, just a little over $10 billion was jumbo. The rest was conventional conforming. 
+
+Answer_25:
+
+          We'll have to get you the split. 
+
+
+          I think the jumbo's like a third ARM. Counting the conforming, I think it's all fixed. That's what I remember. 
+
+
+          We'll confirm for you. 
+
+Answer_26:
+
+          You are right that at these kind of 2.5%, 250 basis point levels in Card, it does speak to the quality of the loans we're originating and the engagement with the customers. Which is much more now about driving, yes, some NII but really, really good spend and therefore lower credit quality. It's an integrated equation. We're expecting, given our originations and the runoff portfolio, the work loans running off in the portfolio that we're building is really very, very clean. 
+We're expecting that those charge-off rates to be low for the short to medium term, to read out for the next year for sure. And there will be a combination of things that would drive that. But largely it would be environmental. We don't expect at this point, we have made changes to our credit box but they aren't material changes and we'll continue to test our appetite to want to do that and that may have an impact. But we're originating the vast majority of our cards in the super prime sector. 
+
+Answer_27:
+
+          Similar, yes. Compared to the industry, our originations are skewed to the prime space. 
+
+
+          And our LTVs are lower and our durations are in line or lower. 
+
+Answer_28:
+
+          The biggest comment I would make is that there was a lot of volatility, particularly in China, in the second part of or the last part of the second quarter. We were -- we did pretty well. We helped our clients. We didn't have significant open risk positions. We weren't very directional. We were able to do well in that situation. Also in the reversal, also on currency moves. It really is a comment I made about we're here to serve our clients, they were transacting, we were able to do risk intermediation in today for them and so we made money on both ends. 
+
+Answer_29:
+
+          Let me just talk qualitatively for a second and we'll get you some numbers. But we're focused on mobile and digital primarily because it's going to be great for the customer experience, it's what our customers want. And also because it's a significant enabler for reducing cost to serve and improving efficiency. So we've been very focused on whether it's quick deposit, whether it's quick pay, whether it's our mobile wallet, whether it's our mobile app and we've been seeing great results. I'm off the top of my head not going to be able to tell you the penetration rates but we can get back to you. 
+
+Answer_30:
+
+          I can tell you that we are growing our deposits nearly twice the industry. That we know. I think that's a reasonable indication for a bunch of different reasons and that we have a very highly rated app. I think the most highly rated bank app but we'll check that too. 
+
+Answer_31:
+
+          On the Fed funds and reverse repos, we had moved toward higher yielding, for example, emerging markets assets there. So we got some high yield there. We saw some yield on our trading book moving out of emerging markets. Just a bit of puts and takes. On securities, was it significant? I'm sorry, I'll come back to you. Operator, any more? 
+

exam/original-files/Problem_2_3_Sample_QandA/12_questions.txt

@@ -0,0 +1,124 @@
+Question_1:
+
+          Thanks very much. So I'm curious, the capital markets related commentary, I get there could be a hangover effect into fourth quarter and I'm guessing that's the primary driver behind your analyst estimates appear high on fourth quarter. But could we talk about what you're actually seeing in terms of where the financing markets are maybe drawing the line? Meaning, are the deals that underwriting you expect to fall off in the fourth quarter based on your pipeline, is that a function of timing that you think could come back next year? Are these marginal deals where markets are drawing the line? I'm trying to get at -- 
+
+Question_2:
+
+          The ultimate question of is this the first time that FICC could actually grow in 2016 just because of the beat down it took in the back half of this year? 
+
+Question_3:
+
+          Maybe just a follow-up in FICC in general, I know none of us have a crystal ball. The slowdown in activity that we see, some of it's clients sitting on hands. Maybe you could separate that between any providing of liquidity [and marks] along the way. Because we did see a really wide credit spread widening in the quarter. 
+
+Question_4:
+
+          Thanks. Marianne, can you talk a little bit more about the Card business and try to help us understand the Card revenue pressure that we saw this quarter into the fourth? How much of that is the NII side of things and how much of that is the partner repricing? And how far past the fourth quarter do those resets continue before growth can overcome it? 
+
+Question_5:
+
+          Got it. Okay. Second question, just on -- in this tough revenue environment, first of all, can you give us a quick update on the progress on the expense plans? And then, any -- does anything change given how tough this revenue environment has changed as far as either accelerating or digging in again? I know your prior comments have focused on obviously always needing to invest. But in terms just of your focus as you think about next year and building the expense budget against the environment that we're seeing. 
+
+Question_6:
+
+          Hi. Just a follow-up to that last question. So of the total $4.8 billion of expense savings, how much have you achieved? And if you're on track, why did the adjusted overhead ratio go backwards? It's 60% in the third quarter versus 58% in the second and 59% last year. 
+
+Question_7:
+
+          All right. And one follow-up. Clearly it's due to revenues. So the question Jamie, if you could answer this, a simple yes or no question. Is the economy getting stronger or weaker? And the reason I ask that, the jobs report from a couple weeks ago seems to imply the economy's getting softer. Yet, your loan growth actually -- your core loan growth accelerated and you're guiding for faster loan growth in the fourth quarter. So is there noise in that loan growth figure or is the economy, based on what you're seeing, getting stronger and the jobs number is misleading? 
+
+Question_8:
+
+          Hi, Marianne. You saw some very good improvement in the GSIB surcharge from the 4.5% to 4%, probably came a little faster than some of us expected. Do you have good momentum there to do more there and how are you thinking about the tradeoff, the cost benefit tradeoff, of pushing further down on that GSIB bucket? 
+
+Question_9:
+
+          Hi, thanks. So just a question on the capital, getting to 4% now with a goal over time to get to something lower, 3.5%, 3%. Does it also give you more room for capital return requests next year, Jamie? 
+
+Question_10:
+
+          Okay. And then just on TLAC, I know we're still waiting for the Fed decision but we did get FSA recently. Anything in there that you can respond to as to how you're prepared for TLAC? 
+
+Question_11:
+
+          Good afternoon. Just maybe a question on NII and NIM. I think Marianne you said it would be relatively flat in the fourth quarter yet you're still expecting some pretty strong loan growth. Just wondering if you could maybe discuss why you think it would remain flat in that scenario? And maybe a bit longer term in an environment where we're looking at lower for longer potentially in the rates, how do we think about the NIM a little bit over the intermediate term? 
+
+Question_12:
+
+          Yes, good afternoon. My question is on the Credit outlook. The consumer reserve release has continued to offset the wholesale reserve build and I'm just wondering, how should we think about how much is left on the Consumer side over the next several quarters, especially given the 23% loan growth that we saw this quarter and your note saying that this momentum should continue? 
+
+Question_13:
+
+          And just my follow-up question, following on Ken and Mike's question on expenses, maybe I'll ask it another way. Over the past two quarters your adjusted overhead ratio was 58% to 60%. You noted that you think that net interest income could grow next year even if rates stay low. Could you potentially slide below the 58% to 60% band that you reported over the past two quarters relative to -- you mentioned an efficiency target of 55% if rates actually normalize? 
+
+Question_14:
+
+          Good afternoon. Thanks for taking my call. First of all, Marianne, if I could in terms of some of the credit numbers that you mentioned in terms of the Oil & Gas provisions? They seemed pretty modest in the scheme of your more than $20 billion of exposure to that industry. How are you thinking about the redetermination process that started this quarter and how would you guide us in terms of thinking about what the provisions could be in the fourth quarter following the redetermination this quarter? 
+
+Question_15:
+
+          Okay. And then in terms of Mortgage Banking, you noted that production -- the production amount was actually up quite nicely year-over-year but the revenues in terms of production and also in servicing were a bit weaker, certainly on a quarter-over-quarter basis. But the expenses were relatively stable on a quarter-over-quarter basis. Is there something going on there that we might see further improvement in the expense base on the Mortgage side of the business in the fourth quarter? Or are we sort of -- are you at where you need to be in terms of the $1 billion to $1.1 billion a quarter in that business? 
+
+Question_16:
+
+          We've seen some assets change hands and you guys have been mentioned as a buyer for some of the other assets that are out there. Just wondering on what the ability and appetite is out there to buy loans. 
+
+Question_17:
+
+          Just separately, following up on energy, how exactly do you re-evaluate the portfolio? Is it as the defaults happen, that's where there's a big boost to reserves or you get in front of that? 
+
+Question_18:
+
+          Good evening. 
+
+Question_19:
+
+          Marianne, I appreciate your commentary on the preferred issuance that you guys have done so far throughout the year. Looks like you're now above the 150 basis point target. You alluded to that being a function of efforts to manage to your binding constraint under CCAR. Just wanted to get a sense as to what -- how you guys are thinking about issuance plans going forward? 
+
+Question_20:
+
+          So just moving over to the Investment Banking side and maybe trying to dig a little bit deeper into some of the guidance you've given on M&A. Looks like the backlogs and expected completions for the fourth quarter are quite healthy but at the same time, post the August volatility, some of the historically strong M&A indicators like market cap, CEO confidence, those measures appear to be deteriorating. I just wanted to get a sense as to how you're thinking about the M&A outlook beyond the fourth quarter, just given some of the weakness that we've seen in some of those measures. 
+
+Question_21:
+
+          Thank you. Good afternoon. Marianne, can you share with us -- you mentioned that you've built out 400 new relationships in the middle market area of the Commercial bank. But when we look at the loans outstanding, they're essentially flat on a year-over-year basis whereas the Corporate Client business has grown very rapidly. Can you give us some more color behind what's driving those numbers? 
+
+Question_22:
+
+          Okay. And then you talked about the reserve build in the CIB, about $128 million was for Oil & Gas and the total number was $232 million. What was the other areas that required reserve building this quarter? 
+
+Question_23:
+
+          Mine were asked and answered. Thank you. 
+
+Question_24:
+
+          Yes. On the Mortgage Banking side, I noticed that your jumbo loans -- not your jumbo loans -- that your residential loans on your balance sheet's grown. Are they mostly jumbos and are they coming out of your normal production, that $29 billion and you're selling less to the government? Can you add some color around those numbers? 
+
+Question_25:
+
+          And are they mainly ARM loans or are they fixed rate loans? 
+
+Question_26:
+
+          Thanks very much. Marianne, if I can just follow up on some of the consumer credit quality metrics. At the Investor Day and subsequently Gordon was indicating unsurprisingly just given the very low levels that the expectation should probably be for some moderate rate of deterioration. And yet, we haven't seen it and I'm guessing that's partly because of the underwriting that's occurred over the past few years. My question is, what are the circumstances in which we should expect more significant deterioration there? Is it only macro or is there something else competitively that could influence that at this stage? 
+
+Question_27:
+
+          And are the dynamics similar in Auto as well? 
+
+Question_28:
+
+          Yes, hi. Just a quick one at this point. Equities, Marianne, you highlighted strength in Asia which I think probably was better than maybe some had expected given some of the volatility. So could you give some color on the trends you saw in that region in your Equities business? 
+
+Question_29:
+
+          Thank you. Hi, Marianne. Quick question on your Consumer business. You guys have shown very strong steady growth in the mobile users. I think it's over $22 million in this quarter. That's up from $18 million a year ago. Can you share with us what percentage of your customers are actually mobile users and how does that compare to a year ago? And what does Gordon think? What's the penetration rate that you think you can finally get to there? 
+
+Question_30:
+
+          Is there any evidence that you guys can point to where you're actually taking market share from other banks because your mobile products are just more superior than some of the smaller regional banks and community banks? 
+
+Question_31:
+
+          Okay. And then finally, your asset yields jumped this quarter which was good to see of course. Can you share with us how the Fed funds rate went up as much as it did sequentially? And also your securities yield went up in the quarter sequentially, can you give us some color behind both those numbers? Thank you. 
+

exam/original-files/Problem_2_3_Sample_QandA/13_answers.txt

@@ -0,0 +1,264 @@
+Answer_1:
+
+          Good morning. 
+
+Answer_2:
+
+          So, again, I would say that the pipeline coming into 2016 in M&A was good, solid, up, in fact. Obviously, volatility can dampen the confidence of Boards and CEOs. Dialogues are pretty active, and we think the types of deals that we'll see in 2016 will look different. But I think, in the first couple of weeks, it's not been particularly strong, and we do need to see some of the stability come back, I think, for us to really see that conversion start to pick up. 
+
+Answer_3:
+
+          Yes, less mega-deals, more mid-sized deals, more cross border. It's a little different. Actually, more deal count, less big mega-deals, could be very constructive for revenue, but we're likely to see it be a little bit different in 2016. But honestly, the pipeline is good, and -- yes. 
+
+Answer_4:
+
+          North America will be a tough comp. It was very strong in 2015, but Europe could be very constructive. 
+
+Answer_5:
+
+          Yes. So, the way we do our reserves, just for context, because I think it's important is, obviously the oil price outlook is important and instructive. And it's very clearly going to drive how we think about probabilities of default and loss, given [default for] certain of our customers. 
+But I think it's also the case, just for context, to know that it is very name-by-name specific. Specific conditions at clients matter greatly. And so when we do these estimates, they are directionally correct, and order of magnitude correct. But that's just for context. 
+Oil -- we said last quarter, if oil reached $30 a barrel, and here we are, and stayed there for, call it, 18 months, you could expect to see reserve builds of up to $750 million. And that assessment hasn't fundamentally changed. 
+So, it is not the current market expectation that oil will flatline. It is the expectation, right now, that there will be a modest recovery. Based upon that, we would expect to take some additional reserves, but for them to be more modest, less significant. But that's the range; if oil's at $30 and stays here for a long time, up to $750 million. 
+
+Answer_6:
+
+          I think, first, I'd say we try to be very conservative, always, and so we're not trying to put up as little as possible. You know me, I'd put up more if I could. But accounting rules dictate what you can do. 
+And these are baskets of -- the real risk is in producing wells, cash flows are down. Surprisingly, the cost of getting the oil out of the ground has also dropped dramatically, and probably much more than most of us would have expected. 
+So, you take these producing wells, you take the cash flow, you discount it at 8% or 9%, you lend against it. And so these are our forecasts. 
+And our energy book isn't that large, relative to JPMorgan Chase. We're not worried about the big oil companies. These are mostly the smaller ones that you're talking about these reserve increases on. 
+
+
+          I also think, Mike, just -- 
+
+
+          And the forward curve is -- the end of the year, for 2016, I think is more like [$41] or [$42], or something like that. 
+
+
+          Yes, it's [$48]. So, hey, Mike, the other thing to know about the profile of reserves -- three things. The first is, it's not linear. 
+So, just the oil price decline, and the decline in the forward curve that we saw into December and to the end of the year, that's the impact it had on our reserves. It's fallen significantly in the first two quarters. That was not a knowable condition, and we can't reserve for that at the end of the year. That's why we said we would expect to take some more reserve increases in the next couple of quarters. 
+But again, it's a name-specific thing. And lots of other conditions at clients matter, including their hedging, their cash flows, the level of security, all those things. 
+
+Answer_7:
+
+          We don't. 
+
+Answer_8:
+
+          First of all, the oil folks have been surprisingly resilient. And remember, these are asset-backed loans, so a bankruptcy doesn't necessarily mean your loan is bad. 
+So, you have to be a little bit careful in -- and it's also, Mike, a philosophical thing. A bank is supposed to be there for clients in good times and bad times. So, it's not a trading market, where you try to support clients. 
+So, to the extent we can responsibly support clients, we're going to. And if we lose a little bit more money because of it, so be it. 
+And we've done that around the world. We did it in 2007 and 2008 and 2009. We try to do it responsibly. If banks just completely pull out of markets every time something gets volatile and scary, you'll be sinking companies left and right. 
+
+Answer_9:
+
+          Yes, so, let me just deal with where we are against our targets. So, the most notable targets were $2 billion in the Consumer businesses in 2017 versus 2014, and $2.8 billion in the CIB in 2017 versus 2014. 
+You probably heard my comment, but to clarify, on an apples-to-apples basis, we're halfway through on Consumer. We've done $1 billion this year. You don't see that 100% translate into the results, partly because of legal expense, which is not something that we particularly can predict, and hopefully won't be there forever. Also, because we intentionally decisioned in 2015, in the fourth quarter in particular, or mostly, to increase our investments in the Consumer businesses by $150 million. 
+So, we've achieved the $1 billion. We chose to reinvest a portion of it. Another $1 billion we're on track for. We will potentially reinvest some of that, too. And Gordon and we will talk to you about the basis for that at Investor Day. 
+On the $2.8 billion in the CIB, we're $1.3 billion through at the end of the year. And we talked before about the fact that the first $1.3 billion is largely on business simplification. We've had the revenue decline. We need to have the expense decline, and we've worked hard to deliver that, and we have. 
+The next chunk is to do with technology and operations and infrastructure and organization, and it's harder. And so, we will continue with them on track to deliver it, but it's going to be a job through 2016 and into 2017. 
+
+Answer_10:
+
+          Yes, I can give you some thoughts that won't totally satisfy you, which is our core expenses will continue to trend down, on the back of delivering against them. But we will make investment decisions that we think are good for the Company, accretive for shareholders, that will re-spend some of that money. And so we'll give you that shrink and grow at Investor Day. 
+
+Answer_11:
+
+          So, just on NII, yes, we are seeing, embedded in that NII, flat to up slightly. We are seeing a nice lift associated with the rate hike in December across businesses, as well as the continued benefit of the mix towards loans in our balance sheet. But we were flatted in our NII this quarter by $178 million on securities gains in CIO. So, that's going to mean the comparison is challenging, and then day count is obviously seasonal. 
+So, that's the dynamic. We are seeing the rate benefit. We do expect to see it, as I said in my remarks, for the full year. 
+Look, we think we are appropriately conservative on deposit [beta's]. It is not -- it is way too early to have any idea. There's -- virtually nothing has moved yet. And so, our job, and what we are doing, is paying very close attention to the competitive landscape. 
+These deposits that we're talking about, that have the high beta's, are valuable deposits with valuable clients for us, and we want to be competitive and pay fair rates. But it's so early in the movie that we haven't changed much in our modeling assumptions. 
+
+Answer_12:
+
+          So, energy, Metals & Mining, we're watching very closely, industries that could have knock-on effects like industrials and transportation. But we're not seeing anything broadly, in our portfolio, right now. 
+We're just watching very closely, which is why -- now, obviously, you can take our reserve build number, and you can say it's almost substantially all made up of Oil & Gas and Metals & Mining. And behind the scenes, we've had upgrades and downgrades of a number of other different companies, across sectors, but nothing particularly thematic yet. But we're watching. 
+
+
+          I would just point our that Credit Card, Commercial Bank, middle market, large corporate credit is as good as it's ever been. So obviously, it's going to get a little bit worse. I wouldn't call it a cycle, per se. 
+If you have a recession, yes, you will see a normal cyclical increase in all those losses. We're not forecasting a recession. We think that the US economy looks pretty good at this point. 
+
+Answer_13:
+
+          Yes, so, look, we talked about achieving 4% last quarter, I think; and for disclosure, we were quite close to 3.5%. At that point, it becomes increasingly compelling to want to look at the margin, for what you could do to get within the bucket. And so that is what we did in the fourth quarter, is spend time really focusing on getting to that achievable boundary, which we thought at that point it was. 
+And remember, it's not nothing, in the year, that we started the year thinking we would exit $100 billion of non-operating deposits. And while there still could be some volatility in that number, of course, we've almost doubled that -- or doubled that, in fact. 
+So, we got some wind to our backs in doing it. It's also the case that, when you get the entire Business and Company attuned to the sense of urgency and desire to want to be increasingly efficient in this way, that, at the margin, in a 100 different things, little benefits accrue. 
+So, look, we're at about 3.5% -- we're just inside the 3.5% bucket, as best we estimate it. It's not as much important whether we're basis points or surcharge points below or above. It's much more what we do now to get safely in the bucket. And that's going to still take work. So that's why -- we'll obviously talk to you more about this at Investor Day. 
+In terms of the give-up, from an economics perspective, we wouldn't have done it at any cost. We have done it because we think it is important to do, because we think it's going to be constructive for the Company, and because the revenue give-ups were not significant. But they weren't zero, either. But to be able to reduce a constraint that is, in one way or another, likely to bind us -- or in multiple ways, in fact, likely to bind us, it was a, I think, very good trade. 
+
+
+          It was done, effectively, client by client. 
+
+
+          Yes. 
+
+
+          To make sure we were trying to do the right things for our clients; not just jamming our balance sheet down and hurting people. 
+
+Answer_14:
+
+          The US economy has been chugging along at 2% to 2.5% growth for the better part of five years now. In the last two years, it has created 5 million jobs. If you look at the actual household formation -- car sales, wage, people working -- it still looks okay. 
+Corporate credit is quite good. Small business formation -- it's not back to where it was, but it's quite good. Household formation's going up. 
+So obviously, market turmoil, we all look at it every day. But I'm not sure most of the 143 million Americans look at it that much, who have jobs; and you have a big change in the world out there. People are getting adjusted to China slowing down. When you have commodity prices go down like that, there are big winners and losers. 
+The oil companies are the losers; consumer is a benefit. Brazil gets hurt. India benefits. South Korea benefits. Japan benefits. And those cause troubling waters. And hopefully, this will all settle down, and it's not the beginning of something really bad. 
+
+Answer_15:
+
+          Okay. So our total reserves, on balance sheet, for Metals & Mining, or notwithstanding we built $60 million-odd this year, is over $200 million. So the coverage ratio is pretty good. 
+The exposure is about -- I haven't got the precise numbers in front of me. They're [about] a third the size of our exposure to Oil & Gas, so about 2% of our overall wholesale credit exposure; so, considerably more modest. Which is why, if energy prices and general commodities weakness and stress stayed where it is right now, even for an extended period, we would think that the incremental reserves would be considerably more modest. 
+
+
+          And it's also -- that one is mostly name by name. 
+
+
+          Yes, for sure. 
+
+
+          It's not big asset-based reserves. It's just -- they're big corporate credits, name by name. 
+
+
+          And for both Oil & Gas and Metals & Mining in our portfolio, Oil & Gas is close to 60% investment grade, and Metals & Mining about half. 
+
+Answer_16:
+
+          Yes, so, with respect to home equity [re-class], remember, the majority of the problematic home equity underwriting was 2005 through 2008. So here we are, at the beginning of 2016, with [pig filling the python]. But we're monitoring it closely, and we have some re-class that have happened. 
+Obviously, interest rates are low. Home price appreciation, on the other hand, is your friend. So there are puts and takes. 
+We've been monitoring it, I would say, at the margin, or more than at the margin, at the early stages, coming in better than we had modeled. And remember, from an incurred loss perspective, we would consider these re-class risks to be largely incurred, so we've tried to reserve them, to the best of our ability. So we feel good about our reserve. I don't think we've disclosed them. But so far, from a performance perspective, I would say slightly better than our models. But we continue to monitor it, because it's still relatively early. 
+
+Answer_17:
+
+          Good morning. 
+
+Answer_18:
+
+          So obviously, you'll forgive me because we've been on calls since it came out. But, yes, we have been working on this for years. 
+The problem with this particular rule is that, as you stated, based upon the four QIS's that were done, there were some, I would characterize, significant challenges, with respect to the rules as written. And we were expecting there to be a number of meaningful changes, and there have been; in many cases, meaningful improvements. 
+But it's very technical, and there's been a lot of changes, so we need to sift through it to figure out, net-net everything. Although it is clear that net-net, despite the fact of the stated intention of the committee wasn't necessary to increase market risk capital across the industry, it will be higher. But by how much, it's really going to need to be sifted through. 
+And for that same reason -- for both those same reasons, I'm sorry -- for the reason that the rule has not been stable and there have been significant questions, many of which have been either addressed or partially addressed, and many, I guess, that have not, it would have been premature to have taken any actions in advance of figuring out where this has landed. And, as you know, the period to comply is three years. So it's more of a start from here, to figure out how to manage with this, after we've sifted through the details. 
+So, I wish I were able to give you a little bit more of a detailed answer, but we're going to need to take the time to go through it. 
+
+Answer_19:
+
+          There are always actions that we can take to reduce the impact. And so, we have to think about them in the context of our overall capital optimization program. 
+And, again, if there are -- if some of the things that we hoped -- and I -- honestly, I've been on calls since it came out. So, if some of the things that we hoped were going to be addressed have not, they could have had, or may have, meaningful impact on specific types of activity. And we will have to react accordingly. And, yes, we will take actions, if that's the right answer. I wish I could give you more details, but we just need to go through it. 
+
+Answer_20:
+
+          Good morning. 
+
+Answer_21:
+
+          Yes, so, I would say that, based upon our fourth-quarter balance sheet, given that market risk was a driver, given that balance sheet levels was a driver, particularly on standardized, we could give back, on standardized, as much as 10 to 20 bps of capital, of the 10.7% capital accretion. But the bigger point, on the RWA outlook, is that we expect to be bound, over the medium term, by standardized. And standardized is going to always have a neutral to upwards pressure, as we continue to grow these high-quality loans. 
+So, even though the RWA, being at the $1.5 trillion-ish sooner than we expected, is obviously good news. Regardless of how much of that may, in the short term, revert, our job is going to be to continue to become more efficient, to try and keep it there, just given the natural upward pressure of the standardized calculations. We can become more efficient in advance, but we're unlikely to be bound by it in the medium term. So, that's what we're focused on. 
+So, I wouldn't take the $1.5 trillion, and read through that we'll be continuing to decline from here on standardized. We'll be continuing to work hard to make sure that we can grow those loans that we love, but that have (inaudible) [risk weights] under a standardized basis. 
+
+Answer_22:
+
+          Okay. If I miss something at the end, remind me. 
+In terms of how we think about buffers, just really conceptually, the Firm manages, and the Board has set for the Firm, a risk appetite. That risk appetite has a number of features, and capital depletion in a stressed environment is one of them. And so, when we think about setting buffers, we think about it just broadly in the context of allowing ourselves enough room to absorb losses that are within our risk appetite, and not have to take premature actions, from a capital perspective. 
+So -- but having said that, our buffer has been pretty consistent, at the 50-basis-point level, for a reasonable period of time. And we'll update you on all of that at Investor Day. 
+With respect to our targets, it's a little bit more complicated than minimum regulatory capital, because as you say, we're bound, potentially, by multiple constraints, and one of them may be CCAR. Plus --  it is CCAR, I should say. Because as you know, the first two quarters of this year, our capital distribution plans have already been approved. And we haven't done CCAR, so this is not any kind of prediction, but it wouldn't surprise you to know that it's unlikely that we will pay out 100% of our earnings in CCAR, going forward. 
+So, we are on a path to continue to accrete capital, though we would like to move up in our pay-out range. So, given that we're still moving towards our 12% target, and we will update you if any of that changes at Investor Day. We're also, as you know, potentially going to understand whether or not the Fed changes any of the CCAR parameters, and whether that has an impact. 
+So, at the moment, the best we know is that we're going to continue to accrete capital, albeit more slowly, as we hope to move up in the pay-out range, but we haven't done CCAR yet. And that's if the rules don't change. So, 12% it is for now. 
+
+Answer_23:
+
+          It's both. So, think about -- in a [rate-sat] scenario, when you can pick whether you believe the market -- whether you think the market is -- or whether you believe the [FONC docs]. And I think it's going to be data dependent, so we're not going to have a stated opinion on that. 
+But because of the mix in our balance sheet in 2015, as well as our expectation of continued loan growth, we would expect mix to contribute about half of that. And defer 25 basis points about the next half because we are more sensitive to the front end of rates in the first 25 basis points. And you can see that in our earnings and risk disclosures. So -- even if we see nothing else. 
+Now, obviously, we believe, and the market believes that you're going to see a couple more hikes. That would be, on average, another 25 basis points, and that would be incremental NII again. 
+
+Answer_24:
+
+          I would say I would think about them in a somewhat similar directional way, given that our balance sheet ended below $2.4 trillion, a little bit of it market delivered, a lot of it purposeful. But we do intend to continue to gather deposits and extend loans, and while you're -- and portfolio loans, as well. So, while you will see some securities balances decline and the like, I would say again, net modest growth, but modest, and very lending driven. 
+
+Answer_25:
+
+          Okay. So, in terms of the impact of rates, obviously there was a lot of monetary policy confusion. Broadly, in the fourth quarter, the ECB underwhelmed the Fed, was (inaudible). So there was a lot of confusion. But by the time the rate hike happened, it was obviously pretty well understood. We did see strong activity, or strong client activity, relatively speaking, on the back of that in the rates business, more so than necessarily about spreads. 
+With respect to the Fixed Income business, we've always been very disciplined about how we think about the staffing levels and the expenses in that business. We've managed it very carefully. The compensation has come down across the trading businesses, and it wouldn't surprise you that some of that -- a lot of that has been in Fixed Income. And our business is at scale and productive. So -- 
+
+Answer_26:
+
+          You've seen, in Fixed Income -- we have a very good Fixed Income operation globally, around the world. Rates themselves don't filter through FICC trading directly. I think what Danny was talking about is, if you have healthy economies and confident investors, you have more volume in things like that. 
+We do see a little bit of repricing taking place, in prime broker, repo, conduit, and some of those things run through FICC. So, that is going to take place as the world adjusts to all the new capital requirements. And obviously, there's a lot of seasonality in the business, which we've experienced for the last decade. 
+
+Answer_27:
+
+          Thanks, Erika. 
+
+Answer_28:
+
+          No, we've seen no real repricing in loans on the balance sheet. You have seen a little bit of -- people are getting other revenues to make up for their credit exposure. 
+
+
+          Yes. Think about the bank loans as being relationship loans that need to be in the context of [broader] relationship, and everybody is competing for them. 
+
+
+          They barely repriced in 2008 and 2009. Banks were continuing to lend at the existing price. But that was because they -- these were long-term relationships. The bank loan market does not reprice like the markets do. 
+
+Answer_29:
+
+          We haven't seen it. 
+
+
+          Also, it's very, very competitive. Everybody has been chasing these loans, and so that's a factor, too. So, we haven't seen it yet. 
+
+
+          And then, if you -- the number in middle market lending, if I remember correctly, if you look at it by client, 60% of the revenues are not loan related. So, clients -- they also know what their relationship is to the bank. And while we need to make a good return on capital, the capital applied to the client is only partially loan related. And that capital, on its own, doesn't earn an adequate return. Simple lending, on its own, is generally not an adequate return business. 
+
+Answer_30:
+
+          I think the better way to look at it is that people seem, in certain of our businesses -- and I mentioned those, and there are some other ones -- capital has been deployed, people have adjusted to the new rules, and you've seen pricing go up. Whether it goes up a lot -- I wouldn't count on it going up a lot more from there. 
+The markets are going to be competitive at that point. But use of balance sheet, the cost has gone up; not loans, but most of the other stuff. 
+
+
+          And remember, we think about our prime brokerage business going hand in glove with equity. 
+
+
+          That's correct. 
+
+
+          And so, while the repricing is helpful, and does -- at the margin, everybody is going to continue to always observe their pricing. We've built our platform internationally; Europe, we are seeing strong demand for our [synthetic pull-outs]. In Asia, we're adding clients -- we've got the wind to our backs. 
+So, it's an important business to our clients. You're right, there are some other people, potentially, not going to be as aggressive. And if we can take share, we certainly will. 
+
+Answer_31:
+
+          Obviously, we expect any transition adjustment to go through equity. If we are able to adopt it early, we might do that. I'm not aware that we are. But I could be wrong about that. 
+
+Answer_32:
+
+          So, yes, obviously, it was -- I think if you add up [cleared plus] other servicing rules, print them out, put them on the floor and stand them next to me, they're a foot taller. So they are very complicated. There's a lot of operational complexity to complying, and we're working very hard at doing that. 
+I will say, in the quarter, we did -- as part of being cautious about making sure that we're complying, our cycle times were a couple days -- a few days worsened. And so, volumes, our origination volumes, are a little lower than we would have otherwise seen; not a lot. And that's just timing, and it's just days. But not really from a financial results perspective, because of the way we recognize the revenue. 
+So, I would call it a little bit of teething problems -- across the industry, by the way, not just us -- nothing significant. We are going to get the work finished, and so it's tough, but it is what it is. 
+
+Answer_33:
+
+          Yes, so, it's about 60% jumbo, 40% agency or conventional conforming, and it's a better execution decision. So, when we look at the better economics between selling or portfolio-ing the mortgage, we'll generally choose the better economics. But we also prefer the annuity nature of the NII -- the lower servicing risk, and the better capital efficiency. 
+So, it has been the case, over the course of the last several quarters, that it has been the best execution to portfolio these mortgages. And actually, they are generating a nice return on equity. 
+
+Answer_34:
+
+          So we have had pretty big tax gains over the course of the last -- most notably, obviously, last quarter, over the course of the last couple of years. Most of those related to the, call it, 2003 through 2008 tax periods, when we were going through the financial crisis. And so, some of the matters were more complex, and we took appropriate reserving decisions on that. 
+There are many less of those very complicated matters ahead of us, and so we wouldn't expect to see the same sort of size of tax benefits going forward as we've seen in the past. But we had some this quarter. So, we'll have a few. And generally speaking, they are, because of the nature of the reserving for tax, generally speaking, we take a conservative approach and the bias to the positive. But it could be much more plus or minus zero, at this point. 
+
+Answer_35:
+
+          30%. 
+
+Answer_36:
+
+          So, do I think it's plateaued? I think it remains incredibly competitive in card generally, in particular in the co-brand space. So, plateaued at a very competitive level, I suppose. 
+But in terms of -- I'm not going to talk about any specific names, actually, Brian, in terms of the potential for repricing. It's an important part of our Business, and we're going to defend our Business. 
+
+Answer_37:
+
+          It's a Board decision, and so, neither have we received that guidance from the regulators, nor have we done CCAR, and had that discussion yet with the Board. But we have generally said that the Board likes to have the flexibility to increase dividends over time, and we have had our dividend most recently at or close to that soft cap. 
+So, we would love that capacity, and I would imagine that, over time, it may be used. But again, it is a Board decision, not a management decision. 
+
+Answer_38:
+
+          From -- we do everything pro forma. So, first of all, I would say the following. Right now, my understanding -- and if I'm wrong, forgive me -- is that it's your spot balance sheet two years prior that would drive your G-SIB two years forward. But the reality, if you ask my opinion, given that we're going to be reporting quarterly going forward, and because of the likelihood that G-SIB may or may not feature into CCAR, I think it's going to be less important, necessarily, what you are at any one moment in time, but where you are projecting to be or stay. 
+So, I suspect that we will get the benefit, potentially, of this, not today. We just closed our balance sheet. But I think that it's going to need to be a little bit more dynamic going forward, as it gets potentially introduced into stress test. 
+
+
+          But I don't know that. 
+

exam/original-files/Problem_2_3_Sample_QandA/13_questions.txt

@@ -0,0 +1,164 @@
+Question_1:
+
+          Good morning, Marianne. 
+
+Question_2:
+
+          So, curious about whether or not you all have seen the stress we've seen in some of the credit and equity markets, and some of the volatility impacting M&A velocity appetite, amongst Boards and C-suites, broadly, in your conversations and throughout the IB? 
+
+Question_3:
+
+          And just by different, is that a reference to size, or can you be a bit more specific on what you mean? 
+
+Question_4:
+
+          Okay. (multiple speakers) That's helpful. 
+
+Question_5:
+
+          Terrific. Helpful. And then, you referenced energy prices staying this low would lead to a significant reserve build, you expect, in your energy book. Can you maybe give a little bit more color around that? How would you define significant? And how long would oil need to stay down here, in order to see some of that reserve action? 
+
+Question_6:
+
+          Hi. I wanted to follow up on the Oil & Gas question. It just seems as though $124 million in additional provisions for Oil & Gas could be low, at least based on the one-year forward prices for oil, which are still in the $30s. And so, my question is for Jamie. As you look back, how does the Oil & Gas situation today compare to prior periods of stress? We have 2002; we had the TMT meltdown. 
+When you were at Bank One, you reduced the lines of credit. You got ahead of that early. In 2007, you weren't exactly at the start, but then you adjusted and you said -- hey, this is a big issue. 
+And now we have Oil & Gas, which could be another industry-specific stress, and you're only taking additional provisions of $124 million. Is that going to be enough? And one year from now, are you going to look back and say -- whoops, we didn't get ahead of this enough. 
+
+Question_7:
+
+          And how do you use CDS to help protect yourself on that portfolio? 
+
+Question_8:
+
+          Okay, you don't. And then, the last follow-up: Do you intend to keep lending to the Oil & Gas companies, as they run into problems? On the one hand, you have the risk of throwing good money after bad. On the other hand, if you stop lending as much, and you have the high-yield market retreating, and you have private equity firms retreating, maybe it becomes a liquidity crisis for some of the oil companies. 
+So, which is it? Do you lend more or less to the Oil & Gas sector? 
+
+Question_9:
+
+          Hi, good morning. Marianne, was wondering if you could remind us where you are on your expense reduction targets in the Consumer and the Investment Bank? And how does that translate to some thoughts about the expected trajectory of total Firm-wide expenses for this year? 
+
+Question_10:
+
+          And how does that all net in to an outlook for this year, if you're willing to give us some thoughts on that? 
+
+Question_11:
+
+          Thanks. Good morning. I was wondering if you could talk to us a little bit about the benefits from rates, as they come through? Obviously, your commentary that NII will be even flattish in the first quarter, adjusted for day count, and even with some securities gains in the numbers this quarter, presumes a nice helper from that first move. 
+And you guys were really conservative on your deposit beta thoughts, when you talked about them previously. I know, probably you haven't seen much change yet. But how are you expecting the deposit behavior to act? And has there been any change to your modeling expectations about what might come through, as we get through the first couple of hikes? 
+
+Question_12:
+
+          Okay. And my second question -- if I can ask an ex-energy credit question? A lot of concerns are that we're going to get into some type of broader deterioration, of which your numbers showed no signs of heading towards. What are you looking for? Are you seeing any signals of ex-energy changes in either delinquencies or watch trends? And are you still comfortable with that low [4%s] type of charge-off expectation that you guys had talked about previously? Thanks. 
+
+Question_13:
+
+          Hi, thank you. So, I think you talked about some of this, Marianne, in terms of the Method 2 G-SIB surcharge now estimated at 3.5%. I'm just curious -- I think, if the numbers are right, you took down notionals, and that there's booked $3.4 trillion, $21 billion in level 3 assets, $50 billion in non-op deposits. 
+You've said that you don't want to be an outlier, so you're whittling that down. I'm curious of the driving force behind it. What kind of revenue give-up there is, in such a move like this, because we like it. And thoughts on the go-forward? 
+
+Question_14:
+
+          Fair enough. I just have one quick follow-up, on Ken's last question: If two-thirds of the economy is consumer-led, you look at all your early-stage delinquencies, like Ken said. And, Jamie, to your comments, things look okay. I hate putting words in your mouth, but what do you think the disconnect, then, is, between what's going on in the markets versus what's going on in the trends in your Business, both in terms of growth and forward-looking credit looks? 
+
+Question_15:
+
+          Hi. The disclosure around the Oil & Gas is really helpful. And I was wondering if you could just walk through something similar on Metals & Mining? So, you gave us the -- I think you said $68 million of full-year reserve build, and you gave us the not-significant, if things stay where they are. Can you give us the balance? 
+And then, is there a comparable $500 million to $750 million stress test for Oil & Gas, or stress case? Is there a comparable -- what is the stress case, if broader Commodities, and Metals & Mining, comes in worse? 
+
+Question_16:
+
+          And then on -- I guess staying with credit -- on home equities and the whole issue of free cash from interest [home-made] amortizing, can you lay out how it's progressed, relative to your expectations so far? And also remind us how big the allocation of the reserve is against that? 
+And I guess, not to lead the witness, but is that an area where things are trending, early days, better than expected, and could provide some buffer against, maybe, anything else that happens on the C&I side? 
+
+Question_17:
+
+          Hi, good morning. 
+
+Question_18:
+
+          Marianne, I know that the Basel Committee put our their fundamental review of the trading book proposal this morning. So, clearly, no one's had time to really go through it in detail. However, I'm sure you have already gone through the prior proposals, and done the QIS for the last couple of years. The proposal is better than what had been -- the ruling is better than what the proposal -- the most recent one had been. 
+Just wanted to get a sense from you, as to how you can manage to this 2019 implementation time frame? Are there things set in motion already? Or is this something that you would start from here? And if you could just give us some broad strokes on how you think about overall impact, that would be helpful. 
+
+Question_19:
+
+          Right, I totally understand that. And I guess my basic question is: There's -- you can take action, as opposed to just deal with what the current decision would be for you. There are actions that you can take to reduce the impact? 
+
+Question_20:
+
+          Good morning. 
+
+Question_21:
+
+          I had a couple of questions on capital. The first relates to the RWA progress, which did surprise positively in the year, by about $50 billion ahead of expectations. And I was just hoping you can give a better sense, Marianne, just given some of your prepared remarks, as to how much of that incremental $50 billion reduction was a function of more proactive mitigation efforts? Maybe even tied to the G-SIB mitigation efforts that you guys had talked about, which should presumably remain in the run rate, versus balance sheet shrinkage that may be due to the risk loss environment that we're experiencing today? 
+
+Question_22:
+
+          Understood, Marianne. That's very helpful. 
+And then, maybe just switching gears to the G-SIB surcharge, clearly the progress surprised positively, getting down to that 3.5%. I was just wondering how you guys are thinking about establishing minimum capital targets? I recognize you'll likely lay that out at Investor Day. 
+Just want to get a better sense as to what methodology are you employing, in terms of thinking about a management buffer? And all the different binding constraints that you have to manage to day-to-day? And thinking about through-the-cycle target that you guys would like to manage to? 
+
+Question_23:
+
+          Thanks. Marianne, if I could just clarify your NII comment from the very beginning of the call, do I understand correctly that the $2 billion of incremental NII that you've cited is just a function of the repricing dynamics, as they move through your balance sheet, rather -- or is there also, I guess, a contribution from loan growth? 
+
+Question_24:
+
+          Great. Thank you. And so, I know we just touched on RWAs, but how do you suggest we think about GAAP assets for this year? 
+
+Question_25:
+
+          Good morning. I just wanted to -- I had a follow-up question on Fixed Income trading. I think Dan Pinto has talked about benefits from higher rates. And so, I guess number one, I wanted to see if you had any thoughts on that? Have you seen any initial benefits to spreads in the FICC trading market, with the first rate hike? 
+And in contrast, you've had a couple of competitors announce -- or at least it's reported -- that they're cutting headcount. That seems to be a little bit in contrast to the expectation that Fixed Income could pick up with higher rates. So, if you could talk through your thoughts on Fixed Income? 
+I do notice that you did mention 1Q is off to performing well, so maybe that's part of it, too. But if you could help on that, that would be great. 
+
+Question_26:
+
+          All right. So, you still feel pretty comfortable with your outlook that things could improve, and market share gain potential, as competitors pull back? 
+
+Question_27:
+
+          Hi, good morning. My questions have been asked and answered. 
+
+Question_28:
+
+          Hi. If we look at credit spreads in the bond market, even ex-energy, they've widened considerably. And I'm wondering if this has resulted in wholesale credit being repriced at all? I realize the bond market doesn't set bank loan pricing, but just wondering if you've been able to reprice some of the wholesale customers, or expect being able to do so? 
+
+Question_29:
+
+          I guess I wonder why. We saw pricing in the debt markets come in considerably over the last several years. C&I pricing came in. I realize it might take some time. But I would think there's the opportunity for at least some repricing around the edges; no? 
+
+Question_30:
+
+          Thank you. Good morning. Jamie, to follow up on your comments about maybe some better pricing in prime brokerage and repo because of the capital requirements, or requiring you guys to raise prices, can you expand upon that? Do you see it growing, where you could get even better pricing going forward, because of less competition? Can you give just more color there? 
+
+Question_31:
+
+          Great. And then the follow-up question is: Obviously, the FASB is coming out this quarter with the new loan loss reserve methodology -- the current expected credit loss versus what we're using today -- obviously, the incurred loss model. There's going to be a true-up for everybody. Have you guys given any thought that, when this goes into place, when you may take that true-up? Assuming they say you have to implement it by 2019, or something like that, would you do it much before that, or can you give us some thoughts on your thinking about what's going to happen? 
+
+Question_32:
+
+          Thank you very much. We know that you implemented a new disclosure form in the Mortgage Banking space tread. Did that have any -- you guys had very good Mortgage Banking results. Did that have any impact whatsoever on your operations in the Mortgage Bank? 
+
+Question_33:
+
+          And then a follow-up question on your portfolio: You look like you grew your residential loans by about $11 billion. Last quarter, you said it was a mix between agency and jumbo. If a big chunk of it's agency, can you give us your thoughts on portfolio of that agency product? 
+
+Question_34:
+
+          One quick follow-up, Marianne: You've had some pretty big tax gains the last couple quarters, running below 30% of your tax rate. At some point, do you pull forward future benefits, and run with a higher tax rate in the future? 
+
+Question_35:
+
+          So, what's your natural tax rate, if you don't have those? Is it around 30%? Or is it closer to --  
+
+Question_36:
+
+          I was wondering if I could just sneak in on credit cards. Do you think the competitive environment has hit a plateau? And on co-brands, are there any large upcoming repricing events? And is there any bigger than a bread box size you can give on [Marriott]? 
+
+Question_37:
+
+          Thank you. Hi, Marianne. If the regulators lift the dividend pay-out ratio in this year's CCAR to 40%, would you guys consider lifting your dividend pay-out ratio something closer to that? 
+
+Question_38:
+
+          Thank you. And then just one last follow-up: On the G-SIB buffer, obviously you guys have done an incredible job in bringing it down to where it is today. When do you expect the regulators to put you into that bucket, assuming you guys are obviously looking at the same types of numbers? 
+

exam/original-files/Problem_2_3_Sample_QandA/14_answers.txt

@@ -0,0 +1,247 @@
+Answer_1:
+
+          So the first thing I'd say is with respect to oil and gas, obviously I think $529 million is pretty close to $500 million, plus or minus. So that was pretty much in line. But you are saying it'll be a little bit higher with metals and mining. We were expecting close to $100 million and there were a couple of extra downgrades that came through in the quarter, and that kind of timing is going to happen. It doesn't change the overall sort of perspective for us. 
+With respect to draws, when I gave some sort of indicative guidance about what you might expect to see potentially in the rest of the year in terms of reserve build, we do try to take into consideration the likelihood that we will see incremental draws. And clearly we will work with borrowers to try and help them such that that may not be necessary, and in other cases we can reduce our exposure in redetermination cases. But we will expect to see draws and that's contemplated in our guidance. 
+ And I want to make sure that everyone understood that we tried to be very complete. So this is not just oil and gas and metals and mining, as the [Mace] Code would suggest. We've looked at very closely related companies in shipping and marine transportation and the like. So we're trying to be very complete. 
+
+
+          We've yet to take a loss. 
+
+
+          We have taken a couple. Not very much. 
+
+Answer_2:
+
+          So of the $1.2 billion, $1 billion was a combination of oil and gas and metal and mining, so the vast majority and outside of that, consistent with my comments on contagion, there's not any sort of thematic other noteworthy thing to mention to you. And obviously as we continue to watch the cycle play out over the next several quarters and reevaluate some clients that may be experiencing stress, it's likely that we will see some more MPLs. But I gave you context around what we're expecting to see in terms of reserve. So they will go up, but not to numbers I would consider to be large in the context of our wholesale portfolio. 
+
+Answer_3:
+
+          The draws are about $1.3 billion in the quarter. So some but not excessive. And after the reserves that we put up in the first quarter the coverage ratio is 6.3%. 
+
+
+          What is it on balance and stuff? 
+
+
+          That is the on balance sheet. 
+
+Answer_4:
+
+          Sorry Glenn, just on that 6.3%, that's the Firm. If you look in the Commercial Bank, obviously it's higher. So you've got a sort of a different portfolio mix in the Commercial Bank versus the CIB. So if it's some parts of our portfolio it's closer to 9% or 10% and in other parts it's lower. Sorry. Your second question? 
+
+Answer_5:
+
+          It's a perfectly reasonable question. And obviously when we look at growth in CRE, or the commercial real estate business, of 18% it's an obvious question, are you doing something different? And the answer is, no we're not. We haven't changed our geographies, we haven't changed our risk appetite. It just simply is the case that we have a good process and we are continuing to focus on our sort of core capabilities and our core risk segments. But we've been able to take advantage of the opportunity because our process is better, and to a lesser degree, but nonetheless to a degree, given that the CMBS market has been somewhat disrupted. 
+
+Answer_6:
+
+          Hi. 
+
+Answer_7:
+
+          So Betsy obviously, with having only received the specific feedback less than 24 hours ago we still have to get into the analysis phase about what it all means. 
+I would start with your opening comment that considering our liquidity you were surprised. This doesn't appear to be a statement about the adequacy obviously of JPMorgan's liquidity, which is very significant, as you know. But it really about how we analyze and think about that at the material legal entity level and the inter-affiliate nature of how we formed our entity. So I can't tell you with any clarity exactly what will be required as we get into the analysis. It wouldn't be my core expectation that it would require us to do a meaningful overall new liquidity actions, but we have to do the work. 
+
+Answer_8:
+
+          Again, just based on our preliminary read, I think there's going to be significant work to meet the expectation of the regulators. And our plan already had us doing a lot of work around actual real simplification of legal entities and other things. So I don't know that there are going to be significant changes. It's not my primary expectation that there would be, but we do need to have a moment to go through the details. 
+
+
+          The liquidity of the Company is extraordinary. We have $400 billion in central banks around the world, $300 billion of AA-plus short duration securities, just about $300 billion of very short-term secure -- really top quality repo or type of stuff like that. The trading book is $300 billion, which is mostly very liquid kind of stuff. So the liquidity of the Company is extraordinary. 
+
+
+          I would say, just again, we need to do the work and we need to figure out obviously what the response to that will be. But it is encouraging that sometimes we're found to be credible for large systemic financial institutions. And if they have been able to adequately show their preparedness, we're confident we should be able to do the same. We just need to make sure that we understand the details of what it is that we don't have in our plan today that we need to change, and we're committed to doing it. 
+
+Answer_9:
+
+          Yes, absolutely. So I just wanted -- if you used the industry codes the way that you could if you want to expand your thinking to just what is technically considered to be an oil and gas company, you'd miss out on, for example, a marine shipping company that all they do is ship oil and therefore their financial and their performance is going to be directly related to the health of the energy sector. 
+Those companies we have identified them specifically, they are managed within our energy risk team. They are not managed by a different team. So I was simply saying that some of the companies that we are watching, and in one or two small cases that have experienced some stress, are not traditional energy companies. But their condition is directly related to oil and gas. 
+
+Answer_10:
+
+          So obviously not for us. I would say that it's competitive, as the C&I space is very competitive. Commercial real estate is also competitive, but it's not irrational. And we aren't seeing, or at least we are not seeing very rational proposals on structure and risk. 
+Meanwhile we haven't changed our risk appetite, we haven't changed our underwriting standards. We continue to have lower LTVs and higher debt coverage ratios, pretty consistent geography. So speaking for JPMorgan specifically, there's been no change in our underwriting standards. In fact if anything since the last crisis, obviously the last recession, we tightened our underwriting standards and we've moved away from some of the riskier types of that business, so home builders and a lot of construction loan business. 
+
+Answer_11:
+
+          Hey, Mike. I'll start and then Jamie can add to it. 
+So on the interest rate point, the colors are pretty consistent with what we said over time, which is we have the belief that the US economy is continuing to move in the right direction, that the consumer is on solid footing, and that despite the noise in the data and some of the volatility in the market, global growth will continue albeit at a moderate pace. And obviously stability in the markets in March has continued to help us with that thesis. So that coupled with the fact that the Fed themselves, while they are dovish in their narratives in the minutes and also they are [dots] are continuing to talk about gradual increases, and the debate around negative rates has kind of quieted. 
+So we don't particularly run the Company with a day-to-day view on what's going to happen with interest rates, we are positioned for rising rates, as you know, and have been. But we also understand what the performance of the Company looks like if there are no more rate rises, or when we stress our portfolios in lots of different ways. 
+So we are positioned for rising rates, it is our central case that will happen. The market is pricing less than one hike in this year. The Fed dot says two. Our research says two. We're just going to have to wait and see. 
+I'll also start and then Jamie can jump in on the living will thing. We have to take it at face value in discussions with our regulators that we need to meet their requirements, whatever they may be, all of the rules whether it's capital, whether it's liquidity, whether it's stress testing, whether it's resolution plans. And if we do that and satisfy them, then we can continue to operate the Company the way that we think it is best for our clients and communities around the world. 
+ So at this point we need to remediate and address the issues and the feedback they've given us and resubmit a plan for assessment that we hope will be credible. And that's certainly what we will commit to do. And that's what we are focused on. 
+
+Answer_12:
+
+          Well I don't think it's inconsistent. We're trying to meet all the regulations, all the rules and all the requirements. We've been doing that now for five or six years. What is it, six years since Dodd-Frank was passed. They had their job to do and we have to conform to it. 
+
+
+          I know it's easy to sort of overlook the quite a few statements where there's an acknowledgment that progress has been made. And none of the feedback in the letter negates the significant progress across the industry on capital liquidity stress testing. So it is consistent, but we have more work to do and we'll do it. 
+
+
+          On the interest rate stuff, I wasn't predicting it. I'm simply saying I think there's a chance it will be different than what people expect, and it will be a little -- I said it'll gradual until it's sudden. 
+
+Answer_13:
+
+          Good morning. 
+
+Answer_14:
+
+          So obviously we're the first to read out, and it's very difficult when you think about performance because you also have to think about the relative performance in the comparable periods and prior years and the like. So I would say that down mid-single digits adjusted for what we would consider to have been outperformance last year is really quite good performance. So I don't know that we gained share, but I certainly think we protected share, and it may differ across the different product sets. But I think in general we feel pretty good about our performance and we don't know anything to the contrary. 
+
+
+          I'd just add that $5 billion-plus of sales and trading in a quarter like this look as good, earning decent returns. We have good margins. We're not quite sure about share, but it was -- I would look as quite a good performance. And trading losses, while we, was it six days you said to me? 
+
+
+          Six days, yes. 
+
+
+          Six days, there was -- like $40,000. So that the actual results were just -- that's really good. I look at that as a very healthy business. 
+
+
+          And then with respect to the restructuring and whether that presents opportunities for us broadly [define], including in compensation for -- we pay for performance and we pay risk (inaudible) returns, and we're not looking to try and make changes to what we've been very consistent about over time. And you can see our comp-to-revenue ratio of 32% this quarter is in line with the ratio in the first quarter of last year, and in fact the first quarter of the year before. So lower -- obviously on lower revenues, but a fair pay for the performance. And obviously we intend to insure that we are competitive, but we're not going to take any direct actions as a result of that in terms of (multiple speakers) -- 
+
+
+          We've also got some big deals done near the end of the quarter in Western Digital and [Newmar] Cable, which is part of sales and trading. We also got -- we did this, I thought, a very creative Chase, [what I would call], a Chase Trust in order to secure the first real securitization in a long time in the mortgage business, we do revenue risk-sharing, and I think it's quite good. 
+
+Answer_15:
+
+          On legal, the number is [circ] $0. Pretax is actually slightly positive. After-tax we did some true-ups, assessments on penalty. So actually net/net about $0 this quarter, which I'll take it for the quarter but it doesn't necessarily predict the future. 
+In terms of expenses, so we talked at Investor Day, Gordon in particular but also Daniel, that we are continuing to invest in our businesses. And across the board in fact adding bankers and technology and digital, digitizing, et cetera. So we continue to do that across the businesses and I mentioned in the CCB page that the net expenses, albeit down, includes self-funding $200 million of incremental investments year over year and growth. 
+ But you did notice the headcount in the Consumer businesses is up slightly. And that's a combination of the investments we're making in technology and digital, that's about 500 of the heads and other 1500 is increasing part-time staffing in the branches so that we have flexibility to make sure that we have loading at the right times of day for making sure the customer experience is good. So I would characterize it all as very consistent and yes, we continue to invest. And that is in part what you're seeing in the headcount in CCB. 
+
+
+          And you saw new credit card Freedom Unlimited 1.5% back. We're doing a lot of stuff in Chase Pay. So the Starbucks thing, we apply the top digital side, and we continue to win awards in the Consumer Bank. So we'll always be investing there. 
+
+Answer_16:
+
+          So it is our expectation across both the consumer and the wholesale businesses outside of energy that the credit trends will remain favorable, or credit will be relatively benign. We're not expecting to see material increases, except for the fact that we are growing our loan portfolio. 
+So when we did Investor Day we talked about charge-offs this year will go up year on year, and they will go up to potentially as high as $4.75 billion. But half of that would be on the back of the fact that we are growing our portfolios. So you'd just have natural sort of BAU levels of charge-off from that and then the other half would be on energy. So we're not expecting or seeing at this point anything, other than good credit quality for the rest of 2016, outside of the obvious. 
+
+Answer_17:
+
+          So I will start by saying that as you know our regulators have extraordinary powers over a wide range of requirements for us regardless, and many ways of influencing those and you're familiar with most of them. It is absolutely the case that as you look at the resolution process that there are provisions that talk about if remediation is not satisfactory with, or cured within a two-year period, there are - there's a possibility that the regulators could jointly decide, may jointly decide, to take other actions that could include capital or liquidity or leverage or operating model discussions. So obviously they do have those powers. 
+October is not that far away. We're going to do our very, very best to make sure that we put our best foot forward and remediate the issues and then we have another submission in July 2017. So not to suggest that we won't fully remediate them to the very best of our ability, but the living will process I expect to continue to be somewhat iterative over the next several cycles, and we continue to push ourselves to raise the bar. And I'm certain that the bar will continue to be raised on us, as it should. 
+
+Answer_18:
+
+          Good morning, Matt. 
+
+Answer_19:
+
+          Okay. So we talked about the fact that if there's no change in rates and if we continue to grow our loans, we would expect our NII to go up by $2 billion. So you're right, if you look at the run rate right now that would be relatively flat from here. 
+I think in our favor, because of the easing that's still going on around the rest of the world and the sort of the dovish Fed comments, there's been a lower re-price just in the industry generally. So that's in our favor and we're much more sensitive to the front end of rates. So we're not suggesting that the long end of the curve has no impact, it's relatively modest. So $2 billion, maybe a little more. The biggest driver of significantly higher NII above that guidance would be if we had another hike earlier than December. 
+
+Answer_20:
+
+          So not going to talk specifically about the Treasuries' actions, other than saying that we would support Fed tax reform in general. With respect to the impact on our business, either historically or going forward, it wouldn't be zero and it wouldn't be significant. 
+
+Answer_21:
+
+          Okay. So obviously I'm not going to be able to talk specifically about our plans that we've submitted because we just submitted them and we haven't had any feedback and they are confidential, but I will tell you that obviously negative rates, it was the first time this has been in the scenario. It's not the first time we have thought about it, and it is not the first time that we've experienced it, and at least in other parts of the world in Europe, Japan and elsewhere. So we have had strategic discussions, we understand broadly what we think we would do and what would happen to our balance sheet. We can model it and we can effect it. So in that sense, now I mean obviously, we'll continue to work that process through if it continues to be a feature of CCAR. 
+You're absolutely right that year over year our launch point is a higher level of capital and our balance sheet and our credit quality continues to improve, and our risk levels have not materially changed. So as a general matter we would hope, and we've also added [press]. So as a general matter we would hope to have incremental capacity but nothing inconsistent with what we have said externally, which is that the Board would like over time to continue to have the capacity to potentially increase dividends and that we would likely the capacity to, within a reasonable range, repurchase our stock. And that's the framework that we have used to submit our plan. 
+
+Answer_22:
+
+          Good morning. 
+
+Answer_23:
+
+          So if I do the -- I don't want to use the word call, if I adjust for the full impact of the asset sale that was in the quarter not just the $150 million in this quarter but also the revenues that were present with respect to that in the first quarter of last year, my adjusted revenues are down about 4% to a market that on average, while I appreciate that it recovered in March, but the market on average for the quarter was down around 5%. So we would characterize that as generally in line. And similarly if you do adjustments on the balance sheet side, the Assets Under Management and client assets. So certainly you can speak to Jason afterwards and reconcile our numbers so that we're not confusing each other. 
+I'm sorry what was the second part of your question? 
+
+
+          Retail engagement. So retail engagement picked up in March, as you would expect. We saw positive flows. We obviously saw negative flows for the quarter in equities, that's not surprising. And then we saw positive flows, particularly in multi-asset. So we did see some reasonably healthier retail flows in the quarter, but primarily in March, and some were offset by outflows in equities. 
+
+
+          Thank you. 
+
+Answer_24:
+
+          As luck would have it, in this quarter there is nothing one-time that you need to adjust for. Last quarter there obviously was. So we would expect that our NIM should be stable to improving over the course of 2016. The extent to which it would improve, obviously depending upon what happens in term of gradual rising rates. 
+
+Answer_25:
+
+          Okay. So with respect to equity capital raises, I mean obviously to a degree that would be true, although those companies that were able to access the equity markets are not those that are experiencing the most stress. So obviously all other things equal it's a positive, but I'm not necessarily thinking it's going to take significant steam or the pressure off. With respect to second part of your question I'm so sorry? 
+
+
+          The C&C. 
+
+
+          Jason will get back to you. I'm sorry, I don't have the answer. 
+
+Answer_26:
+
+          Okay. So no, nothing has changed in the card competitive landscape, including in co-brands. It's still very competitive, albeit that we saw a little bit of deceleration in sales growth year over year last year and we've seen that trend back positively for us this year. So we feel good about that and we've been increasing our marketing spend and as Jamie did say, we launched Freedom Unlimited quite recently and it has been quite recent, but early feedback is very positive. With respect to Freedom with a 50% increases in activity and interest, there's going to be a degree of cannibalization of other products, we would expect that. But so far, so good. And we just like to give our customers choices. And its been favorably received. 
+
+Answer_27:
+
+          So the Manheim is down slightly. We continue to believe and expect that it will continue to trend downwards and so [also seeing] it will continue to trend upwards, just given where it is today and also the amount of leased inventory that will ultimately go into the used car space over the course of the next several years. However the fundamentals are still good, the market is still solid. 
+ We have pulled back on subprime a while ago. It's a small part of our originations. So other than seeing some delinquencies tick up, as expected, in some of the energy-related states but not very significantly, there's nothing at the moment that's on the burner. 
+
+
+          For us. I do think you'll see issues in the market. 
+
+Answer_28:
+
+          So the MSR P&L for the quarter was a positive $124 million, and they are a combination of BAU and  material factors that added up to that, and probably about half of it was a combination of hedge performance and the market. 
+
+Answer_29:
+
+          Yes, yes. So purchase applications are up 30%, I think, year on year. We continue to be positive momentum in that space, and we are seeing Spring activity continue to be robust, as expected. 
+
+Answer_30:
+
+          Okay. So in terms of run rated, the two biggest drivers of the walk that we gave at Investor Day were the card co-brand renegotiations and the mortgage banking non-interest revenue. I would just point out that while we are seeing some of the incremental impact of card renegotiation, that will play out over the course of the year. But on the positive side -- and on the positive side mortgage banking, just given where rates were over the quarter, has been positive relative to central expectations when we did Investor Day. So those two things are worth noting. 
+But we are seeing really quite good drivers in non-interest revenue drivers across the consumer space generally, in debit investments, in fees and accounts, in the sort of 4%, 5% range, and sometimes in the range higher than that. So we are continuing to see exactly what we expected, which is the majority of our businesses will continue to deliver mid- to high single digit growth, and they seem set to do that. The card impact will be what it will be, and mortgage NII will end up down year over year, whether it's $700 million or $600 million we'll see. And so the biggest driver of what the end result will be is going to be markets. 
+
+Answer_31:
+
+          Yes. Look, the business is not immune to markets either. So obviously as you look at the performance for the quarter our fees have been impacted by low asset levels. And we also have got the tail impact of some business simplification, just getting the tail of that out of the performance. We are also seeing the benefit of higher rates. 
+So I'd characterize the majority of those negatives on lower fees and simplification as being behind us. So the trajectory, if rates continue to rise, would be upwards. But that's why we said market dependence. We were not expecting our performance to go down from here. Flat to up, but depending on rates. 
+
+Answer_32:
+
+          So -- 
+
+
+          I'd just use 32%. 
+
+
+          We've given a range 30% to 35%. We've been at the lower end of that range. When we performed very strongly we could drift up. If we perform less strongly, we pay for performance and I think we did a good job in the first quarter. 
+
+
+          We have among the lowest ratio. 
+
+
+          We're paying our people properly and well. 
+
+
+          And consistently. 
+
+Answer_33:
+
+          That's very fair. And we've talked about it pretty often, that people when they restructure, they restructure out of the things that they were less strong at, less comfortable at, and in many cases they double down where they continue to have strength. And we are seeing that. And that's what we mean when we say there's always someone left to fiercely compete in every part of our business, and equities is no exception. It's not the poster child for that. 
+ However, the equities business here at JPMorgan, we've rebuilt our technology platform. We have rebuilt the prime -- we've built the prime brokerage, international capabilities. The two of those work hand in glove. And we have every opportunity to continue to gain share and win. 
+
+
+          And we've done very well gaining share in electronic trading and the prime broker has been built in Asia and Europe where we had weaknesses. So you've seen our share go up and we intend to win it. We have topnotch research, which obviously helps drive the equity business too. 
+
+Answer_34:
+
+          That's correct. 
+
+
+          Give or take, and that's right. Obvious are there's a high degree of variability around it. If we had complete ability to understand it we would lean into those reserves. But it's name specific and situation specific, it would evolve over time. We just wanted to give you an indication that there's likely to be some more costs. It could be plus or minus quite a bit from that because we've had to make stress assumptions in there. But $500 million for nine months, yes. 
+
+Answer_35:
+
+          Yes. No Gerard, I'm not going to make any comments about SNC, except to say that everything that we know and aware of is reflected in our results. 
+
+Answer_36:
+
+          Correct. Yes. 
+
+Answer_37:
+
+          They changed by a couple of billion dollars on a single name that we like, up. 
+

exam/original-files/Problem_2_3_Sample_QandA/14_questions.txt

@@ -0,0 +1,158 @@
+Question_1:
+
+          Good morning. Thanks for taking my questions. Marianne, maybe a couple of questions on energy. You noted that the provision was slightly above your guidance this quarter relative to what you mentioned you thought it might be in late February. 
+Guess I'm curious in terms of what your expectations are in terms of your guidance relative to potential draw-downs, particularly in the $10 billion of high yield loans that you have undrawn? And what your ability is to potentially mitigate potential draw-downs based on the financial condition of your borrowers? 
+
+Question_2:
+
+          Fair enough, that makes sense. But that dovetails nicely actually into my follow-up. In terms of the wholesale non-accrual balances, those are up about $1.2 billion quarter over quarter. 
+Can you give us a sense as to how much of that was energy and metals and mining? And were there other areas of the portfolio that added to that? And what's your outlook for wholesale non-accruals over the course of the next couple of quarters? 
+
+Question_3:
+
+          Hi. Just one follow-up. What was the drawn-on energy facilities this quarter? It doesn't seem to be too big, but -- and then related to that, what's the reserve as a percentage of drawn credit right now? 
+
+Question_4:
+
+          And then maybe a little bit of different question. 
+
+Question_5:
+
+          I appreciate that, and I thank you. 
+The other question is on growth. We've been waiting for a long time, but you've been seeing great growth across a lot of different products. CRE up 18% and the commercial bank C&I up 9%. 
+At this stage of the cycle, I appreciate the consumer's showing a lot of strength. Is there any growth where we scratch our heads and said, wow is that growing too much? It sounds funny for me to be asking for less growth, but just curious to get your thoughts. 
+
+Question_6:
+
+          Hi, good morning. 
+
+Question_7:
+
+          I have a question on the living wills. The indication today was that there were four areas that you needed to enhance. Liquidity was one of those and I was a little surprised to see that, given the strength of your liquidity book. I guess what I'm wondering is, does the living will submission and the changes that you have to make have an impact on your current business at all? In other words, do you need to build liquidity to meet the requirements that the regulators have, or this is in a obviously worse case scenario you'd build at that time? 
+
+Question_8:
+
+          As we think about the implications of this morning's announcement, it's around your planning and procedures as opposed to a likely impact on the business operations today and the results that you can generate, is that a reasonable conclusion? 
+
+Question_9:
+
+          Thank you. Good morning. Marianne, can you expand upon your comments in your opening dialogue about the energy exposure? You're not too worried about the contagion risk, but you did say there are a couple of specific issues relating to some very closely related companies. Can you give us more color on what you're referring to? 
+
+Question_10:
+
+          Thank you. And then on the loan growth, which is obviously very strong, what are your people on the front lines saying about commercial real estate? Are there any changes in terms of underwriting metrics that your front line people are seeing since we are starting to see in certain markets, like multifamily, which you guys have already identified as some weak spots? Are there any other underwriting issues that are cropping up now that you didn't see three months ago or six months ago? 
+
+Question_11:
+
+          Hi. That was a very serious CEO letter you had in the Annual Report. But two questions related to that. 
+One would be you, Jamie, indicate the potential for higher interest rates, and just looking for some more color into why you think that's the case and if you're preparing the bank for a scenario of higher rates or if you're just trying to set a tone at the top, or perhaps be a contrarian. I know you gave some technical factors in the CEO letter. 
+And then the second thing is just the contrast between what you have in the CEO letter, liquidity trading governance oversight with the living will letter that came out today. And just a follow-up on the earlier question, do you simply have to write a better resolution plan or might you have to change a little bit the way you do business? And does this make you have a more conservative CCAR ask? 
+
+Question_12:
+
+          Was there anything else from Jamie on that, because if you compare and contrast the CEO letter to what the regulators just said about you guys, it's not completely consistent? 
+
+Question_13:
+
+          Hi, good morning. 
+
+Question_14:
+
+          I wonder on trading, you appreciate that you reported first so you haven't seen the market yet. But two questions around the whole thesis, the last man standing versus restructures. 
+One, do you have any sense of whether your performance overall and really thick represented market share gains or not this quarter? And then two, with some of the guidance coming out of the European banks in particular being very poor and some of the restructurings maybe accelerating steam, is there any thought around comp and maybe using that as a lever to improve returns over the remainder of the year and into next? 
+
+Question_15:
+
+          Hi. Just a question on expenses. First, was there any legal expense in the quarter? And then just a broader question, Marianne. 
+Are the incremental expense saves you're getting from your programs flowing through the bottom line, or is it some of it getting reinvesting, like in CCB I noticed the headcount is up a little bit on page 11, just the last couple quarters? Is that reflect like reinvestment of the cost saves? And then just on the legal side, if you had anything this quarter? Thanks. 
+
+Question_16:
+
+          Yes, good morning. You're fielding a lot of questions on energy credit quality. But taking a step back, given that the delinquency statistics outside of energy still remain fairly stable, could you give us an outlook for how you think credit quality trends will play out for the rest of the year if the base case is slow growth in the US? 
+
+Question_17:
+
+          Great. And just one more follow-up question on the living will. Could you help us understand what you think the regulators meant in terms of if the remediation is not met by October 1 of this year that there could be more stringent prudential requirements? Could that possibly mean higher capital or liquidity standards if the expectations aren't met by October? I guess we always thought of the living will as more of a cost issue rather than a further tax on regulatory ratios. 
+
+Question_18:
+
+          Good morning. 
+
+Question_19:
+
+          If I look at the first-quarter net interest income, which was at least better than what I had, good NIM, and think about your full-year outlook. If I take it literally it implies flattish net interest income dollars from here. And I'm just wondering if that's too literal of an interpretation, or if maybe there are some offsets to the loan growth from, say, lower long-term rates as we think about the rest of the year? 
+
+Question_20:
+
+          And then just separately, any comments on the Treasuries ruling on inversion as you think about M&A, kind of broadly speaking for the industry and for you guys specifically? And if you can frame how much that driven your M&A revenues in the past, or the industry? Any color around that would be helpful. 
+
+Question_21:
+
+          Good morning. Maybe we could talk a little bit about CCAR. I've had some investors express concern about the Fed's inclusion of negative rates. Have you found that to be difficult in terms of modeling? And overall, I guess given the improvement -- on the flip side, given the improvement in your capital ratios, do you think that there's -- you should be able to see some improvement or increase in CCAR into -- now that you've looked at it for a few months? 
+
+Question_22:
+
+          Hi, good morning. 
+
+Question_23:
+
+          So Marianne, within the Asset Management segment you noted that the revenues were down in line with the market. But if we isolate the fee income components to exclude some of the gains you highlighted as well as other income, the revenues declined by double digit both quarter on quarter and year on year, which is a bit more pronounced than what we had expected. And I was hoping you could speak to maybe some of the factors outside of the market declines that may be impacting revenues in that business, specifically what you're seeing in terms of retail engagement and maybe whether you've seen improvement in sentiment now that the markets have recovered pretty nicely off the February trough? 
+
+Question_24:
+
+          Good morning, Marianne.  Quick question on NIM here. Can you talk about how sustainable you think the NIM expansion might be and whether or not there's anything one-time in the numbers we should adjust for? 
+
+Question_25:
+
+          Okay, great. Thank you. And then on the energy exposures in the loan book, can you comment on maybe whether or not some of the equity capital raising that we've seen in the energy space has perhaps taken some of the tail risk away from that book? And then is it possible also to update us on the criticized exposures in oil and gas? I believe in the 10K it was somewhere around $4.5 billion at year end? 
+
+Question_26:
+
+          Thanks. Marianne, can you comment on what competitive conditions are like in the credit card market currently and if there's been any change around the intensity of competition for co-brands and awards? And I think Jamie you alluded to the launch of a new product. I'd love to get an update on your initial thoughts about how it's going. 
+
+Question_27:
+
+          Great, thank you. And on the -- auto has been a big area of focus, and you touched on it certainly during your Investor Day. But on the mid-FICO range is there anything going on, on a macro level, that would suggest some significant likelihood of credit quality deterioration? 
+
+Question_28:
+
+          Thank you very much. In the mortgage banking segment you wrote down the MSR by almost as like $0.9 billion. Was there any hedging gains? I couldn't find them in the documents, any hedging gains to offset that? 
+
+Question_29:
+
+          And the other. And then on the mortgage banking side, have you been seeing -- you saw the MBA today release that the purchase applications are the high since 2010 or something in that order. Are you seeing the Spring buying season, especially on the purchase side, starting to pick up? 
+
+Question_30:
+
+          Hi, thanks. Good morning. Just two quick follow-ups on the fee side. Understanding that market dependence is built into the outlook to get the $50 billion of fees for the year. I'm just wondering, have we now run-rated the combination of the business repositioning, the card revenue run rate, and so -- and the toughness of this first quarter? I guess the question is really, what are the things that you expect to get better from the first quarter on the fee side upside of normal seasonality? 
+
+Question_31:
+
+          Yes, okay. And I know it's a smaller line item, but just noticing in the guide for security services to be flat from here, there's always some seasonality in there too. But I'm just wondering if you could just give a comment about what you're seeing in that business and are there any incremental challenges that leave you with a flat outlook? 
+
+Question_32:
+
+          Yes, good morning. The question is already on the compensation ratio. You've obviously done a fantastic job on the cost base. But one of the issues that strikes me is clearly with the reduced revenues, particularly in the capital markets business. Your comp down about $400 million in the --compared to the first quarter of last year. 
+Obviously what we've experienced generally is you holding the ratio steady for the second or third quarter and then tooling up with a lower ratio in the fourth quarter. So I'm looking at the estimates we have for revenues on a well-known provider of data. We've got pretty flat revenues being forecast by people like me, whether we're right or wrong. Should we be thinking about how you're going to build a bonus pool on the -- against this background and whether we should be looking at thinking -- or thinking that you're going to have to [retain] the comp ratio at a pretty similar level through the year, if indeed we don't see any uptick in revenues and they remain reasonably flat? 
+
+Question_33:
+
+          But I'm not [be] talking about the quality of the ratio. I'm interested in (inaudible) because clearly what we're seeing are mostly this, and indeed in Europe, is the difficulty of building a pool when you have been so used to having a very strong first quarter, obviously makes it quite difficult. Maybe just as a follow-up which is vaguely related, could I just ask, you talked earlier about where there's question about competition and picking up market share, which indeed you clearly have. But one of the questions I perhaps just wanted to ask is, I know that you've been pushing hard on these equities, cash equities in particular. 
+My sense is that actually a lot of the players, including the Europeans who are doing massively structural, are putting more capital into equities on the back of the fact that it's a lower capital business and therefore they think they can get higher returns. And just maybe that's why [Nomura] pulled out of European equities yesterday. What are you seeing in the equity space in particular, because I'm not seeing as much sort of withdrawal as we have done in the fixed space? 
+
+Question_34:
+
+          Thank you. Marianne, just as a follow-up I just want to make sure I understood you correctly. On the $500 million of incremental reserve build for energy for the remainder of the year, that's for the total of the following nine months is that correct? 
+
+Question_35:
+
+          Okay, thank you. And then I know there was the energy specific shared national credit exam that the first quarter results for the industry will reflect similar to your own. But we also have the traditional shared national credit exam that's been done for 20-plus years. Any color on how that's going, the normal shared national credit exam? 
+
+Question_36:
+
+          Hi. Two quick follow-ups, Marianne. Getting a couple questions about just the math on the energy reserve ratio. I think you mentioned 6.3%. Just to be clear, is that the reserve for loans, over-funded loans, and then there's an additional reserve for unfunded commitments? 
+
+Question_37:
+
+          Okay, got it. And then did you tell us the size of your energy commitments and whether they changed at all this quarter? 
+

exam/original-files/Problem_2_3_Sample_QandA/15_answers.txt

@@ -0,0 +1,176 @@
+Answer_1:
+Good morning, Brian.
+
+Answer_2:
+Brian, I know that everybody is keenly interested to hear what we have to say, but the truth of the matter is it's very, very early days. The new government is just forming as we speak. Negotiations need to be given some time to unfold and take shape. So it's really too early to hypothesize.
+We would hope that we can continue to operate the way we are right now. But we will just continue to evaluate the landscape, as I'm sure you will, over the coming weeks, months and quarters, and plan accordingly. The most important thing is that we intend to continue to support our European franchise and clients throughout.
+
+Answer_3:
+So, on the card space, as you know, we have loans running off. We're replacing them all of the time. Over the course of the last couple years, since the end of 2013, we made some changes to our credit box and our credit risk policies very, very thoughtfully. And we've been monitoring them very closely.
+And what we're seeing in terms of the loss rates and the seasoning of them is fully in line with our expectations. And these loans are coming on at higher risk-adjusted margins. So, the ROEs are at or above the portfolio ROEs. So, nothing that would speak to anything other than our full expectations for our credit risk appetite.
+And with respect to Auto, not to speak for others, but obviously when you look at lower FICO scores and high LTVs and longer terms on top of each other in an environment where you've already seen used car prices soften some and they're likely to continue to do so, it's something to watch. And so we've been very, very thoughtful about that, not just today but as we've been going through the cycle. And not only on an absolute basis do we compare favorably in terms of LTVs and FICO scores and even terms to the industry, but we've been very, very careful in -- and low percentage of subprime origination -- very, very careful about looking at those layered risks.
+So nothing in our -- and remember, for Auto this year, I think the charge-off rate's going to be 40-ish basis points compared to a long-run average of more like 60. We're sort of reverting to a more normal level, if nothing else. And used car prices will ultimately come down, and we're being thoughtful about that.
+
+Answer_4:
+Good morning, Jim.
+
+Answer_5:
+At the risk of not getting like overly complicated, the long-term debt expense -- our NII was flat with loan growth. And NII on loan growth being offset by long-term debt expense, which was largely to do with the hedging of non-dollar debt and just relative quarter-over-quarter small moves in currency levels and currency basis. So, I would honestly characterize it, not to sort of underplay it, as quarter-over-quarter noise.
+Looking forward -- so when you look at our NIM, you have NII flat. You have the balance sheet growing, as we expected, both on loans and trading assets. So, NIM just naturally is down a few basis points. But we would be looking for NII to be up slightly in the third and fourth quarter, and for our NIM to be relatively stable.
+
+Answer_6:
+So, I would say there's going to be two things. First of all, obviously when you talk about Consumer, it kind of gets dwarfed by Card. So let's start with Card.
+We are growing the portfolio. We added 4% core loans year over year in Card. So naturally, as the portfolio grows over time, you would expect to add to reserves. So there will be some of that, but I would characterize it as modest.
+And then, as these vintages continue to season, we've been experiencing very, very low loss rates at circa 2.5%. They will trend up slightly. So there will be a little bit of rates impact, too, but again, as I say, with very accretive ROEs.
+I would look forward and expect there to be some reserve adds over the course of the next several quarters on a combination of those factors, but for all the right reasons. And similarly, volume-wise in Auto we should see some adds, but again, in comparison to Card, modest.
+
+Answer_7:
+So, as you know, Erika, everything that we do, we do with a view to, first of all, the client franchise and making sure that we're supporting our clients. And then secondarily, with a view to all of our binding constraints. We will provide capital and access to the CIB. But also take into consideration our overall objective of making sure that we stay in the 3.5% G-SIB bucket. So we will continue to try and find capacity to be able to recycle it and grow high-ROE/high-ROA business.
+
+Answer_8:
+Not anything significant, no. I think you've got to compare it to the prior year, which was stronger, particularly this time last year in Asia. And that's less true today -- stronger in Europe, less strong in Asia. It's more of a regional story than any particularly significant items.
+
+Answer_9:
+Good morning, Betsy.
+
+Answer_10:
+Yes. So let me -- two pieces to the story. Yes, the guidance is $2 billion-plus year on year. You'll recall when we came in to Investor Day, we said we would expect $2 billion, rates flat. It looks like rates will be flat, at least in the front end at this point, at least for the majority of the year, if not the whole year.
+You've seen already in the first two quarters that year over year we're up $1.4 billion. We were doing better than that on a combination of lower deposit bases reprices and also on strong loan growth.
+But if you annualize that, that would be too high. We are going to have some impact in NII of the lower 10-year. It's not significant. But it will offset that to a degree. We would expect our NII to be between $2 billion and $2.5 billion up year on year -- largely strong loan growth, low reprice.
+
+Answer_11:
+I would say we've been doing a combination. We've been growing our deposits more strongly than the industry. So we continue to be net-net attracting more deposits than the industry, and also, as you say, a mix shift out of securities and into loans.
+Our outlook for loan growth through the remainder of the year is to be at the higher end of our range. We said 10% to 15% core loan growth, and at this point, demand still seems robust. So we would expect to be at the higher end of that range. We certainly have been this quarter.
+So at this point I would say that it's a combination of factors. And remember that the way we think about our investment securities portfolio also takes into consideration how we think about positioning the Firm's duration of equities. So all of those factors will contribute.
+
+Answer_12:
+If I get this wrong, I apologize. But I think it was actually we make $3.5 billion on the rates implied and $6 billion on normalized rates. But in any case, let me just talk about rates flat versus implied right now. And just because things can change so quickly, let's just focus on 2017.
+Rates flat from here. So, with the 10-year at about 1.5% and IOER at 50 basis points, because of the loan growth, notwithstanding any sort of long-end pressure, we would still expect year over year our NII next year to be up between $1 billion and $1.5 billion, implied, which is actually not that much different from that. So it does have about 20 basis points better long-end rates by the end of 2017, but otherwise relatively flat through the end of 2017 would be about $0.5 billion more than that.
+
+Answer_13:
+Growing like a sunflower, not like a weed.
+
+Look, I'll say a couple of things. The first is, a lot of that growth is commercial term lending. And it is the case that we have the technology and a process that has speed and certainty of execution, and competitive funding costs. So it is the case that it's a value proposition that we're able to bring to clients, I think, that differentiates us. We're able to close in times that are a fraction of what the industry is.
+Secondarily, we're really concentrated on identified, supply-constrained markets, low-rent stabilized. So these are not the same properties that had problems in the past. We have -- since the previous cycle, we have looked carefully at our underwriting, and there are some things and some regions and some products that we either don't do or do significantly less of. So we're very, very careful. But we're looking at some really good credit quality in our commercial real estate portfolio right now.
+
+Answer_14:
+So I would say in the CIB, it's also a revenue story. So you need to consider both factors (multiple speakers).
+So let me talk about where we are on the expense commitments. And you'll recall that -- whether you remember a $4.8 billion number or a $5.5 billion number in total, we're about 70% of the way through delivering against that across the CIB and the CCB at the end of the second quarter, and we continue to make progress.
+In the CCB, obviously, it is generally more progressive. And in the CIB, it's a bit more about technology and operations, and it takes some time to deliver that.
+But fundamentally we continue to chug through that. And we will get there over the course of the next several quarters. So I would say in line with our expectations, and is a contributing factor.
+
+Answer_15:
+So I would say the comp-to-revenue ratio is an outcome, just for what it's worth. Obviously we try to give the range to give people an idea. We pay competitively and we pay for risk-adjusted performance.
+But there's nothing notable going on. We've been actually at the lower end of our range for a little while now.
+
+Answer_16:
+So it's always a little tricky. The share thing is going to become clearer with a rear-view mirror than it is necessarily at a moment in time. It does feel like we are doing fairly well competitively, not just against European banks, but just generally. And not just in Europe, but generally, because we, as you say, have continued to be there for clients across products, across the globe.
+So I would say that we feel like we are doing fairly well. We'll know whether that is share gains when we are able to actually look at that in the rear-view mirror.
+But there's still plenty of competition out there. So we're just focused on serving our clients the right way. But it does feel a little bit like we're doing well.
+
+Answer_17:
+I'm going to try to tell you as best I can, if you can hear me. So, number one, we do think it will reduce the GDP, the UK and the EU, a little bit. And obviously that's not going to affect our business plans. That will affect the economies a little bit.
+Number two, we know it's going to create uncertainty for an extended time period. So we don't think we can answer or make certain all these things you want to know because there are a lot of parties involved. We are hoping that the political leaders are very sensible. It makes sense for both the EU and for Britain to think through the process to make it sensible, whatever changes they make, to give businesses time. I'm talking about years -- time to adjust to the new reality, which we don't know what it is.
+I think the most important thing is that we will continue in every single country to serve our clients day in and day out. If it adds extra cost, so be it. I'm not really worried about it. It would be nice if it doesn't create huge turmoil.
+I'm hoping the EU is sensible, but we're going to be prepared. As Marianne mentioned, there's a range of outcomes. Any one (inaudible) we'll try to be prepared for each one of them.
+We're not going to, like, pull back on serving people in Italy, Germany, France, UK or Spain because it might lead to higher costs. I would accept the higher cost, as opposed to disrupt our clients.
+
+I would also point out, Mike, that competitively we are not in this situation alone. And so we're going to take our time to work out what the right course of action is. And obviously we'll update you as and when that becomes clearer.
+We're not going to be at a competitive disadvantage. If anything, as we talked about earlier, we feel like we're in a position of strength.
+
+Answer_18:
+The truth of the matter is, it's a bit early to say for that, too. I hate to continue to repeat that.
+I will tell you that, generally speaking, uncertainty is not particularly conducive or constructive for M&A. But in this case, I think there are some offsets. So I would start with, in terms of the actual strategic dialogue with CEOs and at the boardrooms, it is as good as it's ever been.
+If you think about the other factors that would be supportive of M&A, like cheap financing globally, low organic growth, good multiples, solid economy in the US and globally notwithstanding a bit of the steam taken out in Europe or the UK, all of that should continue to be supportive for strategic M&A. At the end of the day -- and currency could be supportive of cross-border activities. So there are puts and takes.
+I'm certain that there will be some people who think carefully through the right timing and what to do. At the end of the day, the strategic proposition should ultimately win out in most cases. And similarly, volatility, generally speaking, is not particularly conducive in terms of ECM, but investor appetite is still there, and there have been deals priced post-Brexit.
+It's a little early. There's still activity. Volatility is reasonably subdued at this point. And I think, because there are no event calendars out there right now, there's still quite a lot of opportunity in the space. Obviously, DCM, low rates would be a tailwind, notwithstanding the M&A and ECM landscape.
+
+Answer_19:
+So I'm going to start with the second part of the question. So we are still very much concentrated in the prime and near-prime space, but we have a higher percentage of our origination in the near-prime space, reasonably meaningfully higher over the course of the last couple years.
+So where we may have previously been, I think 40%, above 760. Now that's less than that, and there's more like 20% or 30% below 700. By the end of the day, still pristine credit, relatively speaking.
+With respect to delinquencies, is it a cure rate issue? Not specifically, no.
+
+Answer_20:
+We're not really doing much in the way of 2017 guidance right now. It will ultimately honestly depend on the opportunities we see in front of us to continue to invest and to add customers.
+I think we're at a very good run rate of investments. We've increased reasonably significantly in terms of marketing dollars and also lease growth. That will drive profitability in the medium to longer term.
+So it's possible, if we see the opportunity to continue to do that, we would do it. But we have no specific guidance yet.
+
+Revenue environment can change reasonably quickly, particularly, as you know, with rates, and to a lesser degree, markets. We're not going to overreact to a short-term phenomenon.
+
+Answer_21:
+Yes, taxes much -- generally speaking, the reserve changes are somewhat episodic. Outside of those, yes, 36% is a good central case for our managed tax rate.
+
+Answer_22:
+Good morning.
+
+Answer_23:
+So starting with the qualification that obviously, as you suggested, it's going to be market dependent, but also remembering that we knew when we gave the guidance that we would expect the second half to be seasonally lower. So here's what I would say -- first half, market challenged; second half, markets better. Net-net, first quarter markets challenged; second quarter better. Net-net, first half relatively flat year over year. So, call it a wash, with the acknowledgement that we knew we would expect seasonal declines in the second half of the year.
+Mortgage better -- so you may recall that we said we would expect mortgage revenues to be down year on year, actually by a reasonably significant amount. Given obviously where the rate environment is, as well as some positive MSR results in the first half of the year, we would expect mortgage revenues to be more like flat. And against that, to your point, lower IB fees and lower Asset Management revenues, given the environment.
+The way I would characterize it is there are puts and takes, but net-net it's still a reasonable central case. So we are not changing it. But it's market dependent.
+
+Answer_24:
+So I would say if you look at the last three years of PPNR, notwithstanding that there have been obviously differences in the scenarios, 2015 CCAR results, so not this year's but last year's, were low. Not to say that means that these results are more normal. I would say if you look at the three years and look at the PPNR results now, it's more consistent with the sort of portfolio risks, revenue generation we would expect. And you can see that because it's much more consistent with our results.
+So I don't have insights that I can share with you specifically to try and reconcile the Fed's results year on year, nor do we really try to do that. You're right -- operational risk is likely a piece of it. And that was disclosed in that information. So I would just say, there can be volatility but I feel like this is not an unreasonable place to think the PPNR would start, and it's consistent as you can see, relatively speaking with what we calculated.
+In respect to what that means for what's most binding, what it does mean is if you look at the analysis that we've done a couple of years in a row now, where we've said using the CCAR results from the Fed, what would that imply a CET1 ratio would need to be to pass, it had previously been a little less than 11%. With the improved PPNR and, therefore, the improved result, at this point, it would be a little less than 10%.
+So in that context, as we sort of look forward, sometime in the near future, maybe in the third quarter, to getting the sort of 2017 CCAR changes in proposed form hopefully, it will alleviate to a degree a little bit of that pressure. But I still would suggest to you, as we said at Investor Day, that CCAR may, depending on how the G-SIB surcharge is included in the minimum, may become binding, if not likely will become binding. And so we'll continue to take that into consideration as we go forward. And we are already taking it into consideration as we think about optimizing against the multiple binding constraints we have.
+
+Answer_25:
+We think about using all of our channels based upon obviously the demand, and our capacity and our appetite to want to continue to close strongly for our customers. We've obviously also been focused in the anticipation of it becoming a more purchase-oriented market very much on building out the retail channel and the retail distribution channel, and that's been very successful.
+So there's less correspondent contribution this quarter. It is a lever we will likely use going forward.
+
+Answer_26:
+At this point, I'd still say -- at this point, we would still say it will be episodic. And while we are hopeful that the overall structural costs will start coming down, or has come down, and that's a good thing, there will still be potentially some puts and takes in the legal space.
+There's no real way obviously of forecasting a run rate. I would just do what many of you have done, I think, and go back and look at what the legal expense looked like in the years preceding the crisis, and make your own determination whether it's going to be structurally a little higher. But it probably wouldn't be multiples of that.
+
+Answer_27:
+Okay. So it was particularly strong in rates, but nevertheless also very strong year over year in currencies, emerging markets, credit trading, [SPG]. So it was pretty broad-based.
+But remember, you also have to think about it relative to the equivalent course of last year, and we didn't have a particularly strong second quarter last year. So on a relative basis, that is an important factor, but it was pretty broad-based -- more volume than anything.
+And then seasonality, I'm sorry -- look, it's anyone's guess. I think you can go back and look over time. But last year we saw -- we had a weak second quarter, as I said. So we didn't see as much seasonality. But if you look at the last quarter's run rate, I don't know that would be a bad place to start -- last year's third quarter run rate would not be a bad place to start.
+
+Answer_28:
+I'm going to start with a couple of general comments, which is, we talked about the fact that the charge-offs that we've experienced in the quarter were credits that we had previously reserved for. So we're at the point now where at least as a sort of basic matter as we're experiencing charge-offs, we feel like we're in a reasonably good reserve position, notwithstanding that idiosyncratically there may be additional adds.
+What we would need to see is continued firming of sentiment in the sector, continued access to capital markets to allow companies to repair their balance sheets, and continued stabilization if not improvement in oil and gas prices. And so everything is constructive on that path, but it needs to continue along the same path.
+And yes, we are growing our portfolio. And so even if it were not for energy, we would, all other things equal, be adding to reserves, but there are also time to (inaudible) pay down -- a lot of puts and takes, too.
+
+Answer_29:
+So, I mean, just to say -- we obviously have our own spend data to look at, and it continues -- the Card spend is up 8% year on year. Energy continues to be a tailwind for consumers. The labor market continues to be solid and improving. And sentiment is still good. Housing, still improving.
+So I mean, really just looking at the same things you're looking at, and we obviously have a slightly different lens to it. But all other things equal, consumers are in very good shape, and demand is there for the product. And we've been investing outside of consumer in new products -- inside Consumer, sorry -- in the Freedom Unlimited space and also in marketing. We're growing, not only because the demand is there but also because we're investing.
+
+Answer_30:
+Our second-quarter results reflect everything that we have and we know of at the end of the quarter. And we're not going to make any specific comments on regulatory exams.
+
+Answer_31:
+Not specifically. I'm not sure; I haven't polled the dealers myself. We continue to have very high FICO scores. I'm not aware of that, but I can't comment.
+
+Answer_32:
+In our portfolio at this point, no.
+
+Answer_33:
+So we are expecting refi to be stronger in the coming quarters; and the mortgage market, as best we can tell, will be at around $1.7 trillion, $1.8 trillion this year.
+
+Answer_34:
+So we've done one, and we're looking at more securitizations in the mortgage space. And we are keeping a vertical stripe. We're retaining the loans on our balance sheet -- or the securities on our balance sheet, I should say. And in doing that we've been able to get private capital to take the majority of the lower credit risk and get better capital treatment for ourselves, in terms of the RWA that it attracts.
+
+Answer_35:
+New originations.
+
+Answer_36:
+I'll just start by sort of orientating you on why that would be the impact for us. If you look at our balance sheet and you look at what we have in fixed rate loans versus what we have in either IOER or in LIBOR loans, it's about $650 billion. So we're much more sensitive to the front end of the rate curve.
+If you look at our earnings at risk disclosures, a 100-basis-point parallel shift would be around $800 million. And so obviously we haven't seen, and won't hopefully see, anything of that order of magnitude. That kind of gives you an ability to size up, notwithstanding compounding, why you've only seen our NII relative to prior expectations come down by that much.
+
+Answer_37:
+So I think earlier on the call somebody else asked the question, and I made the comment that it's really more related to the results from our hedges of non-dollar debt, long-term debt. And so in the first quarter, the dollar weakened. In the second quarter, it strengthened. And with some currency basis in the first quarter that we didn't see in the second quarter, it really is, not to dismiss it, but it really is accounting and nothing really else than that.
+
+Answer_38:
+No shift from our desire to want to be with engaged customers and our rewards programs. Our products are all geared towards that. So it's really just a credit decision. And, yes, we do have relationships with many, many customers in that still near-prime space.
+
+Answer_39:
+Yes. So look, obviously P2P real-time payments is very important to our customers, so therefore it's important to us. It's also important for us on the industry that it's done in a safe and secure way.
+And so early warning, the fraud protection that they are able to provide, as well as bank-level cyber security and the absence of a need to provide your bank credentials we think is very strongly positive for our customers. And we expect to see volume go across that.
+As you know, we have QuickPay already, and we saw reasonably significant volume, $21 billion, on QuickPay last year and growing. So I would expect to see more and more P2P payments. And it's good for our customers, it's good for us.
+
+If you look at the whole payment space, Chase Paymentech is gaining share. Chase Net is doing very well. Chase Pay, we've signed up lots of different people. One piece of that is the P2P.
+Today, right now, if you use Chase QuickPay, it's very easy within Chase to Chase. It's now just as easy to go from Chase to a bunch of other banks, who I won't name now. We've just started rolling out -- it's soon to be rolled out to 60% of American banking accounts.
+And then we're going to make it available to all banks. So you will be able to go P2P, real time, through Chase QuickPay, there will be a special app for Chase QuickPay. It'll also be branded under another name, which we haven't rolled out yet, which I think will be rolled out shortly.
+I think it's a great success that the banks can get together and do this. This will be great service, which I think shows you the banks making progress on what you would have called prior fintech.
+

exam/original-files/Problem_2_3_Sample_QandA/15_questions.txt

@@ -0,0 +1,129 @@
+Question_1:
+Good morning.
+
+Question_2:
+I know it's very early, and it's probably limited in what you can say because you mentioned it depends on the timeline of Brexit and how passporting works, but is there any qualitative thoughts you can give us around the operational and/or legal issues we should be watching as this develops -- legal entity restructuring, net impacts of moving people versus lower-cost geographies and things like that?
+
+Question_3:
+I appreciate that. Maybe switching gears, you mentioned the Consumer business was firing on all cylinders. Clearly, there's some nervousness in the market that the credit cycle is turning.
+I wonder if you could touch on two things, which are -- maybe a little bit more detail on the seasoning impact you saw -- you mentioned in Card. Is it just seasoning or is there any like-for-like deterioration? And then in auto, you mentioned risk layering. What particular factors are you seeing layered in the underwriting box that make you concerned right now?
+
+Question_4:
+Hello, good morning.
+
+Question_5:
+Maybe just talk a little bit about the net interest margin and the outlook there. It was down 5 basis points. It looked like it was mostly in the funding costs. I just wanted to get a sense of what was driving -- I think long-term debt was an up-trading. Liability costs were up. Can you give us a sense of what's going on there and how to think about that going forward?
+
+Question_6:
+Okay, that's helpful.
+And maybe just one follow-up on the prior question of credit -- how should we think about the provisioning going forward in Consumer? Is that going to be a consistent build or is that a catch-up that we saw this quarter?
+
+Question_7:
+Hi. Good morning. So my first question is -- given how well JPMorgan did on the CCAR relative to last year's results, and it seems like RWA and SLR exposure have stabilized over the past few quarters, how comfortable are you perhaps allocating more balance sheet to the investment bank, given that you seem to be very well positioned to continue to gain market share, especially in markets?
+
+Question_8:
+Great. And was there anything to call out on the equities, the $1.6 billion equities number, that could be a little bit more one-time in nature for the quarter?
+
+Question_9:
+Hi, good morning.
+
+Question_10:
+Okay, two questions -- one on the outlook page. I see on the printed page it's the same as what you had last quarter for the Company overall, obviously. But I heard the emphasis on NII was on the plus side, right, $2 billion year on year plus. Is that the right nuance that you were trying to communicate?
+
+Question_11:
+And then on the loan growth side, you've been funding this in part from just a mix shift, right, where your loan-to-deposit ratios moved up very nicely. It's still very low at 66%, but up 2 percentage points Q on Q, and up from 61% year on year. I'm just wondering how far do you think you can take that before you might want to look to fund loan growth with deposit growth more ratably?
+
+Question_12:
+Good morning. One more rate question -- as you mentioned, you're super sensitive on the front end of the curve, and you just alluded to the curve is flatter. I'm curious about that great chart that you roll out on Investor Day that talks about -- we make $3 billion more through 2018 if rates stay flat, and $6 billion more if the curve goes down the implied path. The implied path is now lower. Just curious how much those numbers change if the current curve holds?
+
+Question_13:
+That is perfect, thank you.
+Other question was -- there's some regulators chirping a little bit about concerns in commercial real estate. Some of the other banks have mentioned that you're growing like a weed, and your credit is great. So can we just talk a little bit about what you think you're doing differently to both get that growth and then what you're doing to avoid mistakes of the past? And that'll be good.
+
+Question_14:
+Hi, Marianne. Thanks for taking my question.
+Wanted to ask a couple -- wanted to ask a question on the cost side of things where the overhead ratios, both in the CIB and the Consumer Bank, dropped fairly materially quarter over quarter. I guess I'm just looking for some guidance here in terms of how much of the expense initiatives that you've already been talking about, both in the CIB and the CCB, how much progress did you make in this quarter on that, and was that an outsized contributor to the improvement in the overhead ratios?
+
+Question_15:
+Okay. And then just in the CIB specifically, you mentioned the comp ratio there was 30%. That's sort of at the low end of your -- of the range that you typically talk about, which is 30% to 35%.
+I'm presuming that's largely driven by the better-than-expected revenues. Was there anything else going on there, or was that just pretty much a result of a benign revenue -- a relatively benign revenue environment?
+
+Question_16:
+Hi. How is CIB doing in Europe and against European bank competitors in terms of revenue growth, share, the degree of competition? Some competitors are pulling back and you guys have stayed the course. Are you seeing the benefit from that?
+
+Question_17:
+And I know you were asked already about Brexit. Maybe if we could hear from you, Jamie, about the implications of Brexit. Marianne, you said, quote, minimize friction costs. If you can just give us some sense of what that means?
+You've given us a lot of guidance about the recent quarter and the year ahead. But you have what could be a monumental event, and you haven't really talked to investors about that since Brexit's occurred. How do you think about the currency risk, the cost, the revenues? And are you delaying any investments, given the increased uncertainty?
+
+Question_18:
+Good morning. Thanks for taking the question. I just, first off, had a follow-up. So on Brexit, post this development, have you seen any impact on your banking pipelines? Has this had any impact on appetite for M&A, particularly if there is a component that involves either the continent or the UK?
+
+Question_19:
+Great. Thank you for that.
+And then one more on credit here -- so it seems as though we had 30-day delinquency rate actually go down quarter over quarter. So it seems like maybe -- in the Card, sorry, business. So it seems like maybe it's a cure rate issue. Is that the right assumption? And then, could you give maybe a little color on how much the non-prime growth has been -- has driven in recent vintages versus prior?
+
+Question_20:
+Hi, Marianne. I'm not sure if this is too early, but when you think about expenses longer term beyond this year, if you think about 2017, if we find ourselves in a similar revenue environment next year, when you wrap in your cost save objectives and where you want to be on investment spend, do you think you'll be shooting for expenses to be kind of in the same range of that $56 billion next year, if things don't change on the revenue front?
+
+Question_21:
+Sure. Just more near term, you talked at a recent conference about the tax rate going forward. Just with the kind of issues you had this quarter with the tax rate, looking at 39%, you said it would 36%. What should we think about going forward? Is it like in that 36%?
+
+Question_22:
+Hi. Good morning.
+
+Question_23:
+Marianne, I had a question on the outlook. You reaffirmed the fee income guidance of $50 billion, plus or minus, for the full year. I'm trying to gauge, just given the tough start to the year in trading in 1Q, the subdued second-half M&A commentary, and second-half trading seasonality that we would typically expect, the $50 billion target does appear somewhat ambitious. I didn't know if you felt like that was a fair assessment, or just given what you're seeing across the businesses, that the $50 billion is still ready achievable?
+
+Question_24:
+Thanks, Marianne. One more for me on CCAR -- given that you've had some time to digest the latest set of results, the improvement in PNR was probably the most impressive aspect of the release, at least based on our own findings. From what you can gather, based on your own internal assessment, what were the primary drivers of the increase where maybe we have some limited visibility, such as areas like op risk? And does a favorable CCAR outcome inform your view in terms of which constraint is currently most binding and maybe how you might change your deployment tact across the different businesses?
+
+Question_25:
+A quick question on the mortgage originations -- the correspondent channel didn't change all that much quarter on quarter, although I would have thought with seasonality and a pick-up in refis, that would have increased in the second quarter. Could you talk about how you're thinking about correspondent mortgage originations? And given that refi volume looks strong at the start of the third quarter, should we expect a pick-up in correspondent in the third quarter?
+
+Question_26:
+Okay. And I know you can't really discuss too much on the legal side, but is there a right way to think about legal expenses going forward, like an ordinary cost of doing business for a bank your size? Is it 1% of revenues as kind of an ongoing run rate for expected legal expenses going forward, or is there not the right way to think about it and it's just episodic?
+
+Question_27:
+Thanks. Good morning.
+Marianne, I was wondering just if you could -- I know it's a little backward-looking now and you've made your points already about what normal trading seasonality could be, but could you help us understand the products that drove the really strong [FIC trading] and kind of what happened in June? Was it volumes? Was it spreads widening? And then I guess I would actually ask what you typically consider what normal JPMorgan seasonality is, as you mentioned?
+
+Question_28:
+Understood, okay.
+The second question just is -- on the wholesale reserve, you mentioned -- it's been nice to see the energy prices start to stabilize, and it seems like you're able to stabilize the amount of reserve build outstanding, aside from that one credit. What needs to happen for you to get even more comfortable, where you could see some of that reserve start to come out, underneath the context of that you're also growing the wholesale business extremely fast as well?
+
+Question_29:
+Hi, Marianne. Thank you.
+Marianne, can you give us some color -- obviously your consumer loan growth has picked up quite nicely. You pointed to, it's going to be at the higher end of the range for the year. What are you guys seeing on consumer behavior? Has it improved and they feel stronger about their own job prospects, which is enabling them to borrow more? Are there any metrics that you guys are looking at from that end?
+
+Question_30:
+I see. And coming back to credit, obviously your first-quarter results had the results of the targeted shared national credit exam for oil. Traditionally obviously we have the shared national credit exam every year. Second-quarter results normally reflect that exam.
+Do your second-quarter results reflect the shared national credit exam? Or is that going to -- ?
+
+Question_31:
+Great, thanks. Marianne, just a couple of quick follow-ups on the auto lending business -- the originations came down a bit. And you talked about the dynamics around that previously in the quarter and at the Investor Day.
+When I poll auto lender or auto dealers, they say that where they had primarily seen you retreat was from very high FICO, sort of super-prime new lending and leasing, but that their experience with Chase remained very consistent in the mid-FICO range. I just wanted to see if that was consistent with your view internally?
+
+Question_32:
+Okay. Just one follow-up on auto credit -- obviously the Manheim issue points to perhaps some rising severity, given default. But at this stage, is there anything that suggests to you that we should see a higher frequency of default?
+
+Question_33:
+Yes, thank you very much. One of the things about what we saw as mortgage rates -- I mean, the 10-year dropping down to record levels and mortgage rates probably following right behind it -- can you give us a little outlook? Are you seeing an uptick in refi's? We've seen the refi indexes go up very high. Any outlook on where you think the mortgage market's going to be in the next quarter or two?
+
+Question_34:
+And the other follow-up question is -- there's some news articles out there about JPMorgan securitizing conforming loans. This hasn't really been done a lot by anybody. I don't know if you can address that, the economics behind that, or what's the thought behind that, instead of getting Fannie and Freddie wraps, you're securitizing them yourself?
+
+Question_35:
+Thank you. Most of my questions actually have been answered. Just a quick follow-up on the credit card originations in terms of dipping down to the lower prime or below. You said something like 20% to 30% had FICO scores below 700. I didn't know if that was for new originations or for the portfolio overall that you were referring to.
+
+Question_36:
+Thanks. Wanted to ask you a little bit about the focus everybody has on the flattening of the Treasury curve, but yet earlier you were able to say that going into next year you would see 2016 NII growth of $2 billion to $2.5 billion, only really fall to $1.5 billion to $2 billion, which means that flattening of the yield curve is very manageable. Just talk about asset yields as your earning asset yield actually went up 1 basis point -- what you've been able to see in the market versus what's happening in the Treasury curve.
+
+Question_37:
+In this particular quarter, your funding costs went up. Is that a lag effect from what the rate hike in December still just now coming through, or was there something else maybe more unusual about the funding cost that we saw that drove the margin down this particular quarter?
+
+Question_38:
+Hi, again. Just a follow-up on the Card new originations -- I know one of the key things that you've done for many years is to focus on relationship lending, relationship offerings. And so when I hear that 20% of the new originations are below a FICO of 700, is that a shift from the relationship strategy that you have or does it reflect the fact that you do have significant relationships on deposits, et cetera, with folks in that FICO band?
+
+Question_39:
+Thank you. As a follow-up, Marianne, your consumer business obviously has been very, very strong. Can you share with us the update on clearXchange? It's expected to be rolled out later this year, and what that might do to even grow the mobile business even more than it's growing now?
+

exam/original-files/Problem_2_3_Sample_QandA/16_answers.txt

@@ -0,0 +1,108 @@
+Answer_1:
+So I think there's three or four things to mention. The first is that I would say that the industry generally had a pretty weak third quarter last year. And so when you think about the year-over-year comparison we are a little flattered by last year's performance.
+Not necessarily more so than our peers, but nevertheless we are. Then we talked about the fact that this quarter the conditions were relatively favorable broadly and compare and contrast that to last year where there were pockets of activity and client flow but there were also pockets where people were really sitting on their hands and not transacting. So I think client flow quite broadly across the environment would characterize the quarter.
+In terms of the competitive performance I would say it feels like we did well. Obviously, we're the first to report, apart from Citi this morning. It feels like we did relatively well, so we may have gained some share.
+Certainly, hopefully the momentum in terms of the business we've been building and the way we are serving our clients will service in that capacity, not just this quarter but through time. But, obviously, there can be a bit of volatility in the market share space. So we prefer to look at it more through time and we feel pretty good about the performance.
+
+Answer_2:
+So I would say we don't specifically target a competitive set. But I will tell you that our balance sheet, we talked about it many times on this call before that we do have the capacity to put our balance sheet and our resources to work for our clients, for our best clients.
+And we think about using those resources in the context of overall relationships. So if any period is more leverage constrained and has less access we may have competitive advantage. And certainly we will continue to make those resources available to our clients.
+
+Answer_3:
+So I don't know, Glenn, if you recall that we had a bit of discussion about this last quarter and guided to the fact that we would expect to see our loss rates go up slowly, partly because, obviously, at 250-ish basis points I think we could call that pretty low historically. But also because over the course of the last couple of years we have been changing the mix of our originations a bit to the prime, near prime space, still completely within our credit risk appetite and at risk-adjusted margins that are better than the portfolio average.
+So we are getting paid for that. So we are doing it within our risk appetite, doing it judiciously. But as a result, as those vintages become a higher percentage of our overall population they will have a gentle upward pressure on the charge-off rate.
+So what we are seeing in terms of the delinquency uptick and the charge-offs, gradual increases completely in line with how we underwrote those loans and our expectations. And so as you look forward for us over the course of the next several quarters and we would expect those phenomena to generally continue, again, slowly. We are growing our portfolio, we are going to see the seasoning of those vintages as the mix increases and as they become more seasoned cause us to build a reserve but for the right reasons.
+
+Answer_4:
+No, nothing significant, Glenn. No significant changes to our sensitivity.
+
+Answer_5:
+So I would say that all of the things that you mentioned, whether it's closed loop network, whether it's our new proprietary products, whether it's our investments in the technology platform and the business in merchant services are all at good returns that ultimately will drive the business to be profitable in the future as it has been in the past. So we haven't given specific guidance for ROE targets for this business but nothing has changed over the medium term for what we think that the performance of the business would be.
+
+Answer_6:
+Yes, it's a very competitive business and it's very profitable. So all other things being equal, we would like to continue to gain share.
+
+Answer_7:
+So we haven't given specific cost guidance going out beyond this year at this point. But our objective will remain consistent with those that we stated previously which is we continue to try and become more efficient across our businesses.
+As you know, we are at the tail end but not finished on a couple of large expense programs in our largest businesses so that we create capacity to be able to invest in the businesses broadly, whether that's in products, in marketing, in investment, in innovation, all of which we're doing as much as we can as long as we do it well. So it's going to come down to if we think we have investment opportunities that we can execute well that have an appropriate return we would like to keep doing that and in order to have the right to do it we would like to become more and more efficient in our core business operation.
+So we haven't actually given guidance. I think I would characterize it as expenses under control creating capacity to invest. But we will decision investments based upon their merits and, obviously, explain them to you in the future at Investor Day, if not another venue.
+
+Answer_8:
+So, first of all, I would say that based upon the speech and, obviously, you know that there are still some unanswered questions with respect to specific parts of the proposal which I will come back to, but based upon the speech moving to a baseline minimum standard is more consistent with how we think about our capital management policy. And using the capital stack add-up using, our G-SIB score and our stress drawdown actually you would come out with a capital constraint under CCAR that's pretty much on top of our regulatory capital minimum.
+So in that sense because of the offset, because of the lack of balance sheet growth, lack of RWA growth and the curtailment of capital distributions, we've actually ended up in a place where we look to be approximately equally bound based on last year's test by both of those two measures, which is a space we've played in for a while. We've been, as we talked about before, we've been bound by many constraints, somewhat equally over a period of time and striving to operate within that constraint and maximize shareholder value.
+I think the things we don't know are, obviously, how funding or liquidity shock will be incorporated. And in any case this is not for the 2017 CCAR cycle, so it's a whole cycle away from now.
+So we will be operating in 2017 under the same basic test construct as we have previously. And so I don't think it's a clear and present danger necessarily that we will be able to look at payout ratios that are above the top end of our range. Meanwhile, we are at the top end of our range now.
+
+Answer_9:
+Yes, so I would just generally speaking with respect to our rate sensitivity, as I think you know we are most sensitive to the front end of the curve but to IOER and prime. So we do have LIBOR-based assets but also liabilities.
+A good example would be commercial loans on the asset side or long-term debt on the liability side. But our notional mismatch is not particularly big. And so as a consequence, the impact of LIBOR curve moves has been not very significant on our P&L, we wouldn't expect it to be.
+I will say that the LIBOR moves were one of the features that our rates business had a perspective around. And they got good client flow in and around that trade.
+And so it was one of the catalysts, one of many, but one of the catalysts that we point to in terms of the ability for rates to monetize flow as we had a lot of client flow around that conviction. But I wouldn't be able to put a number on it for you.
+
+Answer_10:
+I think we, obviously, did get some good inflows, liquidity flows in terms of money market reform into our government fund. But we also have been very focused in our other wholesale businesses on continuing to attract operating deposits.
+And so as I look at our overall strong deposit growth I wouldn't say it was equally but it was pretty much equally wholesale operating and retail deposit growth. So we feel good about both of those.
+
+Answer_11:
+I might just give for context remind you all, or maybe you recall, that for a number of years now, for a fairly long time we've been standing up at Investor Day and other venues saying that customer experience is the central tenet for how we think about engaging with all of our clients but certainly our retail clients in the branches. And we have been very, very focused on investing in customer experience broadly defined and have made great progress, I think, in doing that.
+And also we had talked about the fact that what we are looking for very, very clearly is deep customer relationships, engaged customers. We want to be primary bank. We want to gather deeper share of wallet.
+So balance is not necessarily products. And so, again, remember saying that cross-sell is an outcome, it's not an objective. And that certainly is a philosophy with which we have designed our compensation and performance structures for the branches.
+We review them regularly, at least annually to make sure that they continue to be aligned with our objectives and, again, objectives about the engaged relationship with customers, good customer experience in the right products, all the right reasons the right way. So as we think about those objectives and how we've designed our plan and as we look inwardly not just, obviously, because of the news now but also regularly in our BAU capacity we feel like our plans are designed to incent those behaviors.
+
+Answer_12:
+So I would say, first of all, I would say we, I will tell you, we are on track with respect to the commitments Daniel made to you to deliver over time the $2.8 billion of expense saves. While we are not finished yet we are substantially through that program. So it's moved from being a plan through execution to being in the later stages of execution.
+So we feel very good about that, which means that all other things equal that $19 billion is still a reasonable level of expense target. However, obviously we pay for performance. And so clearly if we have significant out-performance next year relative to our expectations at the time of setting those plans, there would be some variable cost associated with it.
+But for every dollar of out-performance the variable cost may not always be the same. So, obviously, it also depends upon the mix and payout ratios and all those sorts of things. But a large, large portion of it would be, it would be, obviously, as you know incredibly accretive because we would be leveraging all of our scale, so the only variable cost would really be comp, largely.
+
+Answer_13:
+So first of all based upon last year's results for us we are at the floor for the stress capital buffer. Not to suggest, by the way, that we wouldn't continue to want to properly understand and better understand how we can through time make sure that we are performing the best we can under stress within our risk appetite. But we are at that floor right now.
+So within those constraints what we are trying to do is be within our risk appetite, manage risk properly but also add shareholder value. We have to carry that capital anyway, so we would want to use it well.
+
+Answer_14:
+So for your purposes I'm going to talk about NII. We don't really manage to NIM. But you can, obviously, back into it.
+So if we ended up in a situation right now where rates were flat throughout all of 2017 which for what it's worth I don't think is pretty much anyone's central expectation right now, but if we were rate flat you've seen us grow our core loans and our loan balances pretty strongly, pretty consistently across businesses. And while we may not be able to replicate our 15% core loan growth forever, certainly we can continue to grow our loans.
+So on that plus mix shift away from securities over time we should be able to deliver $1.5 billion of incremental NII next year rate flat. You know that if rates are -- if we are fortunate enough for the right reasons that we see a hike this year, at the end of this year and get the full benefit of that next year, it will be higher than that. And you've seen our earnings and risk disclosures, they've been pretty close to a $3 billion number on a 100 basis point move for a while, most of which is front end.
+
+Answer_15:
+So look, we are aware, obviously, of the riskier types of CRE lending, the types of lending that attract scrutiny for reasonable reasons considering how they've performed in past cycles. We are also mindful of where we are in the cycle and take that into consideration in our underwriting.
+So we have and continue to avoid what I would characterize as the riskier segments and those segments that performed poorly in previous cycles. And we really stick to our knitting, if that's an American expression, in terms of continuing to do what we are good at within our risk appetite.
+And so if you think about our commercial real estate growth, Commercial Term Lending is about three-quarters of our portfolio. And you know that we are very focused on smaller loan size, term B -- sorry, class B, class C properties with low vacancy rates. So rent stabilized, supply constrained markets, underwrite to low LTVs, good debt service coverage.
+We look at forward rates and current rents. And so we really have an expertise in a specific niche and we compete on speed and certainty of execution, not on credit and structure.
+So we feel pretty good about our exposures and even in our more traditional real estate banking space we have avoided the riskier segments with limited construction lending exposure, homebuilders minimal exposure. We are pretty disciplined about it.
+
+Answer_16:
+So we are a primarily prime lender in Auto. We are the number one prime lender.
+We actually have the lowest share in subprime among the national banks. So it is less than 5% of our origination. So I wouldn't speak specifically to underwriting in the lower FICO sectors, not where we play at this point.
+
+Answer_17:
+So not that I would comment on except for we have recently decided to pull back on 84-month plus term loans on all FICO bands, just as where we are in the cycle as we see the risks of that type of lending. So we continue to calibrate our underwriting. But I wouldn't comment on seeing anything specifically.
+
+Answer_18:
+Auto?
+
+We've built $25 million of reserves this quarter for Auto and we expect to continue. We think the Auto opportunity is still strong and we have a great franchise.
+We have great manufacturing partnerships that are growing strongly, too. So as we grow that portfolio I would expect us to continue to grow reserves modestly in 2017. However, we are expecting charge-offs to stay under control.
+
+Answer_19:
+Yes, so you are right. And, obviously, even specifically for JPMorgan if you look at our stress results that [handicapped] by the Fed over the course of the last three years has been reasonable volatility. And clearly it's not the case that we will expect it to be completely stable.
+I would not expect to see the same levels of volatility going forward as we've seen historically as the test has, as you know, over time occasionally included new not insignificant features. And while that may continue to be the case I would think that there would be a bit more stability. But we haven't actually gone through and finalized our thinking about what the buffers would look like.
+
+Answer_20:
+Yes, before I talk about the prioritization of capital distributions I would just start by saying our capital management policies prior to this year's CCAR and this year's resolution had us making those actions regardless of whether they were allowed to be reflected in a test. And, obviously, as part of the resolution planning we have revised our policies to include more granular triggers.
+So our policies do with some specificity run pretty granularly through time through a stress speak to the sorts of actions that we would be leaning into and taking, even if they don't get reflected in the test.
+With respect to the prioritization, look, the soft cap on dividends has been lifted. Dividends are ultimately still a part of the baseline minimum standard, so there will be possibly some natural constraint there. It hasn't changed, at this point anyway, the Board's determination or management's determination about the order of priority.
+We would like to continue to have the capacity to grow our dividend. And I think even though there may be some natural constraints I think it would be above 30.
+
+Answer_21:
+So we are very focused across the spectrum of our businesses on developing better digital capabilities to allow seamless engagement with customers and acquisition through digital channels. There are complexities associated with documentation and standards for know your customer and anti-money laundering that we're continuing to work through. But ultimately it should be achievable, and we are working on it.
+So one of the things that we have previously mentioned is that the majority of our Consumer accounts are opened in branches. One of the reasons among others why branches are [still] important to us as well as advice centers. And we will continue to work on trying to see how far and how fast we can move people to be able to have a better digital experience opening accounts with us.
+
+Answer_22:
+Well, I will just start by pointing out that all of the businesses, all of our businesses, not just the ones that I talked about at the high level, not just macro spreads equities, but even if you go a level below that quite granular, all of our businesses did really quite well this quarter. So not to overuse the phrase firing on all cylinders but it really was pretty consistent. And normally you might see pockets of more strength and less strength.
+So I think it would be hard to imagine replicating this kind of strength through time consistently. But the fourth quarter is seasonally low and we have no reason to expect that it would not be.
+
+Answer_23:
+So there isn't a whole lot of really clear new news. So as we think about all of the -- FRTB we've talked about before, modest and manageable, nothing about that has changed for us. But, obviously, there's the advanced and standardized credit operational proposals out there.
+The most important thing that we've yet to really, and there are pluses and minuses in it and different for us than others maybe. But the one thing that we haven't really heard about yet, Betsy, is how it will all be calibrated and calibration will be very important.
+So we are expecting to hear over the course of the next short while, and maybe that will be delayed some just given some of the discussion. And we will update you when we hear a bit more about how it's all going to come together. But right now it's still a little unclear.
+

exam/original-files/Problem_2_3_Sample_QandA/16_questions.txt

@@ -0,0 +1,80 @@
+Question_1:
+Hi, can you talk about the competitive environment in capital markets? You had a strong growth. Is that due to better markets, better share or both?
+
+Question_2:
+Specifically versus the European banks, are you looking to use your balance sheet more to gain share?
+
+Question_3:
+Hi, thanks very much. Curious on Card delinquencies ticking up. I know you've been guiding towards that but when you see it it's the only part of credit that has anything but great trends.
+You mentioned on your comments newer vintages will have a higher loss rate than the portfolio average. Do you mind just drilling down a little bit more color on what exactly is driving that? Is that going down credit a little bit or is that just expected season as you'd thought?
+
+Question_4:
+Fair enough. Fair enough. Just one follow-up.
+If I could get just a high-level comment on has anything materially changed in terms of rate or curve sensitivity as you remix the portfolio? And as you are getting all this great loan growth I'm just curious on the current positioning.
+
+Question_5:
+Hey, good morning. I had a question on the Card strategy, and I know we all know that you've created the closed loop and you are using that in part it seems to drive really efficient pricing in the marketplace on the credit card products.
+What I'm obviously seeing is an increase in share on card issuance. You are taking some nice share in the merchant space, as well. I just want to understand what the goal is and how far you are willing to push this, market share versus ROA, ROE.
+
+Question_6:
+But is it fair to suggest that part of the market share improvement here is coming from some give-up of profitability and the underlying question is really how much market share do you want in this business? You are already at 18% to 22% market share of the credit card space depending on which numbers you want to use.
+
+Question_7:
+Thanks, good morning. Marianne, you mentioned that part of the increase in Consumer cost this quarter was planned investments and that you are continuing to self-fund.
+I'm just wondering as you think forward and we get past this good gear that you've had, will that be an underlying expectation for you guys, again with the understanding that the revenue environment will always take things up or down? But do you have an aspiration that you can continue to keep costs flat?
+
+Question_8:
+Understood. And if I can come back to another investment day point from earlier this year, you had mentioned that you felt comfortable with an 11% CET1. You plan to get to your CET1 to 12%. You are at 12.1% now already.
+Just within the construct of Governor Tarullo's recent commentary, does 11% still feel like the right time? Did you sense anything from the commentary that would change your philosophy around where you'd like to live in that potential comment you made at February to potentially go above 100 if, in fact, this was the right mechanism?
+
+Question_9:
+Good morning. Maybe just a quick follow-up on FICC in your commentary and maybe you can have a broader commentary around how the widening LIBOR or rising LIBOR yields helped your businesses across the board in FICC or anywhere else? Just help us understand how that's playing through the income statement.
+
+Question_10:
+Fair enough and maybe just a follow-up on deposits. You guys have had very good trends in retail but on the institutional side there was quite a bit of flow looked like, as well. Any particular drivers there, was it money market performed helping the flows in institutional or something else?
+
+Question_11:
+Good morning. In light of some of the selling issues over at Wells Fargo, I was just wondering if you've thought about reevaluating how you approach the consumer, how you compensate staff. And this was, obviously, not a JPMorgan-specific question, but just for the overall industry I think it's something folks are wondering about.
+There's clearly some stuff that's black-and-white that you shouldn't do. But I think we also worry that there might be some gray areas that are somewhat less known. So just how are you thinking about the way you conduct business and compensate staff in light of what's going on?
+
+Question_12:
+Hi, good morning. Just a question you, back to CIB, you had a slide during Investor Day that showed a walk to $19 billion of expenses by 2017.
+If some of the factors that you mentioned that drove revenues into CIB higher repeat for 2017 is that $19 billion number still achievable? Or I guess a better way to ask it, will any incremental revenue uplift from here fall to the bottom line?
+
+Question_13:
+Got it. And just as a follow-up to that, a follow-up to Ken's question actually, he mentioned the stress capital buffer. Outside of the static balance sheet and capital distribution offset, is there an element to this in terms of just getting better at the test that you could do to reduce that stress capital buffer without actually taking risk down significantly?
+
+Question_14:
+Hi, this is Tim Hayes for Paul Miller. Can you give any color on your outlook for margin throughout 2017?
+To me, Fed commentary suggests that rates could remain low and potentially hover around these levels over the next 12 months. So how can we think about your NIM in that type of scenario? And then what would a December rate hike do for your outlook?
+
+Question_15:
+Okay, thank you. And then switching gears, your CRE and C&I lending was pretty strong this quarter and regulators have, obviously, grown a little bit more cautious on those segments. So I was just if you could give any color for your outlook on lending to those segments going forward.
+
+Question_16:
+Thanks very much. Marianne, at a conference just before the end of the quarter another bank talked about improving underwriting conditions in the auto lending space, particularly in the mid to lower FICO range. Are you seeing anything similar?
+
+Question_17:
+Sure, sure. I think the reference was to below 700 which includes the bottom end of the prime segment, which has been an area of intense competitive focus. I'm just wondering if you've seen anything in that segment?
+
+Question_18:
+Got it. And is that influencing your reserve expectations for Consumer at all?
+
+Question_19:
+Hi, good morning. So, Marianne, I appreciated your remarks on the latest guidance from Tarullo relating to G-SIB capital.
+One of the questions we've been getting from a lot of folks is because this SEB is calculated based on stress losses year-to-year and historically CCAR results have been pretty volatile, I'm wondering how you are thinking about the appropriate management cushion or buffer above the minimum? Historically it had been about 50 bps just for AOCI volatility and maybe operational risk losses, but do you now have to also handicap CCAR volatility when thinking about that cushion?
+
+Question_20:
+Understood. One more question, just thinking about capital management priorities, given that the new proposal as you noted allows for curtailment of the buyback or termination of the buyback and then curtailment of the dividend halfway through the test, do these changes as well as the softening of the 30% dividend cap alter your thinking about how you prioritize buybacks versus dividends?
+
+Question_21:
+Thank you. Good morning, Marianne.
+I had a question, you pointed out that about three quarters of your credit card acquisitions organic growth were coming through mobile channels or digital channels I should say. Can that be moved over to other Consumer products or is it just unique to credit cards that you are going to be able to generate that much growth through the digital channel?
+
+Question_22:
+Okay, thank you. And then as a follow-up, obviously third-quarter results in Investment Banking were very strong.
+Fourth quarter seasonally is weaker than third quarter as you pointed out. Are there any other reasons why you think the fourth-quarter numbers may be weaker than the third quarter, other than the traditional seasonality?
+
+Question_23:
+I just wanted to follow up on FRTB and Basel IV and how you are thinking about the implications for JPM at this stage?
+

exam/original-files/Problem_2_3_Sample_QandA/17_answers.txt

@@ -0,0 +1,219 @@
+Answer_1:
+
+          Yes. So hey, Ken, you guys have a busy day today. So I would say that, the first quarter is always a quarter in which we have a bunch of different factors. And most notably, you also have day count issues in the first quarter. So I can go through that, but I would say most of the benefit which we expect to be up modestly will be driven by the rate increase, with growth being offset by day count. That's sort of fundamentally how to think about it. 
+It's probably more instructive to think about the full year. And so, if you recall back to the third quarter, just to kind of reorient everyone, at that point when we didn't have the December hike, we said rates flat. So on growth alone, we would expect NII for the full year to be up about $1.5 billion. Obviously, we have had the 25 basis point hike in December. And based upon that alone, so now the new rate flat, that $1.5 billion would be about $3 billion, a little over $3 billon. So for the full year, we're expecting on the December hike alone, that it would be about half volume, and about half rate. 
+
+Answer_2:
+
+          Yes. So I think the way to think about it, and again, I think we talked a little bit about it last quarter, and you maybe see it in the fourth quarter. So we've been growing our loans in the -- we said it was going to be a 10% to15%. We revised that, to be at the top end of that range. So we've been growing at around 15% core loan growth, the fourth quarter was 12%. So I wouldn't call it a deceleration per se, but it is a little bit lower. So I think going into 2017, our expectation is that we would continue to grow loans strongly, but possibly at the lower end of that range, rather than the higher. And of course, to a degree, it will depend upon our mortgage portfolio, but we intend to continue to add to that too. So sitting here today, I'd say more high single 10% plus or minus, and we'll give you more updates at Investor Day. 
+
+Answer_3:
+
+          Good morning. 
+
+Answer_4:
+
+          So just taking the two things separately, Betsy, I would say the NII, up 5% is dropping to the bottom line. But as we, you saw all of our underlying drivers, across all of the businesses and volumes, transactions, everything is growing very strongly. And although we still have some work to do to finish the large expense programs, we're near the end of that. So just generally speaking, we're continuing to invest in the businesses, and we'll see the improvement in our expenses flatten out, and start to grow with volumes. And that would also support growth in non-interest revenue, outside obviously of the card phenomenon we talked to you about. 
+
+Answer_5:
+
+          Sorry, carry on. 
+
+
+          Right. So when we think about our investment securities portfolio, we think about it as responding to structural changes in our balance sheet, which predominantly is driven by loans and deposits. And it's always important I think, to remember, because we focus a lot on structural interest rate risk, but it also is liquidity and liquidity risk. In this quarter, there was a combination of things. You saw that we grew deposits more strongly than loans this quarter, so we had some excess cash, as well as the fact that rates rose. 
+So two things happened in our investment securities portfolio, mortgages extended, and we did add to duration. But we have a very disciplined risk management framework that's based -- that's been consistent through time, based on our expectations of normal rates in the future, and we just executed on that strategy. 
+
+Answer_6:
+
+          Yes, we added to duration, in accordance with our framework. 
+
+Answer_7:
+
+          Great. So obviously, the Sapphire Reserve card is still quite young, or still quite new. But relative to our modeled expectations even at the intro promo premium, things are coming in, in line or better than our expectations. Now obviously, we need to continue to [back test] that [three] times. But we're very encouraged by, not only the excitement in our customer base, but also the way that the trends are performing in terms of spend and engagement. But when we introduce a new product, we intentionally introduce a very exciting premium promo, and it's intended to generate excitement. And I think you would agree it did. So we're delighted with the response that we've had. 
+And we've actually kept it up for longer than we initially expected, but it's normal for us to come down from those intro rates, as the product becomes more mature, and that's what we are doing. But to be very clear about our expectations of the performance of the card, even at 100,000 points, we still expected the card to be a strong return and very accretive. So obviously, at a lower premium, it would be more so. But one last thing I would say, is everybody gets very interested the up front points. It's our opinion that the real value to consumers of that card happens over time with their spend behavior, and to take the points down from 100,000 to 50,000 has less than a 10% reduction in the overall value through the lifetime of an engaged customer on average. 
+
+Answer_8:
+
+          So the charge-offs came in for the year at 2.63%, which is in line with the guidance that we gave, I think in November that Kevin Watters gave. He's given guidance for 2017, as we continue to see the newer vintages seasoned, are 2.75% plus or minus. And that's still our expectation, so the newer vintages are performing in line with our expectations. 
+
+Answer_9:
+
+          Yes. So I'll give you a couple of things, and hopefully that will help. So I think a year or so ago, we talked about the fact that -- I'm going to now talk about cost of controls more broadly than just regulatory, that the cost of controls had increased for the Company by about $3 billion over several years. But that we expected they would peak and start bending down, and that is indeed what we have been seeing. Now I'm not saying that bend down is a sharp bend, as we continue to be held to very sort of hard compliance burdens. But nevertheless, we are seeing some efficiencies as we mature our processes and automate them. 
+Offsetting against that, and one of the reasons why it may be less obvious, is that we've continued to increase our spend in cyber security, as we want to protect the bank and the customer's data. So naturally, that is happening. We are not going to continue at this point, carving out the costs of regulatory or control because that is our operating model, it's our new normal. And until we understand whether or not the forward-looking landscape is changed, we won't be able to give you any kind of idea about how and when that will impact our expenses. But we will continue to be more and more efficient. 
+And certainly, if we are able to take a step back, and look at the rules and regulations, and the way that they are being implemented, and make rational changes to it, if that is something that is -- allows us to become more efficient, then we will certainly do that, and keep you informed. 
+
+Answer_10:
+
+          So I think in the conference in November, Kevin Watters said that as we look at the new products, and we look at them growing, coming out in 2016 and into 2017, we would expect the card revenue rate for the year next year to be about 10.5%, after which as the cards and the accounts season and drive revenue growth, we should see that continue to trend back up to a level in the past. 
+
+Answer_11:
+
+          Yes. 
+
+Answer_12:
+
+          Yes. 
+
+Answer_13:
+
+          I mean, I think that it's actual detail of retail spend, auto sales, house prices, household formation, confidence numbers. So I'm not basing it on the market, I'm just basing it --  if you look at a broad range of things, it looks like growth may have gotten a little bit better in the fourth quarter. Plus if you take a walk around the world, Japan is doing a little better, Europe is doing better. In fact, one of the IMF [or someone else] came out yesterday, and [said] the global growth is going to tick up next year. So it's just those factors. 
+
+Answer_14:
+
+          We're not going to change our plans very much, because we don't really react that much to the weather, because we grow to add bankers and stuff. You know you have to do it through a cycle. I do think of it as some regulatory relief. You will see banks be more aggressive and growing, opening branches in new cities, adding to loan portfolios, seeking out clients they don't have. So I'm hoping to see a little bit of that too, but that will wait for regulatory relief. 
+
+Answer_15:
+
+          Well, I'm saying we don't react to the small change in the economy to how we grow and expand our business. But I just that it looks to us, if you look across the broad spectrum, capital expenditures, business confidence, consumer confidence, household building, household formation, wage income, wages going up, unemployment going down, auto sales going up, retail sales going up, it looks like it's getting stronger, not weaker. That's what it looks like to me. That's just my own personal belief. 
+
+
+          And maybe just if we give you a bit of insight into the philosophy about how we do our investment and expense budgeting. When we talk to our businesses, regardless to Jamie's point about necessarily whether the external factors are moving, the question is, what do we want to do in terms of products and services and technology and bankers and offices that we can execute on well and responsibly? And that is typically what defines us, not our appetite to invest the dollars. 
+So I think we've told you pretty consistently that, and you've seen it. We added 130 net new bankers, we opened eight offices in the commercial bank. We're investing in technology very, very broadly, payments, digital across the Company. So I would say that, we don't feel like we've been held back in terms of our appetite to invest, because of concern around the economy. And in the same way, a more confident outlook in the economy won't step change that. But we will continue to look for great investments everywhere we can and make them. 
+
+Answer_16:
+
+          So I would say, just if we separate the two, and just talk for one second about banking. The fundamentals for a solid M&A year are there, and obviously there will be puts and takes depending on what happens in the policy and reforms space. But we're optimistic about a solid M&A market, but with the continuing trend of fewer mega deals, but nevertheless good flow. At ECM, looks set to be quite active, and the IPO market continuing to recover, and debt capital markets have a solid pipeline in terms of the refinance arena, but having said that, interest rates may have an impact. So I think pretty solid pipeline coming into the year, but lots of factors will ultimately affect the full year. 
+With respect to trading, Jamie said, that we don't look at the first couple of weeks, but so far, so good. And what I would tell you is, we said this before, we're a client flow oriented business. And there will be a lot of micro and event-driven activity, and as long as it's not discontinuous, we should be able to intermediate transactions with our clients. And so far, generally there's been more risk appetite in the investor space, but that can change very quickly as we saw in previous quarters. So we will be there to support our clients. And if they are active, everything should be good, but it can change quickly. 
+
+Answer_17:
+
+          So just reminding you about our sort of philosophy on comp to revenue, we pay -- or our comp to revenue is just a calculation, obviously we pay for shareholder value-added. So you need to take into consideration the fact that we've had overtime increased capital levels and liquidity levels, and that's reflected in a declining overall comp to revenue ratio. I would say that there are three factors to it being lower. 
+The first is the strength in performance, and the pay outs aren't linear. And as you have stronger performance, you would expect to see a lower ultimate outcome. But importantly, we were -- some tail winds in the numbers this year included a stronger dollar. So as we pay -- remember comp to revenue isn't just on the front office compensation, it all supports our salaries, benefits and compensation. And we have a large number of people that we pay not in dollars. So that was a bit of a tail wind. Some of that will carry on, but maybe not at the same level. And we also just did our normal regular hygiene and productivity, in terms of the -- how we think about the workforce and pay. At the end of the day, we pay for performance, we pay, we think very competitively, to retain the best team on the street, and make sure that our shareholders are getting a fair share of any outperformance. 
+
+Answer_18:
+
+          Simplifying the securitization rules, because we've done some securitizations. We think they're excellent, but that would open up the market a little bit, clarifying the Safe Harbors on certain types of underwriting. For example, it's very hard and risky for a bank to make a loan to first time buyers, former bankruptcies, even though it could be very good people with brand new jobs, self-employed, it's hard to necessarily do all of the income verification, stuff like that. Simplifying servicing, the services standards now have, I think nationwide, we have 3,000 different standards. It's very costly. 
+It's very expensive. It's kind of risky. If you make a mistake, the punishment is pretty high. And all those things, that should be done for the good of the United States of America, not for the good of JPMorgan Chase. And so, I do think it's too tight and there's one thing, that if you get around too quickly, it will help the housing market a little bit, it will help the housing formation, it will reduce the cost of mortgages, and make it available to more people. 
+
+Answer_19:
+
+          Hi, Glenn. 
+
+Answer_20:
+
+          So starting off with sort of interest rates. And obviously, we've talked for an extended period of time about the fact we've positioned the Company to benefit when rates rise, we built the branches, we acquired the accounts, we've built the technology and the services. So we've been growing our deposits very strongly, and we're going to enjoy the benefits of that. With respect to how much will go to the bottom line, we have been we think appropriately conservative, when we've given you guidance about ultimately how much incremental NII we would expect in a more normal rate environment. 
+I mean, if you go back to Investor Days of past, you would see that we said when normalized, we would expect $10 billion-plus, and embedded in that are assumptions obviously around rate paid. We think that rate paid will be higher this time in this cycle, than in previous cycles for a bunch of reasons including as you said, competition for high quality liquidity balances. But also that we are coming off of zero rates and the improvement in technology. So we've been, we think appropriately conservative, but we'll find out in the fullness of time. 
+So far two rate hikes, absolute rates at 50 basis points, it's too early. And so far, you would expect there to be (inaudible) in there, and it's not linear, and everything is behaving quite rationally right now. So we, in fact, if anything a little better than we had modeled. So we'll keep watching it, and we think we've been thoughtful. We don't know the right answer, and we'll keep you updated as we see how things progress. 
+
+
+          And just on the tax side, so other people understand, generally, yes, if you reduce the tax rates all things being equal to 20% of something, eventually that increased return will be competed away. That is a good thing. Okay, so it's not a good thing for JPMorgan Chase per se, but it's a good thing for the world, it's a good thing for growth. And a lot of studies actually show the beneficiary of that is wages. And so, it's important for people to understand that good tax policy is good for growth and the country in general. It's not just good for companies, it will eventually be competed away. 
+
+Answer_21:
+
+          Listen, you aren't going to really know for probably nine months to a year exactly what it is, so I wouldn't worry too much about it. And I also, just remember the most efficient companies do benefit from things like this, more than others. 
+
+Answer_22:
+
+          I think if you look at -- I mean, again, there's a lot of wood to be chopped and sausage to be made before tax reform gets done. And some of these things are brand new, they've never been talked about or done before, so you can read a lot of studies in the next six months. Obviously, interest deductibility, for banks, from a net interest income, so it doesn't directly change how you look at it. For everybody else, it affects complete industries differently. How you leverage differently, and utilities will be in a different position, and unleveraged companies. And plus, I think people will be able to convert what would have been interest expense to some other kind of expense. So let the work get done, before we spend too much time guessing about it. 
+
+
+          I also think that while interest deductibility is one point, the repatriation of cash is another point. And there are puts and takes, and you have to think, you have to see the whole package, before you can see what the net impact is. But ultimately if these things get done rationally and grow the economy, then it's good for our franchise just broadly. So don't focus on DCM, focus on the whole thing. And I think when you get the whole package, if it's done well which we hope will happen, then it will be good for the economy, good for our clients, and good for our whole franchise. 
+
+Answer_23:
+
+          Yes, okay. So yes, Matt, it does include the benefit of higher long end rates. And if you get the Q, and get our disclosure on net income risk, and do some math, you'll get pretty close to numbers that looks similar to that $1.5 billion or more. And then, with respect to rate sensitivity from here, clearly it's not linear. So you can see, if we just look at the third quarter, the first 100 basis points -- this is an illustration of $2.8 billion, 200 basis points is $4.5 billion. So as we clip away, 25 basis points a time, our $2.8 billion will start to come down. And so, that's broadly the outlook. 
+
+
+          And the next 10-Q will show the next -- (multiple speakers). 
+
+
+          And the next 10-Q will show the next. 
+
+
+          But obviously, it's less and less as rates go up. It's not linear. 
+
+
+          Unless we actively change the ratio, which we may also do at one point. 
+
+Answer_24:
+
+          Yes. So I mean, what you saw happen in 2016 was not only obviously a rotation from securities and deploying deposits into loans, but also we took a very large amount of non-operating deposits out of the balance sheet in 2016. So that is having an impact. But we would expect to continue to grow our loans, to grow our deposits strongly to manage the overall balance sheet through our investment securities portfolio. And from here, if everything continues to be as the market implies, we should see margin expansion. 
+
+Answer_25:
+
+          Good morning. 
+
+Answer_26:
+
+          Yes. So answer is across the metals and mining and energy, we have a little over $1.5 billion of reserves. I mean, there is a normal level of reserves that we will have, that would be a large chunk of that. And as you saw in 2016, we did take charge-offs of a little less than $300 million. So we will continue to likely see on a name specific basis, as people work through their business models, that there will be more charge-offs. But ultimately, if energy stays stable or improves, and of course, we have to see that be somewhat sustained, and find its way flowing through the financial statements of our clients. Then as we upgrade them, God willing, then we will see more reserve releases. But it's going to take some time.  
+We'll start to see some of that -- and think about the large reserves we took. We took them at the tail end of 2015 and into 2016, we'll start to see new financial data from our clients. We'll start to do the borrowing base redeterminations, and look at the impact of prices on reserves in the spring. And so, we'll start getting some data this year, and so we may see some more releases, but it's going to come through over time. 
+
+Answer_27:
+
+          Yes, I mean, I would say that when I talk about the overall core loan growth going down, still being strong, it does reflect the fact that we've been seeing very strong outperformance in our growth over the course of the last couple of years, particularly in commercial term lending. And while we continue to believe there's great opportunities there, they will be lower. So we've been printing in the teens pretty consistently, and I would say, it will be less red hot, and maybe more in the high single-digits, but we're going to keep you updated. 
+
+
+          There's still plenty of opportunity. 
+
+Answer_28:
+
+          Well, I don't know that I would ever try to decide what moment in time, is the pinnacle. But I would say, you saw us invest heavily in the business in 2015 and 2016 across a number of different fronts. You saw us proactively renegotiating the card program deals for the vast majority of our portfolio, and investing very heavily in exciting new products. And in both cases, while it has had an impact on our revenues, in one case in the short-term, and another case more structurally, in both cases these are still very attractive returns. And so, card is still a very attractive ROE business, very important to our customers. We are after deep engaged relationships through time with them. And so, we are going to continue to invest in growth. 
+
+Answer_29:
+
+          At this point, yes. 
+
+Answer_30:
+
+          We did try to actually analyze it, because we got asked a lot about what was secular. So you could break apart your exotic derivatives, certain types of CDOs. Of course, across the whole spectrum, there are things that disappeared and won't be done no more, for better or worse. In some cases, by the way, like a CDOs it didn't go away, because the person is still a credit buyer. So they just went to another product, but that was our best estimate. I don't want to over do it or anything like that. 
+I also said that the actual market making requirements are going to be going up over time, I'm talking about over 20 years, I'm not talking about the next quarter or next month. And remember, we don't run the business next quarter, next month, because assets under management are going up, and needs of corporations are going up. The fixed income mortgage is going to go up, the needs for FX is going up, the needs for hedging is going up. So over time, we know there's going to be a cyclical increase. And we just try to estimate how much of the [downturn] is cyclical, and so, there will be a flip side of that. And I think you might have gotten to the end of the secular, end of cyclical decline. 
+
+Answer_31:
+
+          So I will obviously, give you a lot more detail about all of this at Investor Day, but really quick, because I knew the $19 billion would get some excitement. If you go back, and talk to yourself to look at the specifics on the slide, you should see that the $19 billion that he guided to did have some assumptions about some legal costs in there. The CIB didn't have legal costs in the year. And as a result, it's still a little higher on an apples-to-apples basis than that would imply. Additionally, I talked about the tail winds in terms of a stronger dollar. 
+Now for full disclosure we have intentionally reinvested some of that, but it was a tail wind that meant that apples-to-apples, it would still be a little higher. I'd tell you that compared to the targets that they set, we still have a few hundred million dollars to deliver on, and Daniel will go through that at Investor Day. 
+
+Answer_32:
+
+          Okay, so just to talk about rate trading for a second. You're right, that it was a part of the strength story in the fourth quarter this year. It was also a strong fourth quarter last year, which is pretty much the only reason why we didn't call it out as a bigger driver of the year-over-year growth, but it was a strong performance in the quarter. And we would expect that to continue. It's much more interesting to -- for our clients to trade around a moving yield curve and rates above zero. So as we see rates normalize, we would fully expect that to be ultimately a beneficiary to the franchise in terms of clients trading, and positioning, and hedging around that over time. And so, [wonderful] if that would be the case. 
+In terms of the excitement and the enthusiasm of our businesses, lending versus we're enthusiastic about all of our businesses, and would want to defend share and grow them all. I mean, the reality of the CIB revenue performance in markets, and in general, it was very strong in 2016. So we will try our hardest to replicate that. But it will be a challenging comparison, but we're proud of it. So we gained share competitively over the course of the last couple years, and so I don't think you should necessarily expect that we can continue to gain share at that pace; but defend it we will. 
+
+Answer_33:
+
+          I think the better way to look at CIB lending, is it's kind of episodic, and goes in and out. Corporations, a lot of corporations don't need to borrow, and when they do, it may be inconsistent. It might be because of M&A or something like that. Our [bridge] book will always be driven by certain types of activity, so the loan book isn't something -- the CIB loan book isn't something you're going to say, that you're growing. That is more serving clients in the way they need. 
+One of the things I just want to point out which is, of course, all of our businesses, but just take trading in particular is, we're always creating efficiencies. Part of what we're investing is big data, is [trade] through processing, electronic exchanges, online services. I think 97% of FX -- I think it's 50% to 60% of US interest rate swaps, all these things have become electronic and digitized, as trade through for clients. So that's where some of the investments are going. And you're going to see more of that not less, but it also creates another round of efficiencies every time we do that. 
+
+Answer_34:
+
+          Good morning. How are you? 
+
+Answer_35:
+
+          Yes, so we talked before about -- we had in certain markets already pulled back, not necessarily because we had a crystal ball, but because we saw them getting soft before the energy decline. Dallas and Houston would be examples, parts of Brooklyn would be examples of that. I would say, watching more carefully -- you've seen us, we have that there is some supply coming through in markets, Seattle, Denver, D.C., San Francisco. We're still very active there, but just keeping an eye on those markets. But the supply pipeline, while it's real does not look like it did when we saw the real pressure on the term lending business, the real estate business back in the 1980s and 1990s. So we're keeping an eye on it. 
+
+Answer_36:
+
+          (Inaudible) I'll add, we don't want to give you all of our secrets in that business, but we do (inaudible). But we're very disciplined about where we see supply, and supply and demand and pricing, and we would have no problem, not growing at all. We don't sit at meetings here and say, can you grow at 10%, can you grow to [12%]? No, if we can't meet what we think is proper risk return, we're not going to grow at all. We'll shrink. We have no problem doing that. And so, the other thing I want to point out about CTLs, the exceptional performance of the CTLs through the last Great Recession. I mean, we were really pleased with how that happened. So we try to look at all these things through the cycle, not just what are they doing in good times. 
+
+Answer_37:
+
+          We don't disclose that. 
+
+
+          Thank you. 
+
+Answer_38:
+
+          So, there's a couple different things. First of all, we, about a little more than half of our originations are jumbo. We retain all of those. And then, when you look at the conforming space, it's really, honestly, consistently the best execution decision. And so in particularly in this quarter, it speaks a bit more to our correspondent conforming volume, it's the lowest margin product. And it does somewhat frequently toggle backwards and forwards in terms of better execution, whether we would retain or sell it. 
+But we intend to keep adding to our portfolio, we like the mortgage asset classes. Even those spreads have compressed in the fourth quarter, OAS and ROEs are holding up. And so, I would expect us to continue to grow it strongly. And from quarter to quarter, it may go up or down a few percent, but over a year, we'll continue to add to the portfolio. 
+
+Answer_39:
+
+          No. 
+
+Answer_40:
+
+          I think there was a little bit of that in the fourth quarter, particularly around actively managed product. I think you're accurate. But we haven't seen everybody else yet, but I think you will be true, when we see everybody. 
+
+Answer_41:
+
+          That's a really hard question to answer. I'd have to think about that a little bit. 
+
+Answer_42:
+
+          I think that -- I mean, everything is going to end up being reasonably named specific, so I mean, that may be true in some cases. But for some companies in industries, where deregulation and that would be more helpful. But generally as I said the trend is towards lower -- I'm sorry, less mega deals, more flow, and the fundamentals are in pretty good shape, and then there will possibly be tail winds, in terms of tax reform and other things. So I think net-net, we think the underlying flow in the M&A market, and the fundamentals are set to have a pretty positive year. 
+
+Answer_43:
+
+          We'll see. No more questions, operator? 
+

exam/original-files/Problem_2_3_Sample_QandA/17_questions.txt

@@ -0,0 +1,173 @@
+Question_1:
+
+          Hi, thanks. Good morning. Marianne, I was just wondering -- I know you'll give us more at Investor Day, but just in terms of that first quarter starting point for NII, and just how it translates between growth in the balance sheet? And then, you mentioned the benefit from the roll over in rates, can you help us just try to think about -- just you parse those views out, and think about volume versus rate? 
+
+Question_2:
+
+          Understood, great. And if I could ask a follow-up? Just on the volume side, you had another great year of double-digit loan growth. And obviously, we're at this intersection between kind of the what was, and then the what will be. Any change to that expectation you could just grow the loan [bit] book, a core loan book that is, as strongly as you have in the past few years? 
+
+Question_3:
+
+          Hi, good morning. 
+
+Question_4:
+
+          I just wanted to dig in a little bit on the forward look. NII up a bit, but also expense is up a bit. And I just wanted to understand is that because you've got the opportunity to reinvest in things that you haven't been able to? And if you could just speak to what kind of time frame the reinvestment will yield returns, because the question I've gotten from people is, why aren't you dropping the NII benefit to the bottom line here? 
+
+Question_5:
+
+          And then related follow-up has to do with, how you're thinking about the excess cash you've got, and the balance sheet duration? And if there's anything in this new interest rate environment that you would be seeking to do -- (multiple speakers) to optimize -- 
+
+Question_6:
+
+          Okay. So no change to the duration? 
+
+Question_7:
+
+          Hi, good morning. Marianne, I was wondering if you could comment a little bit about some more color in card trends? You have exciting new products out there. How are the economics of the Sapphire Reserve card been coming in relative to your expectations, and what factors drove the decision to cut the original  promotion award back, and should that affect your account acquisition costs? Thanks. 
+
+Question_8:
+
+          Okay. And just as a follow-up on that, in terms of the card, credit quality, it's been very good. Would you still expect to see though some seasoning as the book matures? What kind of outlook would you have on the card charge-offs? 
+
+Question_9:
+
+          Hi, good morning. I know that you've said previously that regulatory reform or regulatory relief will unlikely have any fundamental change in terms of how you're thinking about budgeting. But I'm wondering if you could help us understand, sort of over the past few years, how much has regulatory costs grown, and has that peaked anyway? And can you give us a sense of how that could trend over the next few years, either the natural trend of it, or what the impact would be of regulatory reform? 
+
+Question_10:
+
+          Great. And just as a follow-up to John's question on card trends, when you look at the card revenue rate declining about 200 basis points or so year-over-year, is your response to this question essentially implying that we've potentially hit peak promotion in 2016, and perhaps the revenue rate will have some stability to it in 2017? 
+
+Question_11:
+
+          Hi. Is Jamie on the call? 
+
+Question_12:
+
+          So Jamie, your comment said that the US economy may be gaining momentum. 
+
+Question_13:
+
+          If you can give some of the basis for that comment, is it more risk borne by investors, or more CapEx by companies, or is this more hope? 
+
+Question_14:
+
+          Is that enough for you to say you're going to invest a little bit more, or hire more people, or expand a little bit more? And along those lines, how do you see market share gains potentially from now? 
+
+Question_15:
+
+          Why are you saying this might be a little bit more than just weather, that this might be more sustainable, when you say the economy might be turning? 
+
+Question_16:
+
+          Hey, good morning. Maybe we could talk a little bit about the investment bank? Obviously, your peers and a lot of investors have been growing in their optimism for this year, in terms of animal spirits and everything else, and just want to get a sense of how you're thinking about it? Do you share that optimism, and any commentary on how we can think about both banking and trading into the New Year, with all of the moving parts that we have around policy, et cetera? Thanks. 
+
+Question_17:
+
+          Okay, that's helpful. And maybe as a follow-up. On the expense side, the comp ratio in the investment bank, I think dropped around 240 basis points this year or last year. Do you think that's sustainable into 2017, assuming flat to up revenues, or was there anything unusual in there? 
+
+Question_18:
+
+          Yes, thank you very much. Hey, Jamie, one of the things that we're seeing, some of the new politicians, coming in talking about opening up to credit box, especially in the mortgage world that has been really shut down over the last years, mainly due to the rules coming from all of the things, Fannie, Freddie, [UB]. What type of things do you need to see or do you think they can do to open up that credit box, where banks can take more risk and be protected? 
+
+Question_19:
+
+          Hi, thanks. 
+
+Question_20:
+
+          Hello, there. So I guess the question for either one of you is, if we do get some lower taxes and/or a better rate environment, I'm curious on your confidence on how much of that can fall to the bottom line? Because there's a lot of optimism about what can happen if stocks have moved well, we're expecting that to move to the bottom line. There's the big concern that people have is, that it gets competed away by irrational behavior. So curious to get your thoughts on that, just big picture in general, if things go well how much of that are you repaying? 
+
+Question_21:
+
+          So when should I take that lower tax rate out of my model? I'm kidding (laughter). 
+
+Question_22:
+
+          The real follow-up I had was, that the concept of interest deductibility, if that is the means that they use to pay for the tax hikes, it feels tough, like a bad thing. I'm just curious on how you think it impacts your franchise, from anything from debt underwriting to anything else? 
+
+Question_23:
+
+          If I could circle back to the discussion on net interest income and the rate leverage. I think the outlook for net interest income to grow over $3 billion versus $1.5 billion before the rate increase. That's obviously a nice lift for just a 25 basis point bump on the short end. So I guess, one, does that include the benefit of longer term rates since they've moved up as well since 9/30, which I assume it does, but just to confirm that? And secondly, what's the leverage to rising rates from here, as we think about movements in both the short and long end? 
+
+Question_24:
+
+          And that is actually  -- getting to my follow-up question. I  mean, on the size of the balance sheet, you did talk about loan growth of about 10% this year. If you look full year 2016 versus 2015, the balance sheet or the earning assets only rose 1%. So maybe tie that into, as you think about duration, the fact that you're sitting on a lot of liquidity and cash, and how we should think about both overall growth in the balance sheet, and then potentially some more remixing? 
+
+Question_25:
+
+          Hi, good morning. 
+
+Question_26:
+
+          Just a quick question on the credit and reserve releases, as it relates to the energy and metals and mining portfolio. Now that you've actually seen some better credit in there, how much of the reserves are left in that portfolio, and can you still see reserve releases going forward? 
+
+Question_27:
+
+          Okay, thanks. And then, also on CRE, again strong loan growth year over year. I mean, I understand that you're focusing in these housing-constrained markets, but is there a limit to how much you can grow in those markets? 
+
+Question_28:
+
+          Thanks very much. Marianne, just to follow-up, a couple more questions on card. I know you've talked quite a bit about it already. But one of the sort of conventional wisdoms at the moment is that 2016 represented the pinnacle of the intensification of the competitive environment. And I just wanted to get your thoughts on whether that's an accurate assessment or not? 
+
+Question_29:
+
+          Great. And just on that point, the ROA expectations that you have as a consequence of the trends that you just underscored, do you consider these to be, sustainable as you get back to that 11% kind of revenue yield? 
+
+Question_30:
+
+          Hi, Jamie. I wanted to start off with a big picture question on the trading side. You made some recent remarks talking about the outlook for the [FICC] business, and alluded to roughly half of the declines versus the peak being attributable to cyclical as well as secular factors, and a lot of FICC optimism in particular that we've spoken with have really latched on to your remarks. And I was hoping you could provide context as to how you determine the 50/50 split. Should we be taking those comments so literally? And how you're thinking about the FICC fee [portfolio] trajectory overall, as some of those cyclical headwinds abate? 
+
+Question_31:
+
+          Thanks, Jamie. That's extremely helpful color. And Marianne, maybe just switching over to the expense side for a moment. You also provided very helpful detail on some of the drivers of the strong expense progress that you're seeing in CIB in particular. And from what I recall, last year's update, Daniel actually guided to an expense target of about $19 billion by 2017. It looks like you've gotten there essentially a year early. And I'm wondering whether there are more savings initiatives that have not yet been filtered through, and could potentially accrete in the coming year? 
+
+Question_32:
+
+          Hi, good morning. Was just wondering if we could talk a bit about rate of trading. I mean, to my mind, that was a product that's done particularly well this quarter. But I was wondering looking forward, how you see that performing, whether it's supported by what's going on in the yield curve? Or whether do you see that supported more by sort of like one-off euphoria around the election, so maybe that might tail off a little bit? 
+And then just moving on from that, how do you view the opportunities for growth in your capital markets businesses, your CIB versus say, your lending businesses? Are you equally enthusiastic about both, and given the opportunity sets going forward, or do you see some being more positive than others? 
+
+Question_33:
+
+          I mean, it sounds maybe that you'll  (laughter)  the pressures of year-on-year growth, in the CIB business but you're not really highlighting that in terms of your lending businesses, which obviously you'd expect further margins to grow, the loan books to grow. 
+
+Question_34:
+
+          Good morning, Marianne. 
+
+Question_35:
+
+          Good. Can you give us some color, in the past you've talked about -- in the multifamily, I know you commented on that in your prepared remarks, on your multifamily book, some of the markets that you continue to be a little leary of, can you give us an update to those types of thoughts? 
+
+Question_36:
+
+          Okay, great. And I know you talked about the duration of the securities portfolio, it's in line with -- (multiple speakers) 
+
+Question_37:
+
+          Certainly. And Marianne, coming back to the investment portfolio, obviously you talked a little bit about the duration. Do you have the actual duration of it in years, this quarter versus the third quarter? 
+
+Question_38:
+
+          Good morning. Just a quick question for you, Marianne. In terms of the mortgage, in the overall picture, I understand why you're talking about maybe 10% core loan growth rather than 15% more recently. But just within the residential mortgage portfolio, it looks like that slowed in the fourth quarter, third and fourth quarter from a mid teens year-over-year rate, to a low single-digit quarter-over-quarter rate. Can you give us a little more color as to what's going on there? Are you buying -- or are slowing your purchases of your own originations, or is that -- is there something else going on there? 
+
+Question_39:
+
+          Okay. So no real change in your thinking there? 
+
+Question_40:
+
+          Thanks for taking my questions. The thing that jumped out at me was, if you looked at the asset management group, you had $21 billion of long-term product outflows, and you had $35 billion of liquidity products inflows. And it seems like now that we're getting past the financial crisis, when everybody was looking at liquidity, that combining that with continued deposit growth, we're not seeing a change in that perspective, but there's still a premium for increasing liquidity still? 
+
+Question_41:
+
+          Do you foresee that premium for liquidity lessening, as we kind of go into the rerisking of a better economy, and some things that improve the outlook? 
+
+Question_42:
+
+          And then my last thought was, when you look at M&A, we had M&A kind of suppressed when things were more regulatory constrained, and the outlook was a negative on the overall economy and that uncertainty. Now we have this positive uncertainty. Wouldn't that delay some activity for at least a couple quarters, for people to kind of see where we're going to end up, and see where tax rates are, and see what we might get in deregulation that may change perspective on their long-term opportunities? So just thought there might be a little pause here. 
+
+Question_43:
+
+          I just thought maybe in the second half versus the first half, but thanks for your response. 
+

exam/original-files/Problem_2_3_Sample_QandA/18_answers.txt

@@ -0,0 +1,171 @@
+Answer_1:
+
+          So in the retail space, the answer is no, not really. And to be completely honest, we've been pretty consistent that we would not really have expected there to be much in terms of deposit reprice at absolute levels of rates that are still quite low. And so with IOER at 100 basis points, we're still in that sort of realm of the atmosphere, and so we would expect that to start happening a couple of rate hikes from here maybe. We'll have to wait and see. We've obviously never really been through exactly this before. On the other side of the equation, in the Wholesale space, we are in the process of seeing a reprice happen.
+
+Answer_2:
+
+          No.
+
+Answer_3:
+
+          Yes, so I don't have all those numbers directly in front of me. I know that in the Commercial Bank, our exposure to mortgage is really pretty modest, it's around about a total of $3 billion in the commercial real estate space. And I would tell you that while there obviously is a lot of discussion around retail, and with some merit, it's very case-by-case, location-by-location-specific. And I kind of liken the discussions a lot to discussions we have around our bricks-and-mortar banking businesses, which is consumer -- the way consumers engage with retail isn't changing, it doesn't mean they will stop engaging with retailers. And so it will be very specific with respect to location and tenants. And it doesn't necessarily mean that retail is going to be in as much potential trouble as I think people are talking about. So we remain cautiously watching it but also cautiously optimistic that it's not -- that it's a bit overblown.
+
+
+          And you should assume that we've looked at not just direct retail or retail-related real estate, and all the vendors to any potentially covered retailers. When you put it all together, it's a little bit like there'll be something there, but it's nothing that will be dramatic when it's happening.
+
+Answer_4:
+
+          Are you talking about real estate related to retail? Or are you talking about retailers?
+
+Answer_5:
+
+          No, you're way out of line. I mean, direct retail exposure, we're very careful. The retail business has always been violent and volatile. You can look back through our history, and half of them are gone after 10 years. That's the normal course. So we're usually senior, we're very careful with stuff like that. And then you go to real estate, okay, most of our real estate has nothing to do with retail. So we do have some shopping centers and malls and buildings and stuff like that. But those are generally high on the stack, well-secured and not relying on single retailers, et cetera.
+
+Answer_6:
+
+          It will be like oil and gas for us, it won't be a big deal.
+
+Answer_7:
+
+          Yes. So look, I know that -- so one of the things that we want to remind everybody before we talk about the trend is that the credit card losses are still at absolutely very, very low levels. And notwithstanding whatever we would have done or have done or continue to do with our credit books, we would ultimately have expected them to normalize to higher rates regardless, so -- and then for -- obviously, the first quarter hasn't been that...
+
+
+          It's probably just the previous cycle stuff.
+
+
+          Yes, exactly. And obviously, first quarter has some seasonality. So I would just start by saying that the charge-off rates we're seeing are completely in line with our expectations and guidance that we gave you at Investor Day both in terms of 2017 being below 3% and over the medium term being between 3% and 3.25% for all of the reasons we articulated. A combination of positive credit expansion that took place over the last couple of years and the performance of those newer vintages is in line with our expectations and with high risk-adjusted margins. So it's not really about tolerating the charge-offs as long as we're getting paid properly for the risk, which is the case. And obviously, as we see those charge-off rates both normalize and reflect those newer vintages, they will go up modestly over time. And we expanded our credit in a targeted way, but it wasn't a significant expansion. And we will respond in our credit and risk appetite to whatever we're seeing in the environment. But it won't necessarily be predicated by charge-offs rates as long as (inaudible).
+
+Answer_8:
+
+          So I would say if you look back over 2016 and even 2015 and '16, it's true and clear that we gained share, not just in fixed income -- reasonable share not just in fixed income but also in equities. And our business performed well last year. And I would suggest to you that we will defend that share. But the competition is back and healthy. And you can't expect us to continue to gain share at those kinds of levels. We want to defend it, but it's a healthy competitive market right now. So I would say not really.
+
+Answer_9:
+
+          We have a ways to go before we're concerned.
+
+Answer_10:
+
+          For merchant processing, there's a lot of share you can gain. And that's not even close, because you give products and services and a change in technology. And I think we're way, way in credit card when you say, "Well, that's too big for JPMorgan Chase." There is a point where it's going to be a good question, but it's not even remotely close to this one.
+
+
+          And I would also say that Cards continue to be a  very competitive space. So we will continue to try and provide our customers with significant value and have deep, engaged relationships. But I don't think you're going to see material shifts in share in the short term.
+
+
+          And we also look strategically at credit card, debit card, online bill pay, P2P as all one big thing to do a great job for the client.
+
+Answer_11:
+
+          Not particularly at this point. I think we're very happy with the performance of the portfolios, with the growth rates we're getting. You saw that our core card loans were up 9% year-on-year. We're getting a lot of NII benefit from that. So I think we're pretty well positioned at this point.
+
+Answer_12:
+
+          Yes, I would say loan growth should be in the mid- to higher single digits.
+
+Answer_13:
+
+          So obviously, when we give you guidance, we give you sort of reasonably rounded numbers. So actually, the impact of current implied is a bit more than $500 million more than it was at Investor Day. But in the law of big numbers, that's a pretty reasonable amount. Yes, there is an element, of course, as we talked about, in the Wholesale space, where we are seeing reprice happen, and it does reflect our estimates of what we expect to see over the course of the year in cumulative deposit bases. And with respect to if there was -- and you know that the implied has priced in 1.5 more hikes, so it's -- obviously, March is earlier, so longer, there's a little bit more rate benefit. But it's sort of in line with our expectations. And if we had another rate hike, it would likely be later in the year, and ultimately have a relatively modest impact on this year but obviously be important going forward.
+
+Answer_14:
+
+          You should be able to extrapolate those numbers on your own.
+
+Answer_15:
+
+          I think it's important to put that slowdown into context. I mean, we did have 8% growth year-on-year in C&I. We're just saying sequentially, things are a bit quieter, and there's a whole bunch of reasons that could be driving that. And importantly, you mentioned it, when we're in dialogue with our clients, they are optimistic and they are thinking about growing their businesses and hiring, and all of those things are true. And so putting aside those that have access to capital markets for a variety of reasons in newer bank loans, it's completely understandable that optimism would lead actions. And so as to what that lag will look like, we'll wait and see. But fundamentally, a pro-growth series of policies will be constructive to the economy, to our clients, and ultimately, will end up in them hiring, spending, and they already are, and we'll see that translate into loan growth. Whether that's in the second half of this year, we'll see.
+
+
+          I would just add that I wouldn't overreact to the short term in the loan growth because there are so many things that affect it. When you go through the episodic part, if you look at CIB, I wouldn't look at loan growth at all, because companies have a choice of doing loans and deals and -- or bonds, something like that. Look at credit card looks okay. Mortgage is obviously affected by interest rates. Autos is obviously affected by auto sales. And middle market was okay. It was like it was slow, but it was okay. So I wouldn't overreact to that. And the second thing is you all should expect as a given that when you have a new president and they get going, that the 9 months after the 100 days is going to be a sausage-making period. There will be ups and downs, wins and loss, stuff like that, okay? But it is a pro-growth agenda, tax, infrastructure, regulatory reform. And that is a good thing, all things being equal. And we think that if that took place, it would be helpful to Americans. But to not -- to expect it to be smooth sailing, that would just be silly.
+
+Answer_16:
+
+          It looks fine. And of course, it's episodic.
+
+
+          Yes. And I would also say that while, of course, people's dialogues include a degree of discussion around regulatory reform and tax reform and the like, it isn't stopping the strategic dialogue and it isn't stopping people from -- or boards from considering strategic deals partly because of what you said, partly because there is a recognition that these things will take some time to ultimately get finalized, and that they don't want to put their strategic agenda on hold. So in some ways, you get both sides of the equation. People aren't going to wait indefinitely to get certainty on issues when there are good strategic deals that can be done, and that's past the dialogue. So not to say it has no impact, but it's still quite healthy.
+
+Answer_17:
+
+          Can I just answer that? Marianne has given you guys some very specific guidance on interest rates. When interest rates got to 0, remember that when it floored, those -- no one expected the first 25 to 50 basis point to necessarily be paid out, because of the cost. Marianne also gave you at Investor Day a very forward-looking view of that, where it kind of normalizes, okay? And it's different for every different type of deposit. For wholesale deposits, commercial credit deposits, company deposits, treasury deposits. They're all different. So it's hard summarize it all. But at one point, you're going to go back to kind of a normalized spread, and in terms of just retail, I would say that's like 3%.
+
+
+          Maybe a little less than that.
+
+
+          Maybe a little less.
+
+
+          And I would also just say, I am glad that you brought up one point because it's something that I'd like -- a point that I'd like to make, which is when people think about the benefit we get from NII on rising rates, there's an element of people making it sound very passive. Yes, you're correct, we did build those branches, we acquired those customers, we built the product, we invested in the customer service to be able to enjoy the industry-leading deposit growth that we're having. But I would also make the -- and so as margins improve, then, we will obviously enjoy the benefit of that. And to your point, we invested to be able to. But I will say that if you -- we look at the performance of our branches every single week, month, individually, put together by market, and the very, very, very vast majority of them, meaning that only a handful do not, are profitable in their own right today at these spreads on a marginal basis. So the branches are doing very well.
+
+
+          There's another number we give you all that you should look at. We give you what we expect normalized margins and normalized returns to be in Consumer, Card, all these businesses. Those numbers include normalized credit card charge-offs, like the credit card, the number we now use is for in a quarter, something like that, and in retail, going back to normal spreads. That's what those numbers include. And of course, it all bounces around. But we kind of look at them to be priced for normalized results. We don't price for them to be overearning or underearning or to have too much credit or too little. And that's kind of how we run the business.
+
+Answer_18:
+
+          We've built that into every number we've given you. We've always told you the beta and gamma.
+
+
+          Yes, I can point you to a presentation in May of 2014 where we showed exactly what we expected the complexity of deposit reprice to look like based upon historical moves. So what we have actually seen to date looks incredibly similar in terms of realized reprice. You're absolutely right. I will tell you though that history may not be a precise predictor of the future because we've never really been in this exact position before and other things play into the equation, including the fact that the industry, but us specifically, have significantly invested in other customer service products, items like digital and the like, which will change the dynamic one way or another on reprice. So you're right, historically, 100, 150 basis points should dot [ph] see some movement, we'll see.
+
+Answer_19:
+
+          Yes, but I'd be a little cautious there, too. I mean, we feel great about the deposit growth and the account growth. So you have new accounts that are growing and existing accounts are growing. Remember, there you also -- history -- you've got to be very careful, because if rates were higher, people do different things with their money, like CDs. And then how they view the stock market, that money -- some of that attracts lenders to the market. So we're always conscious of the fact those flows kind of ebb and flow, and history is only somewhat of a guide to that.
+
+Answer_20:
+
+          So I picked that category out precisely because it didn't take legislation and it was very important. And my point isn't about banks versus nonbanks. My point is about the United States of America and what these things did to the availability of credit to a certain class of people. I was very specific, and we actually published a research report in mortgage land, which you can go get, by Mr. Jozoff, that really breaks it out. But because of the cost of servicing delinquent accounts, $2,000 a year, because of the additional cost of origination, because of the potential litigation, because of the not clarity around the QM, because of the forward claims that the consumer's both paying more and the credit box is wider than it would otherwise be. And that we actually believe that credit box is hurting first-time buyers, younger, self-employed, prior defaults, someone who when they defaulted passed his reserve, who always say deserves a second chance. So that policy has restricted that. And the shocking thing to me is the absolute size of that, which we think could be $300 billion to $500 billion a year. That one thing alone could have added -- because of a secular stagnation, could have added 0.3% or 0.4% a year to growth. So if you'd changed it 5 years ago, you're talking about a lot of growth, a lot of jobs, a lot of new homes, a lot of young families into homes and a very positive thing without taking a lot of extra credit risk. It's not -- it was about America, is why I wrote it. I could care less whether the banks and nonbanks do it. My point about that was how it's hurting the growth of America and hurting that class of citizens. And I really think some of you should be writing about that more because that's how important it is. That was one example.
+
+Answer_21:
+
+          Okay. So I would just start by saying we've been consistent that our operating model, including the diversification of our businesses, has been and was a source of strength not just for us but also for the financial markets during the crisis. And there is strength in the way the company operates that can't be discounted. I would also say that the commentary feels unnecessary given where the industry stands on capital liquidity and regulatory reform broadly. And I would just point, as I'm sure you all read, to most recently, Governor Tarullo making comments about this but historically, other thought leaders in the financial stability space talking about it. And I would further say that it doesn't feel, for the reasons that you just articulated in terms of structural reform or structural change in the model of banks, that, that would be consistent with a level playing field and pro-growth agenda in the U.S. So that's kind of how we feel about it. I can't give you specific reasons to not continue to monitor the situation. But it doesn't feel consistent with the rest of the objectives of the administration. And with respect to Investor Day a couple of years ago, lots of things have fundamentally changed since then, but the ultimate conclusion hasn't, which is that we believe that there's significantly more value for our shareholders, and as I said before, for the economy with this company the way it is today than in some other form.
+
+Answer_22:
+
+          First of all, we don't overthink the shape of the curve or the process of normalization in any one period. We think about the reason for the actions. And ultimately, as long as they're kind of growing, you'll see both of the short and the long end of rates ultimately go up. And even though I know that it's lower than what we've broken down, broken below a little bit of the lower bounds, it's been in the kind of 2.30%, 2.60% range for a while, so we're still within -- largely speaking, within the range. And our central case is that we're going to see the 10-year higher by the end of the year. And if you look at our earnings and risk disclosures, we're much more sensitive to -- as a pure NII, NIM matter, to the front end of rates. And so not to say it would not have an impact, but it would take a while for that to have an impact that would meaningfully offset any of the benefit of higher short-end rates.
+
+Answer_23:
+
+          Well, I mean, ultimately, sort of any actions by central banks, any change in the shape of the yield curve, anything that is presenting an opportunity for clients to transact and trade is an opportunity for our businesses. So as long as it happens in a reasonably rational fashion and there are no significant events, it should create an opportunity for clients and an opportunity therefore for us.
+
+
+          Always keep in mind that why they do something probably is more important than the what they do. So if they are doing it because the American economy is getting stronger, that is more important than the direct effect of adding -- letting securities mature, et cetera.
+
+Answer_24:
+
+          It could, I just wouldn't put that in your models.
+
+Answer_25:
+
+          So well, I mean -- so in terms of rates, obviously, the loan balances are seasonally low in the first quarter and charge-off rates are higher in the first quarter. But overall, we're not expecting to see abnormal patterns in our charge-offs.
+
+Answer_26:
+
+          Because it happens every 5 to 10 years, so why would anyone be surprised? And we've always been very conscious of this and very careful about how we do leases, we do them conservatively, we've got...
+
+
+          But we only do them to our strategic manufacturing businesses.
+
+
+          And only to strategic manufacturers, and we properly account for it. And we have loss mitigation. That's pretty important. So no, we're not surprised, it's going to happen every now and then.
+
+Answer_27:
+
+          I have no idea.
+
+Answer_28:
+
+          So it's actually got somewhat less to do with our marketing strategy than it has to do with the fantastic success we've had with the new products, particularly Sapphire Reserve, in the fourth quarter and in the first quarter of this year. But fundamentally, if you go back, I think, to a conference that Kevin Watters spoke at last year sometime in, I think, September, he said, look, we're going to see the revenue rate be lower about 10% and some for the couple of quarters while we acquire all of these accounts. Once we've hit a pace, we should see it middle out at 10.5% the full year of 2017, so the first quarter lower and subsequent quarters continuing to now start rising back up towards the 11.25%, which was our ultimate run rate target. And that's still fundamentally what we're expecting to see, which is we're at a -- assuming that our expectations of what we're going to see in account growth over the future period continues to hold, we would expect to see an increase from here in the second quarter, the overall year, to be sort of finish the mid-10s and the year 11-ish, and then go back to 11.25% over the course of the next couple of years.
+
+
+          (inaudible)
+
+
+          And we have great new products.
+
+Answer_29:
+
+          I said I'm not interested. I'm kidding.
+
+Answer_30:
+
+          Look, I've been clear. I think that Gary Cohn and Steve Mnuchin are doing the right thing. They want to find the right people for those jobs. They're talking about -- I gather they're talking to lots of people. But even after they announce it, remember, they need to be vetted and confirmed, and that's -- that normally could take 90 days. Well, the sooner, the better, but I think getting the right people is as equally important.
+

exam/original-files/Problem_2_3_Sample_QandA/18_questions.txt

@@ -0,0 +1,120 @@
+Question_1:
+
+          So I had a question about any early signs of deposit beta and elasticity. I guess, on the consumer side, in your retail banking area, are you seeing customers increasingly ask for higher rates in their deposit accounts or any activity where they're moving from kind of checking to savings and kind of early signs of pressure on deposit pricing?
+
+Question_2:
+
+          Got it, okay. And in terms of customers, they're not really asking yet or behaving in a way that they're looking price-sensitive, you're not seeing early signs of it yet?
+
+Question_3:
+
+          I wanted to maybe get out in front of what could be some brewing issues in retail land. And the perspective I'm looking for is you have plenty of gross exposure to retail and retail-related. However, there seems to be plenty of collateral, and you're typically at the top of the capital structure, too. So can you talk about both direct exposure in some of the problem retail areas and the related exposure in, like, commercial real estate and on the mall side?
+
+Question_4:
+
+          Is the main reason you're positioned in the stack, meaning I notice you have a lot of collateral against your exposure, and like I said, you tend to be at the top of the stack. Is that the main issue? I remember doing this with you guys 2 years ago in oil, while oil was dropping, and it turned out you barely came out with a few cuts and bruises. There seems to be more collateral here, but I don't want to put words into your mouth.
+
+Question_5:
+
+          I'm talking both because you do have hundreds of billions of direct retail exposure plus the commercial real estate exposed to it. I'm just thinking you have...
+
+Question_6:
+
+          Okay, I was just looking at taking a temperature.
+
+Question_7:
+
+          Can you give us some color on the credit card area in terms of -- I know you upped your credit card losses earlier in the year at the Investor Day in the fall of last year. What's your guys outlook for the credit losses in the credit card portfolio? Where would you tolerate it to? And at what point do you really change the underwriting standards if you need to?
+
+Question_8:
+
+          Got you. And as a follow-up, obviously you had very strong investment banking on the FICC trading side, very strong capital market numbers. Are you guys seeing further evidence of taking more market share from your competitors in any of the product lines, whether it's investment banking or FICC trading or equity trading, et cetera?
+
+Question_9:
+
+          A couple of questions, one on Card. How large are you willing to be in Card? I think on various metrics, you're between 15% and 22%, depending on if you're looking at things like merchant acquiring or the balances in Card in general as a percentage of total outstandings in the country?
+
+Question_10:
+
+          I'm asking because in the last cycle, you were really nimble. And do you still feel that you can be nimble at this market share?
+
+Question_11:
+
+          And then when you're thinking about the credit box, I know a while back, you mentioned, okay, we widened the box to 680. Is there any interest in widening it further?
+
+Question_12:
+
+          So loan growth should probably stay in line with where it is or slow down, is that how should we be thinking about it?
+
+Question_13:
+
+          I'm going to follow up on the NII question. I think your implied guidance of $4.5 billion higher than 2016 is now $500 million from where you were at the Investor Day. Is that the lower deposit beta experience? What's driving, I guess, the modest increase? And then just as a follow-up on that, in terms of if we do -- the implied curve, I think, has about one more rate hike in June. If we were to get another one realized, a dot plot, say we get another one in September, would that be a material increase in that expectation or just incremental or just how do we think about that?
+
+Question_14:
+
+          Okay. So anything in September would be sort of incremental?
+
+Question_15:
+
+          Marianne, you had noted the obvious slowdown we've seen in C&I, and Jamie, in the press release, you talk about the consumers and businesses being healthy and the pro-growth initiatives. Since the Analyst Day, we obviously had Obamacare not go through, and then there's been some doubts on tax reform. So just wondering, can you help us understand just where you're seeing that slowdown in C&I? And how would -- where are we in terms of that confidence turning into real results? And how much is just the wait and see versus where the economy actually is?
+
+Question_16:
+
+          Yes, fair points. And just one quick follow-up, just on the deal making side. M&A has slowed a little bit, but I'm assuming it's the same point, Jamie, just in terms of just pipelines and expectations that corporates have about transacting. Does that fit into that same vein? Or is there anything different in terms of just companies getting -- strategics getting more aggressive in terms of acquiring and adding to their businesses?
+
+Question_17:
+
+          I wanted to focus on deposit pricing in the sense that before the Feds started moving up, deposit rates and the Fed funds rates were right on top of each other, around 15 basis points. Now the effective Fed funds rates is around 90 basis points and deposit costs are only 20. So that 70 basis points on your $1 trillion of deposits basically gives you about $7 billion worth of incremental revenue that's needed to cover the cost of branches and other things for those deposit franchise. At what point do you hit a targeted kind of spread? And where is that where you begin to at least breakeven on those costs versus revenues?
+
+Question_18:
+
+          A follow-up to that is really what I'm getting at is last year, everybody was assuming through the cycle kind of betas, and we were saying that they were going to be much lower early on. We do think once you get to a certain target, usually about 100 basis points of spread, you start to see a little bit more pricing pressure starting to kick in, just like you were saying, Jamie, in the sense of different products...
+
+Question_19:
+
+          And the last component of this is the balances continue to grow. So as long as we're seeing double-digit kind of sequential, annualized and year-over-year growth in deposits, that provides a little bit cover in a sense of what you're talking about as well. We may see a little bit more lag just because we're still continuing to get deposit growth.
+
+Question_20:
+
+          I had a few questions on deregulation. Jamie, in your shareholder letter, you dedicated a lot of time on mortgage and having -- opening that up for banks to originate more of the percentage of mortgage in the United States. As we look forward, do we need legislative change for the banks to gain more market share from nonbanks and mortgage, like clarity in QM or the CFPB? Or would a change in supervisory attitudes be enough for that to shift on the mortgage side?
+
+Question_21:
+
+          That's clear. And the follow-up to that is a couple of -- a week ago or so, there was a lot of talk from Washington about the current administration potentially supporting Glass-Steagall. And of course, a lot of your investors called in concerned. And Jamie and Marianne, a 2-part question, I'm wondering if that's a real worry for JPMorgan's shareholders? And second, Marianne, maybe at an Investor Day 2 years ago, you mentioned that the capital and the cost that a breakup would save was not that much. And I'm wondering if you could also, if you remember, refresh us on that analysis.
+
+Question_22:
+
+          We've obviously seen quite a bit of flattening of the yield curves. And it could reverse pretty quickly if there is progress made on the pro-growth agenda. But just talk about at what point does the flatter yield curve start to impact NIM. And I guess I'm thinking specifically if we get a couple of more hikes on the short end, but the long end either doesn't move or the long end comes down more, how do we think about the breakpoint in terms of NIM benefiting the short end being offset by the flatter yield curve?
+
+Question_23:
+
+          Okay. And then separately, as we think about central banks winding down, some of the QE and the Fed actually shrinking their holdings, how do you think about that impacting your businesses? And obviously, there might be a rate impact. I think you talked about your rate expectations quite a bit. But just how do you think it might impact, say, the markets business with potentially more assets kind of out there to be purchased and sold?
+
+Question_24:
+
+          I guess there's 2 thoughts on -- there's the impact of QE on the economy, and then the impact of QE on some of the markets businesses that maybe there's been a crowding out from all the QE, so as they unwind, that it could actually boost activity levels.
+
+Question_25:
+
+          Just a couple of questions on consumer. We've talked a lot about card losses. But one thing that seems to be a little bit unusual is that a lot of the commentary across many of the card issuers is for the expectations of losses to be higher in the first half than the second half. And I just wanted to get your perspective on the likelihood of that trajectory.
+
+Question_26:
+
+          Got it. And then just to follow up on auto, your release alluded a little bit to the impact of declining residual values, which has been, of course, a focus for the past couple of years. Was there anything unusual in your view about the pace of decline in resid values in this first quarter?
+
+Question_27:
+
+          But in terms of the pace of resid values from here, similar or different in your view?
+
+Question_28:
+
+          Marianne, let me start with a question on the net revenue rate in the Card Services business. That's been relatively steady, a little over 10%, for the last couple of quarters. I presume, given your outlook, that, that would stay pretty close to the 10.1% level that you reported for the last couple of quarters? Or are you thinking about a change there as you slightly change your marketing strategy?
+
+Question_29:
+
+          Fair enough. Jamie, a question for you, just another one on the regulatory landscape. There are a number of open positions inside the Beltway at a number of the primary bank regulators, and I'm just curious in terms...
+
+Question_30:
+
+          Well, somebody should fill those spots if it's not you. And I'm just curious what you're thinking is of the timing of those appointments and how quickly those could get filled and what benefit that might provide to the banking industry.
+

exam/original-files/Problem_2_3_Sample_QandA/19_answers.txt

@@ -0,0 +1,150 @@
+Answer_1:
+
+          Yes. I would just stop for a second to just point out that what Jamie actually said was, "This is uncharted territory. It's not something that we've seen before." And so while it is the case that the Fed is communicating clearly and has every intention to make this gradual and predictable, things can change, and we should just be prepared for that. Not to say that, that would have a particularly significant impact necessarily on JPMorgan but that, that would just be a downside risk, not a probability. So on the balance sheet, it's still the case that we expect to start seeing normalization in the balance sheet in September; if not in September, by the end of this year. And we're still actually calling for the next rate hike in December; the market is calling for March of next year. And as we said, the communication has been pretty consistent and pretty clear across the Fed space, which is to say that it's mostly priced into the market at this point as far as we can tell. And so based upon what we've understood, all things equal, we would see the balance sheet shrink about $1.5 trillion over about the next 4 years. So that would ultimately slow growth, not stop growth. And if we saw $1 billion -- sorry, $1.5 trillion come out of the Fed's balance sheet, empirical evidence would suggest that we don't see dollar-for-dollar reduction in deposits. So if you just pick a point between $500 billion and $1 trillion of deposit outflows, at our 10% market share, that would be about $75 billion over 4 years. So it would slow growth. It would not stop growth. And it is what we've been expecting and what we've been talking about now for an extended period, and gradual is good in that sense. In respect of which deposits we would like to see, so that's the sort of growth scenario. In terms of liquidity, again, evidence would suggest, and we've been communicating this quite clearly, that we think the preponderance of that deposit outflow would be wholesale deposits and that would -- it would be nonoperating deposits. And those are deposits we ascribe little to no liquidity value to. So assuming that we're close to right, we would see those deposits ultimately leave the system, but it wouldn't affect materially, if at all, our liquidity position. So ultimately, the yield curve has priced, I think, all of this in. What I think the Fed had been clear about is that they expect the balance sheet or hope the balance sheet to be in the background and to use short rates as their primary monetary policy tool. And so as a result, we would ultimately expect to see perhaps a flattening yield curve, but with the front end ultimately pulling the long end up. And you heard Yellen -- Chair Yellen talk about being conscious of the shape of the curve as they go about normalization. I think you may have asked something else. Did I miss anything?
+
+Answer_2:
+
+          No, we -- that's correct. If you saw the -- compared to a $400 million expectation, we were up $150 million. So it would be fair to say that most of it was in this quarter. We had also -- when we gave the last set of guidance at $4.5 billion, we pointed out that the 10-year was low and that, that was ultimately pressuring that $4.5 billion. So it really isn't that significant of a change. The only thing I would caution you to remember is that when we think about asset sensitivity and we think about NII, market NII, which we wouldn't consider to be, in a traditional sense, core, can exhibit volatility geographically with NIR. If you think about a market-making business where we can have assets that are throwing off NII hedged by derivatives that ultimately have an offset in NIR, we actually think about that in total revenue numbers. So there could be a little noise in there, but no, I'm not expecting there to be significant changes. But I think what this makes me realize acutely is that no good deed ever goes unpunished. And chasing our tails, reforecasting the full year NII every 3 quarters isn't as important -- or every quarter isn't as important as keeping our eye on the long term, which is nothing has changed. We are absolutely realizing the benefits we expected in the banking book assets and liabilities, and that means that our long-term projections will be good and the path is a little bit less important.
+
+Answer_3:
+
+          Yes. So I understand why you're asking. As you look at the loan yields, they look relatively flat or even slightly down. If you adjust for the mortgage, it would be flat. If you decompose them into wholesale versus retail, we are absolutely seeing all of the yield improvement on the wholesale side, about 10-ish basis points. And on the consumer side, at this -- with respect to this quarter, there were some mix impacts in the Card business as we saw a higher level of transactors and saw a few other things. So it's not to say that the loan yields aren't moving in line with our expectations, and they are, but mix will matter for any one quarter.
+
+Answer_4:
+
+          Yes, that's right. And if you look back last quarter, they did, too. It's just that we've had a couple of opposing things going on this quarter.
+
+Answer_5:
+
+          Yes. So obviously, one of the biggest drivers over the last recent while in card revenues has been the extraordinary success we've had in capturing new Chase Sapphire Reserve accounts. And so the end of the third quarter both -- importantly, both the fourth quarter and the first quarter were extraordinary in terms of the number of accounts we acquired. And of course, we amortize or contra revenue out those expenses over 1 year. So at 10.5% revenue rate right now and with those -- having adjusted the premium with those originations stabilizing out into the second quarter, we will see ultimately -- we'll lap that impact a year from now. And we'll see our revenue rate start improving from here towards the 11.25% that we sort of guided to in the medium term. And we expect to get to that point, all other things equal, kind of mid-next year. And of course, that's just one facet. We're also seeing significant momentum on the sales front. Obviously, as a result of those accounts, we're growing our core loans, up 8%. And so we're having higher NII on those balances. So there's a lot of dry powder. We just need to get past these account acquisition costs, which we will. And I always feel compelled to point out that these are extraordinarily good customers. Their characteristics, their engagement, their spend, these are the customers that everybody wants to acquire. We now have them, and we intend to deepen relationships with them.
+
+Answer_6:
+
+          So I would characterize our strategy as unchanged. We've always been pretty consistent over an extended period that we would prioritize, first and foremost, strategic investments for growth in our businesses, be that organic or otherwise. And obviously, you've seen us be investing, whether it's in growing loans or introducing new product, hiring bankers, opening offices in our expansion markets and the like. But yes, it's been heavily skewed to being organic over the most recent while. We've also been pretty clear and active, I would say, in terms of partnering with, investing in, collaborating with partners that can accelerate our growth potential. So we would always be interested, whether that's fintech or otherwise, in getting capabilities that allow us to accelerate our growth potential. We don't have big gaps, but we would always be interested in that. Having said that, I'm not going to comment on the state of the regulatory environment except to say you should expect, for any of these events or transactions, that we would have the appropriate regulators at the -- conversation with regulators at the appropriate time.
+
+Answer_7:
+
+          Yes. So obviously, we are supportive of the new hedge accounting rules, and it will allow us to consider taking advantage of hedge accounting for a wiser set of products than we currently do. But we actually have reasonably limited hedge ineffectiveness in our (inaudible) right now. So from a practical perspective, it won't make a big difference to the business, but it is more flexibility in terms of the scope. And we're looking at that.
+
+
+          I would just add, as a policy matter, we make economic decisions, not accounting decisions. Accounting is a fiction. And Marianne spoke about the credit card. You expense the acquisition costs over 12 months. The benefit comes over 7 years. So we make huge investments all the time based on economics. We will never make a decision based upon accounting. And then we'll describe it to our shareholders to understand why we're doing what we're doing.
+
+Answer_8:
+
+          Yes, it's seasonality. So you've seen the first half at or around that guidance level. We would expect that to go down slightly just from seasonality in the second half for a full year a bit below 3%.
+
+Answer_9:
+
+          So I would say, obviously anytime you reach an inflection point, you need to be cautious about understanding the pace of change. For -- at least for 2018, 3% to 3.25% feels right. I think as -- when you get beyond that, we'll be updating you with our views as we experience a bit more in reality. It doesn't feel significantly different from that, but I think 2018 is a good number. And 2019, we'll update you.
+
+Answer_10:
+
+          Yes. Okay, so just talk about what we've seen so far, I think the industry has been really quite disciplined, which is what we would have expected at this early stage of a normalization in terms of the rate cycle. It is a tale of 2 cities. We've said that (inaudible) the wholesale space necessarily experiences higher reprice more quickly, and we are seeing that pretty much in line with our expectations. It matters, you need to get granular. The type of deposit, that client segmentation, it matters. So in the wholesale space, we're seeing it. We're on that journey. In the retail space, we haven't seen that yet. So while there have been small changes in the industry in CDs, there's been nothing in checking or savings. But again, I'd just point out to you that we wouldn't have expected there to be at this point yet in the cycle. And I would say, with respect to deposit betas and the Fed's balance sheet, if we are right, and we believe we'll be close to right, and that we see the wholesale nonoperating deposit flowing out of the system, assuming everybody else has reached that same conclusion, then it really shouldn't materially impact the liquidity position of financial institutions. And if you couple that with the expectation of a very gradual and measured pace, which gives people a lot of time and opportunity to plan accordingly, we wouldn't expect there to be a significant impact on betas, if any.
+
+Answer_11:
+
+          Yes. I would say -- first of all, I would say, focusing on any one -- so we would be very supportive of changes to how operational the capital is treated under [reg] capital rules. But I think focusing on one facet and not the whole thing -- it's unlikely to be that only one thing changes. So we'd like to see changes made over time. But for the foreseeable future, as we're growing our loans quite strongly, and these are extraordinarily high-quality loans where the differential between advanced and standardized is quite big, we still expect standardized to bind us.
+
+
+          And as you pointed out, the standardized were 100% in the United States. In Europe, they're talking about 75%. So there are -- will be some changes over time in how all these capital ratios get calculated for international competitiveness reasons.
+
+
+          Yes. So whether it's because the operational risk rules change or whether it's because the standardized rules become at least somewhat more risk sensitive, there should be changes over time, but I think for the foreseeable future, this is what we expect.
+
+Answer_12:
+
+          Yes. So I would start with, if you go back a couple of years ago, 2013, '14, '15, when we were doing our business simplification agenda and derisking and uplifting the controlled environment, the Commercial Bank was blocking and tackling and doing a lot of inwardly focused work. And we talked, I think, all the way back in 2016, that there were outbound calls, opening offices, hiring bankers, and that if you waited a minute, you'd see that come to our results. And this is the sort of fruits of that labor. So I do think it is sustainable. There's nothing in these results that is particularly noisy outside of reserve releases, which I'll come back to. And I would also say the partnership between the Commercial Bank and the IB in terms of covering our clients, the introduction of 16 specialized industries, which is an advantage we can bring to our clients nationally and, in fact, globally, that other competitors can't bring, all of those things set us up for continued solid growth. With respect to loan growth, I would say, if you look at our C&I loans, this quarter, as an example, was pretty broad based. There wasn't a specific -- in the Middle Market, there wasn't a specific industry or market segment that was strong. But over the last -- stronger, I should say. But over the last few years, a lot of our growth has been driven by the investments we've been making in the expansion markets. So we got into some new markets with the WaMu acquisition. We continued to build out those markets, add bankers, open offices. And that has been a source of growth for us that perhaps others haven't been able to enjoy. And also, as I said, specialized industries. And then...
+
+
+          And I would just add, we -- I think we're in all major 50 markets now, unlike retail, where, one day, we'll embark on an expansion in cities we're not in. And the product set is just fabulous. We're adding more and more online things. We're adding simpler and faster credit approvals. We're adding -- making it easier to do merchant processing when you sign up for Middle Market loans. The online systems are great. So all that stuff, I think is -- this is going to grow for a long period of time.
+
+
+          All right. And then...
+
+
+          And thanks for pointing out how well it did. And Doug Petno, if you're listening, congratulations.
+
+
+          And then the only thing I would say on commercial real estate, just because I think it's really important, is commercial real estate, it depends what you do. And more than half of our commercial real estate exposure is Commercial Term Lending. It's a very specific strategy. We don't deviate from that strategy. And I would just point to you, because it was interesting to me, if you look at the Fed's CCAR stress results for commercial real estate across the industry and look at how our results compared to others, I think you can hopefully get somewhat more comfortable, and we are very comfortable with what we have right now. Now that said, the performance this quarter did benefit from reserve releases and benign credit, and at some point, there will be a cycle. But the risk appetite we have and the way we've managed with discipline, we're very happy with that.
+
+
+          And the IB, bringing JPMorgan Investment Banking to Chase corporate clients, we still think has a long way to go.
+
+Answer_13:
+
+          I would look at it the other way around. So we've, for -- since the Great Recession, okay, which is now 8 years old, we've been growing at 1.5% to 2% in spite of stupidity and political gridlock because the American business sector is powerful and strong and is going to grow regardless -- when they wake up in the morning, they want to feed their kids, they want to buy a home, and they want to do things. It's the same with American businesses. My -- what I'm saying is that it would be much stronger growth had we made intelligent decisions and were there not gridlock. And thank you for pointing it out because I'm going to be a broken record until this gets done. We are unable to build bridges. We're unable to build airports. Our inner city schoolkids and are not graduating. I was just in France. I was recently in Argentina. I was in Israel. I was in Ireland. We met with the Prime Minister of India and China. It's amazing to me that every single one of those countries understands that practical policies that promote business and growth is good for the average citizens of those countries, for jobs and wages, and that somehow this great American free enterprise system, we no longer get it. And so my view is it -- and corporate taxation is critical to that, by the way. We've been driving capital and bringing it overseas, which is why there's $2 trillion sitting overseas, benefiting all these other countries and stuff like that. So if we don't get our act together, we can still grow. I would say it's unfortunate, but it's hurting us. It's hurting the body politic. It's hurting the average American that we don't have these right policies. And so no, in spite of gridlock, we'll grow at -- we can grow at 1.5% or 2%. I don't buy the argument that we're relegated to this forever; we're not. And if this administration can make breakthroughs in taxes and infrastructure, regulatory reform -- we have become the most -- one of the most bureaucratic, confusing, litigious societies on the planet. It's almost an embarrassment being an American citizen traveling around the world and listening to the stupid (expletive) we have to deal with in this country. And at one point, we all have to get our act together or we won't do what we're supposed to do for the average Americans. And unfortunately, people write about the thing like it's for corporations. It's not for corporations. Competitive taxes are important for business and business growth, which is important for jobs and wage growth. And honestly, we should be ringing that alarm bell, every single one of you, every time you talk to a client.
+
+
+          And then I would just say that in terms of how our clients are behaving and how the (inaudible) going, whether you look at Middle Markets, Corporate Client Banking, M&A, it's not to say that the possibilities of reform and the impact that, that could have isn't a part of the dialogue, but they're fundamentally really just getting on with things. And so if there's a client that has a compelling strategic deal to be done or some spending or hiring or growth, then they're pretty much getting on with it, which is why we're seeing solid growth.
+
+Answer_14:
+
+          Yes. So look, obviously, you know the deal with CCAR approvals, which is it is capacity. It's not necessarily a commitment to utilize it, although we are -- as we fairly clearly articulated at Investor Day and as you see in the numbers here, we are at 12.5% in terms of our CET1. And we believe we ought to be able to, over time, operate the company lower than that, within the range of 11% to 12.5%, albeit that we would take time to do that. So we're in the market buying our stock every day. We're at 1.8x tangible book value. So in Jamie's shareholder letter, we still think that there's significant value in the stock. We believe in the earnings power in the franchise that we have here. And so I'm not to say that we will utilize all the capacity because other things can come up, but we put in the request based upon our desire to want to ultimately move lower.
+
+
+          Yes. And there's a very important policy issue here, too. So our preference is always to build organically, to not buy back stock but to build branches and grow and lend more. But there's an argument that people are making that banks can't lend it, and even if there is excess lending capability, they wouldn't have done it. And that is not true. The counterfactual would have been, had banks been free to use their capital and their liquidity 5 years ago, there would have been a lot more lending in the system. And we've pointed out 2 areas where it would have taken place. One is mortgages, where regulations have held back lending to first-time buyers, immigrants, self-employed, prior defaults, et cetera. And the second is small business, where it's not existing small businesses, think of it as start-up small businesses and that they are having a hard time getting capital maybe at the community bank level, et cetera. The counterfactual would have been that $1 trillion or $2 trillion would have been lent out had these rules been changed 5 years ago. That's the counterfactual. It's not that, well, the banks wouldn't have lent the money. And so again, there's a false notion that all this stuff didn't hold back the economy. Yes, it did.
+
+Answer_15:
+
+          Yes. So obviously, they haven't been specific. Although the Treasury report had some ideas, they haven't been specific about what the calibration would look like and whether there would be recalibration to the numerator and the denominator or one or the other. Clearly, we've been pretty clear that we think cash at central banks shouldn't necessarily be included, and there are other things. Different people have different opinions. So we've done the calculations. I would just point you back to the fact that we have some 20 potentially binding constraints right now, of which leverage in a variety of forms is part of that. So to the degree that we get the opportunity to recalibrate that, it could have impact at the margin. But we take all of those things into consideration when we think about the direction of travel of the company. So we're being as thoughtful as we can. We are not specifically leverage constrained right now. That doesn't mean we're not supportive of making those changes and we will obviously model it out. But we take the potential for those changes into consideration when we think about the direction we grow our businesses.
+
+Answer_16:
+
+          So I think -- I want to point out something because I know that Sapphire Reserve gets a significant amount of attention for obvious and good reasons. But it is only one product in a platform of successful products, both proprietary and co-brand. And so in reality, while we obviously do all the modeling and the math, it's not about what the cost of any one individual card acquired is or the NPV of that, it's how the portfolios ultimately together perform over time. And it's still very early on Sapphire Reserve. I mean, it's not even a year old yet. And these are portfolios and products that develop and season over time. And as I said, these are extraordinarily good customer relationships. So you know we've done a bunch of things in the card business over the last few years. We've renegotiated our co-brands. That was ultimately with lower economics but still very good economics. We've been out on the front foot issuing new products, not just Sapphire Reserve but Freedom Unlimited, the Amazon Prime card, Ink. And so we think about everything in the total portfolio and its collective performance over time, and it's still generating very good returns.
+
+
+          Let me just mention about the regulatory SLR. So looking at it very broadly, if you look at -- it's not just capital liquidity but mortgage rules, requirements, capital liquidity, collateral rules, what collateral can be used and not used, if these things were just calibrated differently, the cost of credit would go down, swap spreads would go down, mortgage would become more available, the cost of mortgage will come down. And those are kind of important in total if they're done right without changing at all the risk to the system. In fact, the system is healthier if the economy is healthier.
+
+Answer_17:
+
+          So when we think about the sort of liquidity position of this company, we're obviously managing not just to regulatory requirements but also to what we want the ultimate sort of duration of equity and position of our balance sheet to be through the cycle. So we take into consideration not just the amount of liquidity we have and how that could be utilized but also the mortgage portfolio we have, agency MBS. So all of that goes into our determinations. And we will continue to add to duration opportunistically when it makes sense to do it and manage our balance sheet with discipline.
+
+Answer_18:
+
+          Yes. So I would start by saying that a lot can change between now and the next cycle of CCAR or the next 2 cycles of CCAR. And so we never did actually say that we necessarily wanted to get the low end of the range but just to operate for the short and medium term within the range while we let all of the potential changes to the sort of regulatory environment at large play out. And so as to whether or not, over time, there's a sort of recalibration of whether 11% is our minimum, that will play out over time. So for the next 1 or 2 cycles of CCAR, this cycle and the next one, I would just expect that we want to be on a measured pace to be within the range to allow us to better understand all of the changes that will take place over time and make appropriate decisions. I wouldn't start imagining necessarily how low that goes. I think we would want to operate with a sufficiency of capital and liquidity.
+
+Answer_19:
+
+          So I would say, of course, it's possible. We've seen a number of situations where implementing global standards in the U.S. have differed in meaningful ways from how they've been implemented elsewhere. You have rarely seen that be to the advantage of the U.S., and the SLR is no exception. So while there may be recalibrations of either the numerator or denominator, know that to the Europeans, 3% standard. Our current depository institutions are held to a 6% standard. So there's plenty of room for there to be adjustments before it would create an unlevel playing field. And my suspicion is there will also be adjustments elsewhere. And it's supposed to be, as I think Chairman -- Chairwoman Yellen said, a backstop, not binding in the way that perhaps it has become. So I think the answer is yes, but we'll see.
+
+
+          So -- and the key point Marianne said is almost every single thing that's been done in America added to Basel requirements, the gold plating, SLR, calculation of LCR, calculation of stress, G-SIB, almost every single thing. And remember, America doesn't have to listen to Basel either. And you may -- we may have noticed that basically France, Germany, India, China are all telling Basel they better take a deep breath and stop doing more of what they're doing.
+
+Answer_20:
+
+          And so -- sorry, go ahead.
+
+
+          Go ahead, go ahead.
+
+
+          No. So look, there are a number of different people talking about the forward-looking standard for operational risk, Basel -- under Basel III.5 or IV or whatever is talking about it, there were some proposals in the CHOICE Act. So there's no question that there should be a revisitation of the mechanism to calculate operational risk. And then you're right, the way that all of these rules ultimately interplay with each other matters. And so from a pure stress test perspective, at the margin, we had a little bit more binding constraint on leverage than CET1. But if you look at just what we could run the company at if CCAR was the only constraint, it would be lower than where we are. So it's a complicated dynamic of trying to make sure that we're maximizing against all of these constraints and not just the mathematical ones but also the operational and practical ones. So I mean, it's necessary to go back and rethink the calculation of operational risk just because it's the right thing to do. Ultimately, how that plays out into how we optimize against our constraints is less of what we're focused on.
+
+Answer_21:
+
+          I wouldn't imagine -- it's not going to change our risk management strategy in a meaningful way, so I wouldn't imagine it would be...
+
+
+          Just the (inaudible) corporations, though. The new hedging rules would affect other corporations are nonbanks.
+
+Answer_22:
+
+          We haven't looked at whether it creates more demand from the other -- from the corporate side. So we'll look at that and see.
+
+Answer_23:
+
+          No. It is still this quarter. There are requirements to make public disclosures in August. So depending on whether you make them in your Q, in your Pillar 3 or not will determine whether it's the beginning or middle or end of August. We, as you know, have -- as an industry, are being quite public about the fact that we think -- by the way, we provide an extraordinary amount of real-time granular -- same-day granular information on liquidity to our regulators in order for them to be able to properly supervise not just us but the system. And so we believe the regulators do have and can have anything they need when they need it. It's just a question about whether there is any added benefit of those informations being made public near real time. While it wouldn't matter today when everyone's running very significant liquidity surpluses, it could have unintended consequences if we were in an environment that was more stressful than we are today. So right now, the requirement is that we have to disclose. I suspect, although we've asked for a delay, as an industry, that we might have to disclose. We will continue to debate, I think, with regulators the merits of those public disclosures over time.
+
+Answer_24:
+
+          Yes. And we -- I mean, I would suggest, although it's not something we show you every quarter, that we've been pretty forthcoming about showing you the level of our deposits and the split, at least in Investor Day now and then, between operating and nonoperating deposits. And as we start to see the impacts of the Fed balance sheet unwind and the like, we will be very forthcoming. We try to be incredibly transparent, and we'll take that under advisement, regardless of what the regulatory disclosures are about the quality of our deposit franchise. But we have, I think, periodically, been more disclosive than most in terms of the quality of our deposits.
+
+
+          And knowing that, you could see that we have $500 billion of cash, $300 billion of securities, $300 billion of repo. I mean, it's a pretty liquid company, as liquid as any bank I've ever seen on this planet. And...
+
+
+          And we removed $200 billion of nonoperating deposits proactively. So we manage it very carefully.
+
+
+          Yes. There's nothing that would happen because of all this that would affect JPMorgan that much. And the very important thing about LCR, it's not -- we -- it doesn't affect us, okay? We're fine disclosing whatever they want us to disclose. It's an issue of whether the monetary -- whether it's good for monetary policy. And would it -- will it cause a problem, not for us, for the system when there's a crisis. Like do they want banks to use their liquidity or not? Very simple. Because if the answer is you've got to maintain over 100%, then you can't use your liquidity. That's what it means. And then so they -- and they've said publicly -- some of have said publically that, "Well, if there's a crisis, we'll let you go below 100%." And we're saying, "Well, what bank is going to be the first to go below 100%?" And so it's kind of a policy issue. Whatever happens, we're completely fine at JPMorgan. If I were the regulators, I wouldn't want to put myself in that kind of position.
+

exam/original-files/Problem_2_3_Sample_QandA/19_questions.txt

@@ -0,0 +1,96 @@
+Question_1:
+
+          During the quarter, Jamie had made a comment on potential disruptions related to the unwinding of the U.S. balance sheet. And I'm just curious, it's supposed to be slow and deliberate, but I'm curious how you think that impacts liquidity, the yield curve, trading, deposit betas and is there anything you can do to protect JPMorgan against those disruptions?
+
+Question_2:
+
+          No, that was absolutely awesome. I do have one tiny follow-up. You always get a little more than you wanted. The one tiny follow-up, Marianne, is I just want to make clear, the whole $4 billion versus $4.5 billion, and you spelled out what happened in the quarter, it sounded like most of that full year guidance happened in this second quarter. But I'm just -- I just want to clarify that in terms of the second half NII, do you think it's overly different from where we were a quarter ago?
+
+Question_3:
+
+          I want to follow up on the loan yield side, which were not much moved. You mentioned the $75 million in mortgage. Can you just help us walk through the loan portfolio and whether you're seeing the assets move, whether there's a lag or whether there's any spread compression underneath that?
+
+Question_4:
+
+          Okay. So that -- would that naturally say that, as we go forward, that should -- if they're moving the right way, mix adjusted, they should kind of move the right way from here?
+
+Question_5:
+
+          Understood, okay. And then my second question is, it was nice to see the card revenues on the fee side and the revenue capture rate move towards the way you've been saying. It actually eclipsed the 10.5% you'd said for the year already. Can you just help us understand like have we turned the corner then on card income and your expectations for that going forward?
+
+Question_6:
+
+          Two questions. One on M&A strategy. There was discussion that maybe you were interested in acquiring something. That's not really the question, to comment on that specific rumor. But more in this regulatory environment and the changes that we've had already, do you feel like there's a little more flexibility for your strategic actions or outlook than maybe a year ago?
+
+Question_7:
+
+          Second question is on -- a little bit of a ticky-tacky, but on FASB. They're working on changing some of the hedge accounting rules. And I wondered how you're thinking about areas in your balance sheet you might be able to utilize that in a way that makes your business more efficient. I don't know if that's something that you're thinking about.
+
+Question_8:
+
+          Marianne, wanted to ask about credit cards. The outlook for charge-offs remains the same at about -- below 3% for the year, and you're about 3% now in the first half. So maybe you're expecting a little bit of improvement in the back half of the year. Is that seasonal?
+
+Question_9:
+
+          And then at Investor Day, the outlook for the medium term was not much higher, 3% to 3.25%. Does that allow for the seasoning over the next year or 2 of all the growth that you've had and allow for some normalization, too? Is that enough cushion to get all that in there?
+
+Question_10:
+
+          I just wanted to follow up to the questions that Glenn and Ken had on margin. Marianne, could you give us a little bit of insight on how deposit betas trended wholesale versus retail during the quarter? And also, just back -- going back to your comments. If the Fed balance sheet reduction drives wholesale deposits out of the system, can we assume that, that should not affect deposit betas negatively for JPMorgan?
+
+Question_11:
+
+          And my second question, you mentioned in the beginning of the call that standardized will ultimately be your CET1 binding constraint. And I'm wondering, if you were allowed to float off your op -- current op risk floor, and I think it's still $400 billion, does that mean, if standardized is your constraint, that being able to float off the floor and model out your op risk may not be an incremental source of capital because standardized is binding?
+
+Question_12:
+
+          First question is on Commercial Banking. Can you just comment a bit on the sustainability of the growth in profitability you've had there? Your earnings are up 30% year-on-year; loan growth, C&I, 9%; CRE, up 15%. And we're not talking about small numbers anymore. I think your loan book now is about $200 billion in Commercial Banking. And can you just talk about some of the initiatives that you've discussed of the Middle Market, the IB and how sustainable that is and whether you're comfortable with the risk profile of the books you -- of the book you have there? Because you are growing quickly, it is a big book now, and you're certainly growing faster than the industry.
+
+Question_13:
+
+          That's great. If I can follow up with a bigger-picture question. And Jamie, you've been -- and correct me if I'm wrong, you've been pretty vocal about believing that the underpinnings of our economy are healthy and strong and not buying into this whole secular stagnation argument. But at what point does political dysfunction and political paralysis really start to dent that confidence? And because you've also indicated that we do need structural reform to lift trend growth, whether it's infrastructure, tax reform, whatever it is. And can you just comment on that? And I guess as an adjunct to that, what are your conversations with clients like? And is there a risk that is materializing that clients are also starting to become more frustrated with the lack of progress politically?
+
+Question_14:
+
+          You guys obviously had a very big approval for share buybacks on the latest CCAR here. And I just wanted your thoughts on terms of using it all, given where your stock price is, given loan growth has slowed a tad and given the flatter yield curve makes buying securities a little less interesting. How do you put that all together?
+
+Question_15:
+
+          Marianne, can you give us some color -- Federal Reserve Chairwoman Yellen indicated that she sees that there could be some relief on the horizon for the banks. And one of the areas that's been talked about is changing the calculation of the SLR. Have you guys modeled out what that could do to your SLR and then how that may change your view on capital going forward, if there are changes where, for example, they take the cash that's sitting at the central banks out of the equation?
+
+Question_16:
+
+          Very good. And then as a follow-up and coming back to credit cards, obviously the Sapphire has been a huge success in growing your business there. Are the acquisition costs higher today than when you compare them to maybe 2 or 3 years ago? And in that vein, when you guys look at the economics of putting on new cards, is the net present value or whatever measure you use to determine the economics, has that improved, stayed the same or weakened from maybe a year or 2 ago?
+
+Question_17:
+
+          So Marianne, I wanted to start off with a question on liquidity. You spoke of how the Fed balance sheet unwind should have little impact on your LCR. But just given the strength of your liquidity position and the significant excess reserves that you have at the Fed, how should we be thinking about the current capacity to deploy some of that excess into higher-yielding MBS? And maybe what's your appetite to redeploy, just given some of the tougher liquidity treatment for agency MBS in particular?
+
+Question_18:
+
+          Okay, understood. And then just one more question from me, just on capital targets, and I appreciate all the detail, Marianne, you provided indicating that, over time, there could be a path or trajectory towards getting to the lower end of that 11% to 12.5% range. And I'm just wondering, given some -- the very favorable CCAR results we saw this year, coupled with some of the Treasury reforms that have been outlined, is there the potential for you to actually manage to a target even below that 11%, especially if gold plating of G-SIB surcharges, in fact, goes away?
+
+Question_19:
+
+          Just coming back to the Treasury's proposals for the new calculation of the SLR. Can you give any color as to whether that's actually even possible within the glib context as to how the Basel Committee wouldn't want harmonization across the whole world? Of course, if it did happen, then you would have a massive advantage along with other U.S. banks versus other European investment banks.
+
+Question_20:
+
+          Great. And just a follow-up question also on the reduction in the op risk. I mean, you talked about advances for standardized, but I mean, looking at CCAR, your SLR is a binding constraint there. So isn't it really a moot argument, a non-argument really, as to whether that happens or not, i.e., if you reduce your op risk, it doesn't really change your excess capital?
+
+Question_21:
+
+          Just 2 other quick things. One, on the accounting with hedge, just to get back on that a little sec, the question also was, was there any opportunity for your clients, too, because if there is an opportunity for, say, institutions to hedge their books of business more, that could feed into your revenues?
+
+Question_22:
+
+          Yes. In the sense that you can potentially hedge your commodity risk, so wouldn't that be something?
+
+Question_23:
+
+          Yes, okay. And then is there a time frame here where you have to start telling us what your LCR is? I wasn't sure if that was coming up soon. Was that this quarter or next quarter? Has that just been put on hold?
+
+Question_24:
+
+          I get that. I'm just thinking that there's the opportunity to show us the nonoperating deposits going away, which would help people understand the strength of the deposit franchise.
+

exam/original-files/Problem_2_3_Sample_QandA/1_answers.txt

@@ -0,0 +1,348 @@
+Answer_1:
+
+    Yes, we obviously have to make some assumptions going forward in house prices and they are not that different than the assumptions you would see in most other that get published by Case-Shiller, etc. Right now, they have a modest increase in home prices in 2013 and '14. I will stick with just those two years. But if it was 5% better than that, which is possible, that would run through our books in lower charge-offs and lower reserves. And just as a rule of thumb, $500 million for one year.
+
+
+    It's a very rough rule of thumb.
+
+Answer_2:
+
+    Yes, no, we are required under Dodd-Frank to disclose our stress tests. Remember, we do -- in March. We do it almost immediately after the Fed's report. And remember, we do hundreds. The Fed is four. So we look at multiple kind of stress tests and we are going to try to give you a full view of how we look at the Company under stress. I should point out that a lot of you did it yourselves in the past. You were pretty accurate some of you.
+
+Answer_3:
+
+    Just to give you a view, we have $200 billion of equity and $250 billion of unsecured debt. That is $450 billion. That is a lot of capital before anyone else bears a loss. It is not clear to me that subordinated versus just unsecured, and it would take time to develop those markets. If a bank has 50/50 or -- obviously it changes the nature a little bit over time, so it will take time to develop. But I think we're working with the authorities to get it right, to do the analysis right, to have the right numbers. I think you have a little time before someone says it has to be this amount.
+Remember, we have got Basel I, Basel II, Basel III, OLA, LCR NSF and the new one and we are going to be able to accommodate all of them. It will take a little bit of time. I do want to point out that we fully intend in 2013, late 2013, to be a 9.5% Basel III and to be fully compliant with LCR.
+
+Answer_4:
+
+    Well, we had done giving you some numbers in our annual report last year about where it is a no-brainer to buy back stock, which I said is tangible book value. Tangible book value is now $38 or $39, which has gone up, what is it, $4 this year, almost $5 this year. So we still think if you haircut earnings and buy stuck at these prices, it's probably still a good deal. We got permission to buy back $3 billion in the first quarter. Obviously, it is going to be a little price-sensitive and then CCAR will set what we can buy back for the next four quarters after that. I hope that answers your -- yes.
+
+Answer_5:
+
+    You can do the same numbers at today's prices. Discount, if you want to be conservative, discount earnings, buy back stock. At the end of a two or three-year period, you will apply earnings per share and higher tangible book value per share even at these prices. It seems like a pretty good deal to me. Typically, you have a good company.
+
+
+    And you are not going to need the capital down the road. I am not talking about for one year, but down the road.
+
+Answer_6:
+
+    Think about it as all in and we are expecting our run rate in the future to be I think $300 million to $350 million, as I said, excluding the items we talked about. Including IFR, we are at $725 million. We have got a ways to go, but it is coming down. Think about it in there.
+
+Answer_7:
+
+    Well, I think let me just put out first off that our comp ratio was 33%. If you, by the way, if you added back some of the bonuses paid in corporate that don't show up as comp in the IB, it would be like 35%. We think that the roundest number is kind of an ongoing run rate. We have formulas. We don't pay out necessarily by the formula, but we have formulas that are capital-adjusted, risk-adjusted, etc., etc. that -- that is what really guides it and it is not -- so it is really done at a much more detailed level than it will bounce around that 35%.
+I should point out that again we feel good that our ROE in the investment bank was 17% this year. It was 16% or 17% last year and the year before and we are paying our people fair and well. I feel good about that. That is a good thing. That is a good business model to have something like that.
+
+Answer_8:
+
+    Yes, I think that is probably true, but other firms have ratios of 50%, 55%. Ours is already fairly low. We want to win in the business. We are going to be competitive in compensation and obviously that will adjust over time as competition changes.
+
+Answer_9:
+
+    At Investor Day, we will try to give you a better view of that. So there are clearly some negatives and we don't know all the rules, also some positives. So we are in a position between custody and clearing and our brokers businesses to provide some of those services for investors so they can allocate capital properly, transform the collateral and serve them better. So let the rules come out. Obviously, this is going to affect our revenues a bit, but there will be opportunities there too.
+
+Answer_10:
+
+    No, here is my caveat. We are going to meet LCR this year whatever it is. It doesn't matter to us whether we like it or not. Now to answer your question, there were some changes in LCR; I think they were good, but they still capped the benefit like mortgages and we have like almost $90 billion of MBS. So government-guaranteed MBS is in what they call level 2 and therefore, you are restricted in how much [capital] liquidity.
+Now personally I think that is wrong, but it is okay. We will live with it, we are moving on. I don't know why the American regulators would agree to that. Government-guaranteed MBS in a market you want where they treated liquid and remember, they already have a 15% haircut. I could argue they don't need any haircut, but look, whether changes are made or not, we are going to be compliant. It is not going to affect our earnings that much.
+
+Answer_11:
+
+    Yes, so hey, Betsy, we talked about the third quarter being -- peaking at over 200 basis points before the margins compress in some 40 or so basis points in the quarter and we do expect that to continue into 2013, not at that level. If you go back in time, you would see gain-on-sale margins more in the 65 basis points. I don't know if that is where it will end, but certainly we expect for that to be seen through 2013, but with gaining marketshare. We hope to keep our volumes up.
+
+
+    Obviously, it will normalize over time, but it may not go that low because our expenses could also be permanently higher. To be in the business is going to cost more money and obviously that will be part of your -- what you have to earn back.
+
+Answer_12:
+
+    Yes, so we -- the number that Marianne showed you is the Basel III Tier 1 common 8.7. If you look at what I call for the next two years passive mitigation, that is run-off and what I call normal models, so we still have to get certain models in there and there is not arguing with anybody, it's just models that should be put in place, that would add almost 1% to Basel right off the bat. About I am going to say $100 billion of that would be models, $80 billion to $100 billion would be models. Part of that is the runoff to synthetic credit, which is obviously coming down over time.
+And the other thing, which I think you're going to see, is we are pushing Basel III down, we have, but we are pushing it down at a very detailed level. I think over time you're going to see (inaudible) down capital Basel RWA even more. And there are things in Basel, which I don't know what the future portends. We have $200 billion plus of operational RWA in there now. That is driven very -- that is like $16 billion of capital. That is driven very high by obviously the mortgage litigation and stuff like that, some of which will go away. So one day, a lot -- that $200 million should come down a lot too. I just don't know the timetable for that.
+
+Answer_13:
+
+    No, I didn't mention -- we are going to get there late in 2013 whatever it takes.
+
+Answer_14:
+
+    We will answer -- to give you more feedback -- maybe we have to have a buffer. We don't know what the final rules are for capital. So you already have a conservation buffer. You go below what happens. Obviously, OCI could be a big swing. Like if you model -- I forgot -- we had modeled it. Like 300 basis points would be $20 billion after tax or something like that. But you could handle that too because it is going to come in over time and you can manage your balance sheet going forward, your stock buyback going forward. So we really need to see the future rules to make that determination. If we need a buffer, we will have a buffer.
+
+
+    Whatever that is, we will go there right away too, but we just don't know what it is yet. And we don't know whether CCAR is going to drive capital or the conservation buffer is going to drive capital or whatever. And we don't know how the G-SIFI exactly works, even though we know it's a 2.5%. We will probably find ways to reduce that over time. So we have plenty of capital. Right now, I am -- far more than I personally think we need, but we have plenty of capital.
+
+Answer_15:
+
+    Well, unfortunately, that is a one-year thing, okay and I should point out that before you ask is that when we started the dividends, we said that the intent would be to increase them a little bit every year, so you should expect to see that. We are going to ask for less capital return from stock buyback than we have in the past so where I can do $3 billion in the first quarter. We are going to do less because we have determined, and this is a Board-level determination too, that we want to get to 9.5% quicker and we don't exactly know how these stress tests work. So we think under severe stress, we would have plenty of capital, but the last time the Fed's numbers were very different. We don't understand that and the way CCAR has done this year has even more volatility. Basel 2.5 is far more volatile in how you calculate RWA, OCI and all that than the old Basel I test. So we are a little cautious, which I think is what obviously the Fed expected people to do.
+
+Answer_16:
+
+    Yes, let me just separate the two. In Consumer, credit card is near the end. There could be more, but it is near the end. It's really mortgage. Mortgage reserves are going to have to come down as charge-offs come down and charge-offs are going to come down. We are not trying to manipulate our earnings or anything like that. They are going to come down. The portfolios are smaller; housing prices are going up. We just don't know exactly the pace they are going to come down, but remember they are half what they were a year and a half ago and my guess is, in a year and a half to two from now, they will be half of what they are today, which implies the reserves will come down. We have $5 billion left; that implied would be $2.5 billion. So nothing magical there. That is what is in the numbers. It is really a matter of timing, etc.
+On the CIB side, it was really -- we had one or two big recoveries, so we did have, what was it, $400 million, but Marianne also pointed out there were some other negatives that got booked in CIB too. So you are right; we are not going to have much reserve takedown in CIB, but the other negatives won't be there either. So it is a little bit of a wash in CIB too from other non-reserve-related stuff.
+
+Answer_17:
+
+    I wouldn't call it a strong fourth-quarter showing. We kind of made an assumption that the last two weeks of the year are pretty dead in terms of activity and we were a little bit wrong about that. But here is what I would say. Activity now is continuing; it is usually strong in the first part of the year. We don't know. But I personally believe that this has been, and I have been consistent about this, a cyclical, a secular change. We deal with 16,000 investors. Investable assets are going up; they are not going down. Global trade is going up; it is not going down. High net worth assets, I'm talking over 10 years and so there is a need that people have to buy and sell securities, etc. So I think the underlying trend is up and obviously spreads will compress over time. They have by the way for 20 years. That will continue.
+And now we have got a bunch of model changes, not models, but like business model changes from swaps and derivatives and regulations. We will adjust all that, but there is a chance you're going to wake up one day and it will be a boomer year and no one is going to predict that either. There is a chance we happen to go into recession that it will get worse, but my attitude is I think we are very well-positioned in the business. It is very broad-based between FX rates, credits, securitized products, commodities. It is very global, emerging markets driven by research, which Marianne mentioned we are number one. So over time, it will grow. I just can't predict what it is going to do next quarter.
+
+Answer_18:
+
+    Yes. Look, I think the American economy -- I've said the table is rather well set. Consumers, businesses, housing, small business they are all in pretty good shape and I think we need good policy and good fiscal policy, but yes, so we expect to see -- we have had, which I think you mentioned, we have had run-off in consumer too. Remember, in Card, from (inaudible) and some other stuff and we are running off sort of businesses and certain things we got out of, but you could start to see a little bit of growth now going forward in outstandings. Good growth in spending, a little bit of growth in outstandings.
+
+Answer_19:
+
+    Yes, so, hey, John, we will do that for you at our Investor Day in a lot of detail. I think the way to think about our adjusted expenses going forward, you should think about them being flat to down in terms of direction and we will go through all of that for you in February.
+
+Answer_20:
+
+    Yes, around $50 billion.
+
+Answer_21:
+
+    One day we hope.
+
+
+    (multiple speakers). So we don't -- yes, we won't -- we can't predict the litigation expense, I'm sorry.
+
+
+    I think the one part, which I just want to reiterate, is that obviously that one is going to be lumpy and be ongoing except the part relating to mortgages. We have done a lot of work on and we are hoping that we are properly reserved there and they are not going to see duplication of that. In the last couple of years of litigation, a lot of it related to mortgages. Not all of it, but a lot of it.
+
+Answer_22:
+
+    You have got me there. I think if we buy back $3 billion and what we issue -- I think we issue --
+
+
+    2.5.
+
+
+    -- amortizes in over time as we issue it --
+
+
+    Right.
+
+
+    -- so my guess is it will go down a little bit in the first quarter. When you issue restricted stock, it doesn't immediately go into fully diluted. That goes in as it amortizes. Remember this stuff amortizes over three years generally.
+
+Answer_23:
+
+    If we spend the whole $3 billion, my guess is it will go down, yes.
+
+Answer_24:
+
+    Yes.
+
+Answer_25:
+
+    Yes, I think, John, in part, that is it. I can get back to you with more specific details. It did come down slightly in the quarter. It does reflect the combination of our full understanding of all of the rules, plus some model changes and everything else in the quarter and BAU activity, but we can get you more detail.
+
+Answer_26:
+
+    Yes, well, so we are continuing to grow our deposits very strongly. We are continuing to grow our loans very strongly, so core loan growth up 9%. So all in all, we are generally holding pace with NIM compression and hope to see the same next year plus or minus.
+
+Answer_27:
+
+    It was better by over $100 million versus the fourth quarter last year.
+
+
+    Of course, last year wasn't particularly good by the way.
+
+Answer_28:
+
+    Completely off. Let me tell you where - you raised a lot of subjects; let me do them one by one. Obviously, when you have a problem like the whale, you have mistakes, which you should acknowledge and then fix. So we obviously fixed CIO totally 100%. People in it, reporting, risk, controls, committees, guidelines and we don't do synthetic credit there at all. But some of those mistakes obviously scared us and we went and checked everywhere in the Company. So we are fixing certain things across the Company. Not that they are bad, they are not disasters, but they require fixing. And so when you have an accident like that, you want to say we are going to use this to get stronger, better, smarter, tougher. And we have to and we are going to. Obviously you can't meet every demand of the regulators. So we have got real resources doing it. We have already done a lot of it. We are going to continue to do more. So yes, they were changes from the whale.
+Number two, we are in business to build the business over time by serving clients. That is what we do. We do it every -- we take risk. When you take risks, you make loans; you take risks when you invest money; you take risk when you build systems and branches. But that is what we have been doing consistently and I hope you see in the underlying numbers more branches, more bankers, more custody, more trading, more products, more services, more countries, happier clients in every business. Record results in Commercial Banking, Asset Management, a lot of cross-sell in that and we are going to do a lot more to describe to you the competitive benefits that we get in this Company because the different business units work together and things like that.
+So that part of the business hasn't changed. That is why we are here. Even CIO has always been doing that, investing assets conservatively because I was watching something on TV today -- you have to earn a return on your assets. The book -- you are not going to try to earn a return on your assets is ludicrous to me and to manage asset liability exposure generally conservatively. We obviously made a mistake.
+And the third thing, the reorganization, that was around -- and I (inaudible) do a lot of this for you, around the client. If you said rebuild the Company from the ground up, you probably would have organized it around the clients, not necessarily by product. It is not that we were bad or banks were bad or anything like that; it is that companies acquired mortgage companies, they acquired credit card companies, they acquired retail branches. The power of that franchise is extraordinary. 40% of our retail branches own credit cards -- are credit cards today. A big chunk of our mortgage sales come out of the branches. Most of our small businesses serve out of the branches. Middle-market is served out of the branches. The branches are becoming an enormous competitive advantage for asset management. The commercial bank couldn't survive without them.
+So all we did is say put together those businesses under one roof where you want to have -- you want to treat the client the way they want to be treated when they come in the front door. Same thing for CIB, the same client set in the investor side and the issuer side, the corporate side. So we go to any country. We serve the big companies, we serve the sovereign wealth funds, we serve the governments. We serve them out of TSS and we serve them out of the investment bank.
+All we are doing here is better coordination, which we think will have more cross-sell and believe it or not lower expenses. Plus it will help us deal with the new regulatory environment. So both of these things are going to help us deal with the new regulatory environment to have consistent standards across all the businesses, etc. So that is why we had the reorg.
+And management changes, you went through the litany of changes, but just remember Daniel Pinto has been in that business his whole life. Mike Cavanagh has been here for many years and was already running TS&S. Doug Petno has been running the Commercial Bank for several years now. Gordon Smith and Todd Maclin, we did it a little bit faster than we told people. We told people we were going to put that under one roof. Marianne Lake has been the Controller of the IB and the CFO of the consumer bank. All the people in these jobs have been here a long time and they are very good. I mean I think it is an exceptional management team.
+It is too much turnover, but again the way I look at the turnover, if I have 15 people in the operating committee, you should assume that 15% to 20% every year will turn over. Some years will be zero and some years will be more. When you have reorgs and stuff like that, it is a little bit more. Hopefully, you're going to have stability. We have got a great management team. They are working a lot of different things. Most have been here a long time. And part of it, part of it relates to -- remember if you were on my Board of Directors, you would be asking me, in fact instructing me to make sure you were putting in place in big jobs the people who have to be tested to see if they can do my job. That is -- I mentioned this many years ago, that is job number one. That takes precedence over all other things. And sometimes it leads to turnover. I'm sorry.
+
+Answer_29:
+
+    Well, look, you should get to know them, but you could evaluate their quality, their integrity, their brains. Mary Erdoes has been here a long time. Matt Zames, who is now Co-Chief Operating -- Frank Bisignano both been here a long time. So these are long tenured, very good, respected employees. And so I know it is going to work. Obviously, you have to make that evaluation yourself.
+
+Answer_30:
+
+    Not really, but the CCAR does have this qualitative aspect, which I don't exactly know what that means, but not really. It really related more to the desire -- the stock price is higher and the desire to get to 9.5% quicker. Everyone's being doing it and obviously we shouldn't lag. That's all.
+
+Answer_31:
+
+    Also, Mike (inaudible) because you had me do a little work after one of your reports came out about stock price. So do this yourself. Take Bank One's stock price from the day before I got there to today, and take JPMorgan's stock price from the day we announced the deal to today, compare it to the S&P, the bank, the bank index or all other major firms and it's actually rather good. It outperformed in both cases, the bank by a long shot. In both cases, the S&P not by a long shot but by a significant margin and almost most other financial companies. So obviously something has been working a little bit here.
+Opportunity, I think the opportunities are fabulous. So next year, we are going to focus a tremendous amount of regulatory requirements, these consent orders getting things done, but also just organic growth. Small business, Marianne mentioned, is up almost everywhere, partially in Florida and California where WaMu gave us the opportunity to do that. We opened our 1000th branch in California. We are still going to open net over 100 branches this year. Our credit card has been growing. The Chase Private Client, we have got 250 branches to 1200 Chase Private Client. That number is going to go up -- and I don't know if we've -- I don't know if that is public -- okay, now it's public -- to something like 2000 end of next year. It is really working. So it is growing dramatically.
+Our mutual fund complex has been growing. TS&S, actually not TS&S, the Global Corporate Bank has opened multiple branches overseas. We have gone from 120 Global Corp bankers to 286 or something. It is going to be north of 300 and it is working.
+If you look at Investment Banking revenues out of the commercial bank, when we first got here, I think it was like $450 million. This year, it hit almost $2 billion and we think the opportunity to continue to grow is large. So in almost every single business, we see very good opportunities to grow and obviously, we operate in a difficult world, the financial services, but in the Investment Bank, it was -- it has been -- Marianne went through the numbers, but we don't see why we can't continue to grow that around the world and serve more clients in more places like Colombia or in some of the emerging markets.
+In Commercial Banking, we opened branches in non -- states we don't have branches, which have been focused on kind of larger clients and international. That is working well. International commercial bank is working well and all these numbers are in here. You guys should go through it soon. They are all pretty good and you are going to see us continue to focus on growing those businesses in a quality way.
+
+Answer_32:
+
+    Well, I think you should look at it -- we are already fully engaged in meeting all of those concents and other regulatory demands. Remember, we have changing rules and requirements. We also have a lot of items that the regulators have asked us to focus on, their consent orders. So yes, it is a tremendous amount of resource, but it is not going to change the numbers you see. It is just the people involved -- a lot of people involved in risk credit, legal compliance, audit, HR all are really involved in getting a lot of this stuff right and we have to do that. Of course and people in the business too of course.
+
+Answer_33:
+
+    Yes, so, Matt, you would have seen that we pretty much portfolio all the jumbos we originate right now. We price them to great returns and we would continue to do that. We like that asset. I think overall across the firm, we did $5 billion of jumbos this quarter and so you should expect to see that continue.
+
+
+    I would just add that one of the things you learn to live with a little bit is that you could put a mortgage on your balance sheet and earn or 3.75% or 4% if it is a jumbo or something like that. It doesn't have OCI. It holds more capital, but it might be a wiser thing to do than taking the gain on sale and then buying an MBS at 2.25%. So there are all these opportunities to think through how to manage in the new world properly both for the client and for the shareholder. (multiple speakers). Go ahead.
+
+Answer_34:
+
+    It may be -- and that may change over time and get bigger. So we are doing a little bit more and right now, it is the jumbos. We have done a little bit like C pluses and stuff like that, but there may be others.
+
+Answer_35:
+
+    We would much prefer loans than securities like in commercial bank, credit card, etc. So the reason we have securities is because we can't generate that kind of loan right now.
+
+Answer_36:
+
+    I think the QM was a really big start and kind of well thought through, but it also needs to be coordinated with Basel III, some of these NPR rules, this whole thing about OCI. So all these things are going to affect mortgage a little bit and a lot of players involved in that who have to coordinate it. But I do think over time they will open up the mortgage markets. How rep and warranty is going to be handled, etc.
+
+
+    TRN, skin in the game. I think securitization will be important. So if I was the government, I would want to get QRM and securitization rules fixed as quickly as I can to allow people to start.
+
+Answer_37:
+
+    I would say that is probably in line with that. We have excess cash and excess capacity at central banks and that is what that reflects.
+
+
+    They are two different numbers, but they move in the same direction. And we will probably disclose more about that at the Investor Day too.
+
+
+    We will.
+
+Answer_38:
+
+    Probably not much.
+
+
+    Yes, not much.
+
+
+    The average yield in the investment portfolio is coming down a little bit every quarter and that will continue for a while.
+
+Answer_39:
+
+    No.
+
+
+    We do break it out.
+
+
+    We disclosed it. We haven't disclosed it in the fourth quarter.
+
+
+    What was it last time?
+
+
+    Probably like 3.
+
+
+    Interest duration. So it is probably about the same.
+
+Answer_40:
+
+    The other thing -- right, but the important -- I think the way to look at (inaudible), we would benefit from rising rates. So I've always said that that portfolio is subordinated to the interest of the Company. It is very short. You can extend that duration or a lot more income, but then we would be hurt by rising rates and we break out the earnings and risk from rising rates -- if the whole curve goes up 100 basis points, it is about a $2 billion plus pretax. And that comes through the investment portfolio and loan repricing, etc.
+
+Answer_41:
+
+    I can't -- offhand, it is hard for me to say that, but I think I am going to guess, but like 30 or 40 basis points. It's not a lot to neutralize it --
+
+
+    -- to eliminate -- right, something like that.
+
+Answer_42:
+
+    The margin?
+
+
+    So I think it is in the supplement. I am afraid I --.
+
+
+    It's in the production revenue.
+
+
+    Yes, it's in production revenue, which I think was close to $800 million.
+
+Answer_43:
+
+    Revenue was 3%, 3.5% and net was -- (multiple speakers).
+
+
+    So it's like 3.5 times 50, actually is on closed, not --.
+
+
+    We will do the math for you.
+
+Answer_44:
+
+    First of all, it is a Board-level decision and in some ways, it is a nice problem to have, but the way you set the question up you almost have no option. You can't buy back stock and you can't raise your dividend. All you have left is something like that. So we will get there when we get there. Again, we need to see all the new rules and how they are going to apply like this conservation buffer and we may know more by Investor Day, but when we know more, we will let you know.
+
+Answer_45:
+
+    So the first one is obviously we do budgets and stuff. We put targets in place, things we would like to accomplish. So that is in how we look at -- we are not going to disclose it to you. But I did say that we do think it is going to enhance revenues and reduce expenses a little bit. So a little bit is in there for the CIB and a little bit in there for consumer. And we are going to disclose more at Investor Day about kind of cross-sell and how we look at it and where we think we can benefit, etc.
+And if you look at risk-weighted assets, we are up to -- our balance sheet is $2.4 trillion. We have got $200 billion of money deposited in central banks around the world or in repo, very short-term investments, $350 billion in AA securities and $400 billion in securities borrowed or resales. We have a really, really liquid balance sheet. I just mentioned $750 billion, almost $1 trillion of very short-term stuff that is sitting there on our balance sheet in the asset side and our risk-weighted assets are now $1.65 trillion. They have gone up dramatically because of Basel 2.5, the fact that we don't have certain models in place that will be accepted.
+So some of the benefit arguably is going to be just -- I am going to call it run-off. Some is from models that regulators expect people to design and put in place that we don't have yet. We just don't have the history or we haven't done the modeling and that is -- a lot of it is around credit-related, synthetic credit type stuff, securitizations and things like that. So we are going to put those in place. And that is not arguing with regulators; they would expect us to do that over time. Obviously, regulators -- I know they are going to look at how people do models around the world and they want this done fairly, etc.
+
+Answer_46:
+
+    Sure. So think about repurchase. So both sides of that we do them separately. So repurchase losses, I told you you will see demand down significantly, you will see the outstanding pipeline down significantly. We have seen cure rates improve and so our realized losses were sub $200 million and it is what it is and it is a factor, a feature of activity obviously and it can vary a little.
+On the repurchase reserve side, it is obviously model-driven and we use inputs, including things like cure rates. So it is not going to be a perfect offset in this quarter. It happened to be slightly more and over time, over the next few quarters, we think they could largely offset that you might see some small pluses and minuses.
+
+Answer_47:
+
+    Yes, and I would say we are in constant dialogue with the agencies and obviously people ask about behavior and we are in constant dialogue, we think we understand the direction it is going and we feel good about where we are right now and we will continue to monitor that.
+
+Answer_48:
+
+    I don't know how to respond to that. I think -- maybe you can call later and get some more feedback on some of the stuff you said. You can call Sarah Youngwood at investor relations. But you went through a lot of the stuff that is accurate. Obviously we are in an environment -- the environment changes all the time, but we have growth plans everywhere. So it isn't like we are sitting on our laurels and just looking at what is going to -- NIM compression, stuff like that. So we expect to grow earnings next year. I may be wrong, but that is what we expect.
+
+Answer_49:
+
+    Yes, okay.
+
+
+    You're welcome.
+
+Answer_50:
+
+    I think we had said earlier, on July 13, we hope it is almost a nonissue by the end of the year. I think we are getting there. I think from the day that -- and we are not going to give you more detail than what I am about to tell you so don't ask. We had modest losses in the fourth quarter. There is no reason to have any losses going forward. The risk from the date of the investment bank got and they have done a good job continuing to derisk it are down, I am going to say, another 50%.
+So obviously, there is still risk. It is still a portfolio which has got -- the average duration I am going to say is 2, 2.5 years left. So if you did nothing, it is going to diminish dramatically over time, but I think we have got it well-controlled at this point. There could be some volatility because of the nature of it. It has got some idiosyncratic exposures in there, but we think we are fine. We don't think there's anything that anyone needs to worry about anymore.
+
+Answer_51:
+
+    You have got to do it a little bit by business because I think in consumer mostly sticky, but it is probably a little bit of TAG -- like you guys had an estimate for that.
+
+
+    Yes, like (inaudible) plus or minus. Mostly those deposits we would consider core and sticky.
+
+
+    Right. And then TS&S is a lot of seasonal year-end deposits, so it bounces all over the place. Asset management I put in the sticky category. Commercial Bank has been kind of flat, but it is sticky.
+
+
+    It is flat because the loans are starting to grow and it is huge. Commercial has $190 billion of deposits. I think that number was $100 billion 3.5 years ago. So they have a lot of money there. We actually expect that might have come down one day as companies start to grow and expand more aggressively, which would be a good thing.
+
+Answer_52:
+
+    That's a woulda', shoulda', coulda'. I don't know, Guy, the answer to that question. I think if they had been put in place -- it depends how they would have ultimately been put in place. So they were delayed to get more work and how it gets done. I think if they had been put in place for JPMorgan where the rules constrained us overseas, but didn't constrain other companies overseas, we would be down from what we might now have. If the rules were put in place as we can compete freely in Frankfurt, London, Singapore and Shanghai, my guess is our US revenues would have been down a little bit, our international revenues would have been up a little bit.
+
+Answer_53:
+
+    No, so private equity is $8 billion invested. We expect to earn a return on that. We are obviously getting a great return on it, so that is lumpy, but it should be more than $50 million on average. Treasury -- think of treasury as NII. It is very predictable. The NII (inaudible) by quarter. That number will go down a little bit. That is just how we allocate capital and funds between all the business units. And then how we invest the assets.
+So we can change that tomorrow by having longer duration in our investment portfolio. The lumpier part of treasury and CIO is when we have mark-to-market gains and securities gains. That bounces around a little bit and again some of that is discretionary. So we don't look at that -- we should almost call it a net loss, and that number -- I think the $300 million will come down over time, not go up for a whole bunch of different reasons, which I won't go through right now.
+And then the other corporate -- that has net allocations, BOLI, COLI, taxes, all these lumpy items and we will just try to tell you it should be plus 100 -- it could be on average 100, plus or minus a couple hundred because of lumpiness of those items. Like corporate taxes are lumpy for a whole bunch of different reasons and so our numbers would be 100 on average. And we always explain the difference if there is ever a big difference there.
+
+Answer_54:
+
+    It has got not a damned thing to do with exotic investment strategies, zero, nada, nothing, okay? The bulk of those assets are always invested conservatively, AA plus. We had to do it around the world, so deposits around the world, etc., nothing to do with that. It has all got to do with some of the NIM compression that shows up there because obviously investment portfolio yield has gone down a little over 2%. It was 4% three years ago and how we allocate capital and things like that.
+The changes you have seen. Some of them are the differences due to the regulatory changes of B3, RWA and stuff like that. So we will try to make this a little bit clearer going forward. But on average, that number will come down, not go up over time.
+
+Answer_55:
+
+    Yes, when we allocate the new Basel III operational capital debt, the capital allocations will go up mostly to the CIB by I am going to say 20% or so and to the commercial bank by 20% or so or maybe a little bit more than that. And that will obviously change the return targets for those units. It will also be very healthy, so it will just come down. The Company will be exactly the same.
+I mean so we just have -- I think when we allocate all this stuff intelligently, it will actually probably end up driving better returns over time as people learn how to manage it a little bit differently. So we will be allocating -- again, it eventually will show more. We will be allocating out -- think of it as everything at one point, LCR, G-SIFI, Basel III, Basel II, whatever comes down the pike will be allocated out so our managers can manage through it.
+
+
+    And the other thing we haven't decided permanently is how you look at each business because my feeling has been, this is open for debate, is that the business should be capitalized the way its competitors are going to be capitalized so they would feel free -- they are free to compete in that category. I think the people lump their capital ratios around their competitors. That could be very hard for someone for example to be -- run with 7.5% capital and all their competitors are at 10% or vice versa.
+
+Answer_56:
+
+    No, cost is cost. It has nothing to do with that. I am talking about capital -- saying we may capitalize the commercial bank at 8.5% and the investment bank at 10%. It may not be 9.5% for everybody because they have to operate, they have to compete in different environments. So that is where you just -- we just haven't figured out exactly how to do that yet.
+

exam/original-files/Problem_2_3_Sample_QandA/1_questions.txt

@@ -0,0 +1,227 @@
+Question_1:
+
+    Hi there. Thanks. So over time, we have talked back and forth about housing improving and you were right and it is improving. But curious if you have any metrics for us on say what is built into the reserve models and how -- what kind of sensitivity we could have on say -- let's just say hypothetically housing improves 5% in 2013 and again in '14. Just -- I don't know if you can put metrics around it, but -- (multiple speakers).
+
+Question_2:
+
+    I appreciate that. From what I understand on CCAR this year, the Fed is going to be taking a closer look at internal stress testing and all the procedures that go around that. And I think we are going to get to see -- you are going to be disclosing some of those results. I am not front-running what we are going to see. I am just curious. In general, are we going to see that at the same time, are we going to see that on a lag basis and what you plan on disclosing?
+
+Question_3:
+
+    Jamie, maybe the last one, on things related to part of the liquidation authority. I know we haven't seen the white paper yet, but there has been a lot of back-and-forth and I am not a believer that we are going to get the worst-case scenario that some of the people at the FDIC had thought about, but long story short is, as ironic as it is, every bank has spent the last couple of years reducing their subdebt because Basel III doesn't count it. Now, shocker, we are going to have to (inaudible) some more because the OLA is going to want it. Just curious on how much prep you can do ahead of that and what your expectations are in terms of a phase-in if that is going to be impactful in the near term.
+
+Question_4:
+
+    Good morning. Thanks for taking the question. So you all are about to start buying back stock here in the first quarter and the share price is at about $45. Ironically, this is the price point historically where there has been an indication of some price sensitivity. So maybe I was hoping for an update on your thinking on that front.
+
+Question_5:
+
+    Yes, no, I think so. So basically we can look at the tangible book value growth versus the last comments and imply from there?
+
+Question_6:
+
+    Fair enough. And then the $100 million to $150 million that is coming out of your legacy costs, is that part of that $500 million per quarter that you all have highlighted in the past or is that in addition to that?
+
+Question_7:
+
+    Okay. Good deal. And then the comp ratio in CIB is down this year or I should say maybe full-year 2012 about 2.5 percentage points from year prior. How should we think about the comp ratio in the IB on a going-forward basis? Have we hit a structural shift here?
+
+Question_8:
+
+    Sure, but probably, on the whole, upward comp pressure across the street competitively is probably nowhere near as it had been. So in improvements and increased cost leverage is probably decently sustainable wouldn't you say?
+
+Question_9:
+
+    Okay. And then last one from me, as we start to move forward towards the central clearing of swaps here late in the first quarter of '13, do you maybe have an updated view of what this transition might mean for JPMorgan's FICC business or your capital markets revenues for 2013?
+
+Question_10:
+
+    Hey, good morning. A question on LCR. Jamie, you mentioned that you were going to be -- looking to be 100% compliant by the end of 2013 and I wanted to understand did the Basel release on LCR align with your sense of how it is going to shake out in the US? And I ask because the RMBS looks like it was very tightly worded, so I wonder if there is any caveats to your comment that you will hit the 100% by -- (multiple speakers).
+
+Question_11:
+
+    Okay. And then just separately, a small item, but on mortgages, you talked about the gain on sale that came down on the quarter and that you are looking forward to that normalizing over the course of the next year or so. Could you just give us a sense of how much we are talking about normalizing because we could go back to precrisis and it is a much bigger implication on mortgage revenues than if you are talking about just before the long end of the curve started to come down dramatically.
+
+Question_12:
+
+    Yes, good morning. Jamie, a quick question. Any update with respect to how quickly you expect your Basel III risk-weighted assets to decline? We saw a little bit of a decline this quarter, expecting more decline, but is there sort of any change in the outlook for the pace of that decline or how you are thinking about it?
+
+Question_13:
+
+    Okay. And then just a quick follow-up to that, you mentioned wanting to get to 9.5% by the end of 2013.
+
+Question_14:
+
+    Okay. Along with that, we see a number of companies sort of building a little bit, 50 basis points or something like that, of sort of a buffer on the buffer to account for AOCI fluctuation and things like that. For you guys maybe getting up to 10% or wherever the ultimate endpoint in, is that more of a '14 event or is that also something that you would like to get done this year?
+
+Question_15:
+
+    Well, I think everyone is trying to sort of do math on how much capital you might return this year. So all of those are questions -- (multiple speakers).
+
+Question_16:
+
+    Good morning. Some of the pushback that I have gotten from some investors on your strong quarter is on the provisionals overall. So I guess I want to follow on Glenn's question because clearly CIB is unsustainable from a provision basis, but it seems like there is still a lot of leverage left on the provision side from CCB. So Jamie, was your comment that if house prices were up 5% over what is in your model, the additional leverage provision is $500 million per year?
+
+Question_17:
+
+    Got it. And in terms of CIB activity levels, I think that the investor base did expect some strength this quarter more than seasonal. I guess could you give us a sense of whether or not the strong fourth-quarter showing is sort of a harbinger for activity levels finally picking up in 2013?
+
+Question_18:
+
+    Okay. And just I wanted to sneak one more in on Card. We appreciate the color on sales volume in Card and I think there is a thesis out there that if the US consumer is taking home less because taxes are higher, but the underlying economy is okay, then that could potentially translate into receivables growth finally. Is that a reasonable leap to make as we look at receivables growth for next year?
+
+Question_19:
+
+    Yes, hi. Marianne, it looks like your adjusted expenses ex-litigation IB comp came in around $49 billion or so for the year. Do you have an outlook for this number in 2013? Are you looking for some improvement in that above and beyond what you save from the foreclosure settlement?
+
+Question_20:
+
+    Is that the right number like flat to down from around that $49 billion or so level?
+
+Question_21:
+
+    Okay, okay. And then that excludes litigation. It looks like litigation for the full year came in at about $3.7 billion. That is down from $4.5 billion the year before. Do you expect that trend of declining litigation expense in '13?
+
+Question_22:
+
+    And then on the buybacks, the first quarter is usually a big issuance quarter for you on shares, but knowing you have approval for $3 billion of gross repurchases, do you expect to have a net reduction in your share count by the end of the first quarter?
+
+Question_23:
+
+    Okay. Like for 2012, your share count didn't go down. That is because you suspended the buybacks and it didn't do enough in the first quarter to take the share count down. I assume you would like to see it decrease at some level.
+
+Question_24:
+
+    And then when you say you are going to ask for less, just to clarify, you mean you will ask for less than $3 billion per quarter?
+
+Question_25:
+
+    Okay. Last thing, on risk-weighted assets, it looks like your assets were up 2%, but Basel III RWA came down. What drove that delta? Are we starting to see the mitigation take effect?
+
+Question_26:
+
+    Okay. And one more thing. Your net interest income grew in the fourth quarter despite the NIM headwinds and the runoff. And I understand your NIM percentage outlook, but I guess what helped you grow NII dollars this quarter and do you think you can grow NII dollars in 2013?
+
+Question_27:
+
+    Good morning. Just first a factual question. How much were fourth-quarter performance fees in asset management?
+
+Question_28:
+
+    Okay. My main question is does the CIO incident change how JPMorgan is run? And as you said, you have had record net income, 15% return on tangible equity. I think you said in the past -- someone at JPMorgan at least implied that the CIO incident shouldn't change things. On the other hand, you have the new cease-and-desist orders, regulatory actions by the Fed and the OCC and this change in reporting format is the most radical that has ever been put in place since, Jamie, you have been CEO and then all the changes in management. You have a new head of consumer, commercial, investment bank, international, CFO, CIO.
+So on the one hand, you highlighted the record net income. I guess my question goes to sustainability of the results over the next several years given how many people have changed, the change in reporting format and the regulatory action. Maybe it is like if you are driving on the Long Island Expressway and you get a ticket for going 80 miles per hour, then you drive 50 miles an hour. Is that just completely off?
+
+Question_29:
+
+    I guess we will hear more at Investor Day next month, but what are you watching for since there is so much rotation among top managers around the same time? What are you looking for to make -- ensure that this current team will work?
+
+Question_30:
+
+    Then last follow-up, does your positioning to ask for less than $3 billion per quarter in buybacks have anything to do with the regulatory actions that recently came about?
+
+Question_31:
+
+    Great. Jamie, I was wondering if you could kind of talk just a little bit about given the strong results that you've got and kind of the hopes of continuing to drive them, which areas you think are the best in terms of where you can see investment in either share gains or growth into 2013.
+
+Question_32:
+
+    Just as a separate issue, you have obviously responded to the orders from both the OCC and the Fed. Are there any kind of impacts while those are out there until they have kind of deemed them to be kind of fully dealt with and what is the timeframe for that?
+
+Question_33:
+
+    Good morning. A couple questions in the mortgage banking business and as we think about the mortgage asset, I guess the first one is what is your appetite either now or as you look forward to actually portfolioing some of the mortgages you originate?
+
+Question_34:
+
+    That is really what I was getting to because I think you have one of the shorter MBS books out there. Obviously has a strong mortgage origination platform. And as we strip out kind of the legacy residential mortgages, what you are left with is not a huge number. So just trying to gauge what the appetite might be to --.
+
+Question_35:
+
+    Okay. And then maybe somewhat related, as we think about just the underwriting standards in the mortgage business --
+
+Question_36:
+
+    As we think about underwriting standards in the mortgage business -- I mean we can see the average FICO scores that the banks do collectively that Fannie and Freddie backed still quite high. There has been some good progress with dealing with the legacy issues, not just for JPMorgan, but for the industry as a whole. Got the new guidance from the CFPB, home prices going up. What else do we need to see for banks to loosen underwriting standards of mortgage a bit?
+
+Question_37:
+
+    Good morning. Maybe a question for Marianne. Marianne, I noticed that the global liquidity balance was up about $50 billion quarter-over-quarter to just a little bit under $500 billion. Is that in line with your guidance that you are going to meet the LCR requirements by the end of the year or is there something else going on there?
+
+Question_38:
+
+    Okay. And how much of an effect, if any, was that on the margin in the quarter?
+
+Question_39:
+
+    Thank you. Good morning. Could you tell us what the duration of the securities portfolio is?
+
+Question_40:
+
+    Okay. And I may have missed this, so I apologize if you -- (multiple speakers).
+
+Question_41:
+
+    How much would you estimate at the long end of the curve would you need to see the long end of the curve go up to mitigate the margin pressures so that you could actually see maybe margins not go down?
+
+Question_42:
+
+    Yep. The other question, and I apologize if you guys already gave this answer, but what was the gain on sale of mortgages this quarter?
+
+Question_43:
+
+    And what was the spread, like 3%, the revenue spread?
+
+Question_44:
+
+    Okay. And then coming back to the return of capital, Jamie, I know this at a stock price you are not going to want to buy back your stock. I am not asking for that stock price, but let's assume for a moment bank stocks do well this year, your stock gets to that level where you are not real comfortable in buying it back. Would you guys consider, as the excess capital builds up on the balance sheet and the Fed limits your regular dividend to maybe 30% of earnings, would you consider special dividends as an avenue to give back that excess capital if you feel it is not -- you are not comfortable buying back the stock at the price at some future level?
+
+Question_45:
+
+    Yes, good morning. A couple of questions. The first one, on the latest reorganization, I guess that comes with you in the light of having completed the integration of both Bear Stearns and Washington Mutual. It makes complete sense, but have you actually set any targets in terms of both the revenue and cost synergies you think you might achieve in the medium term? That is the first question.
+And the second one was on the $80 billion to $100 billion of RWA you think you could shed by reworking your models. Something ironically you have been pretty critical about in the past in terms of the Europeans' view on that. But can you just tell me is it getting more difficult to do that in the market (inaudible) at the moment? We are getting some pushback from (inaudible) on some of the risk-weighted asset calculations or are you finding it pretty straightforward to actually negotiate that?
+
+Question_46:
+
+    I wanted to ask a detailed question about the mortgage rate purchase expense. You were able to show this quarter that you had a reduction in the reserve of $249 million and only experienced $196 million of losses. So you actually net brought down the impact there. And in your outlook, you talked about being able to offset future losses with release of reserves. So I wanted to ask that question first and then I had one more follow-up after that.
+
+Question_47:
+
+    So we should see a -- we have gone through an inflection point here where you think the demands are coming down and improvement of what you are seeing overall but that drain should be somewhat mitigating going forward?
+
+Question_48:
+
+    And then as we look into 2013, I was trying to take a little bit of your outlook and just kind of create a net progression. If you look at the $1 million that you basically highlighted in margin compression, you have a natural offset that you have explained in the servicing expenses for about $400 million. So if you take your current run rate of operating of $1.35, annualize that to $5.40, you have probably got somewhere between $0.07 and $0.10 worth of negative that comes out of that from netting out the positive that you have in the servicing expenses from margin compression.
+If you then move incrementally for growth, if you offset a lot of the margin compression with loan and deposit growth, then you are being able to generate about $1 billion of incremental by just growth and overall balance sheet. If you look at expense savings and then some reduction in shares, you can kind of look at how you would layer in towards something like 10% kind of growth next year as you kind of mirror those kind of big moving pieces. So I just want to make sure we were tracking those and if you had any other thoughts about incremental opportunities to create EPS next year?
+
+Question_49:
+
+    And I guess, Jamie, the bottom line is that you have product growth to offset margin compression, but then you have got share repurchase and some efficiencies that create incremental growth. I guess that is the bottom line.
+
+Question_50:
+
+    Good morning. Can you just give us an update on where you are on the synthetic portfolio? I know you probably don't want to give a dollar amount, but is it mostly gone and what the timeframe is of that -- even if it is a modest drag, just having that off the books completely?
+
+Question_51:
+
+    Okay, that's helpful. And then maybe just on the deposit growth, I think you were up on a period-end basis $54 billion. Is there any way to kind of get a sense of how much of that is stickier? Was that just sort of fiscal cliff concerns or was it the TAG-related deposits? Do you have any sense on what was driving that and if it is just more sustainable organic growth that would be helpful?
+
+Question_52:
+
+    Yes, good morning. This first question is a little bit short term, so forgive me, but the CFTC, as somebody mentioned earlier, did push back the timing of some of the OTC reforms with respect to central clearing. And I guess my question is, from your point of view, all other things being equal, should we expect stronger fixed income revenues as a result of that in the first half than we otherwise might have?
+
+Question_53:
+
+    Okay, that is actually real helpful. Thanks. My other couple of questions have to do with your outlook slide. First of all, on corporate private equity, I just want to make sure that there is no distinction that I should read. When you talk about treasury and CIO, you talk about the net loss of $300 million plus or minus specifically in the first quarter. When you talk about the other corporate $100 million, you don't mention a timeframe. So does that mean that you expect more potential variability over say the course of this year in the treasury and CIO number than the other number, which is more of a run rate?
+
+Question_54:
+
+    So if I add the two together, and obviously we know there is lumpiness, but just adding those two numbers together at face value, we are talking about a quarterly loss of a couple hundred million. You used to guide to quarterly earnings of I think it was $100 million to $200 million on that kind of combined line. So if I was trying to assess what the swing had been relative to a few years ago, how much of it would you say is just the compression of net interest margins and how much of it is moving away from some of the, pardon the word, but exotic investment strategies that CIO used to --?
+
+Question_55:
+
+    Okay, that's fair. And then the final question I have is just on the [firmwide] right below that. You talked about capital allocations a moment ago. It sounds like your LOB return on equity targets are, like you say here, are going to come down for some units and therefore overall but the corporate guidance is the same. So does that mean that basically all this change just is because you're allocating more capital out to the business units and you will have less at the corporate parent? That is the only real change?
+
+Question_56:
+
+    So you are going to try to move both capital and cost allocations more to each unit being on a stand-alone basis, is that right?
+

exam/original-files/Problem_2_3_Sample_QandA/20_answers.txt

@@ -0,0 +1,166 @@
+Answer_1:
+
+          So Betsy, there's no change in our transfer pricing methodology or even the way we compute it. It's to do, as you appreciate, with, obviously, higher rates and the fact that we are in a very disciplined environment at this point on deposit reprice. We would expect to continue to see the margin expand over the course of the next several quarters, but we would also expect to continue to drive higher NII as we're growing our deposits. [And those remain] in FTP.
+
+Answer_2:
+
+          Yes, yes.
+
+Answer_3:
+
+          Yes. So I mean, I think the way to think about it, not to sort of diminish the importance of any individual breach or situation, is that we are, honestly, under constant attack both in a more general side, but also from a fraud perspective. And so while we will always react and learn lessons from every individual situation, this is not the first breach, nor will it be the last breach. And so as a result, we have been constantly evolving and refining the way we think about fraud prevention, detection, underwriting, continuing to move to multifactor protocols around customer identification, looking to leverage all of our data to sort of better inform our underwriting decisions. So the reality is that, as important as it is and as much as we -- as each individual breach could impact the overall equation, we have had to evolve over an extended period to the position that we're in now. And so as a direct result of this, there won't be specific, meaningful changes, but a continuous evolution. And so when we are looking whether it's at sending out preapprovals or marketing offers or receiving inbound applications, we are increasingly looking at a number of different data points and facts to be able to identify the customer and understand the application.
+
+
+          And just -- let me add. As part of a breach -- so if your name was taken, and we know that as Social Security, a driver's license, we can put in a lot of enhanced controls that we do about your name specifically. We don't have to rely on those things. We can reduce reliance. We can greatly, dramatically include antifraud on your account. So we do, do that to dramatically diminish any effect on our customers.
+
+
+          And the reality, Betsy, is that we kind of operated over an extended period now on the presumption that while we happen to know about this breach, there will be others either right now that we don't know about or over time. And so we have to be proactive, not reactive. And we'll obviously look to learn anything we can, but we continue to evolve so that we can use all of the information at our fingertips. And as a practical matter, we are not seeing a specific increase in fraud.
+
+Answer_4:
+
+          Correct, correct. As a result, we're already spending the money that we need to spend to keep, hopefully, ahead of the curve on all of these things. Our operating losses are -- I will say, the combination of all of the information that has been compromised over the course of the last several years has put pressure on fraud costs, but nothing incremental from this. And so no impact on expenses or loan growth that would be measurable.
+
+Answer_5:
+
+          Yes. So look, we -- obviously, apart from the rate hike in June, nothing has really happened much since last quarter. And so the landscape is looking pretty similar, and -- not because that's surprising, so I'll come back to that in a second, which is to say that there's been very little to no movement in the repricing of deposit accounts. There's been some incremental movements in certain savings and CDs, but nothing systematic in the consumer space. But that's pretty much as we would have expected with rates at these absolute levels. And so at some point in time, and that may be a couple, 3 more rate hikes from now, the dynamic may start to change, and so we haven't changed our perspective about what we think the ultimate reprice will look like. In Asset & Wealth Management, the story on deposit pricing is somewhat similar. A little bit more movement, but nothing particularly meaningful or dramatic. The story there is very much, again, as expected. At these levels of rates, you are seeing customers start to make choices to move certain of their deposit balances into investment assets. That's normal migration, migration that we expected and that we've modeled, and we are retaining those balances. So we are starting to see some of the dynamics we expected play out. That started happening at the beginning of the year and has continued to progress. And then in the wholesale space, there is a spectrum as well. So I would start with we're firmly on a reprice journey in wholesale, no doubt. And depending on where you are in the spectrum, it ranges from the smaller and lower middle market companies, where the reprice is modest, but present to the higher end, where it's reasonably high. And so overall, if I step back, that's where we are. If I step back and say, "Have we learned something new in this cycle that we didn't know?" The answer is, "No, not really." If you look at the first 4 rate hikes of the previous normalization cycle, the overall cumulative deposit reprice was pretty much the same as it is now. So we continue to believe that the dynamics that we've been talking about over the last several years and that we've expected will play out. They may not play out exactly as we have them modeled, but they will ultimately play out that way and that we have appropriately conservative reprice assumptions.
+
+Answer_6:
+
+          So at the risk of sort of hedging, it's actually a bit of both. The reality is there's always been 2 different camps on the reprice theories for consumer. There's been the camp of acute market awareness, low for long, technology enhancements allow movement of money to be easier, competition for retail deposits and good liquidity deposit is high. Therefore, reprice higher. And the counter to that, which has merit and which we are seeing to a degree, is customers feel that they're weighing a more balanced scorecard of things when they choose where to keep their deposits. And customer satisfaction, the suite of products and simplicity, the digital and online offerings as well as the safety, security and brand all matter and that price is a factor, but not the only one. So I would say we certainly feel that having a leading digital capability is critical to, overall, our customer franchise, and it will, in all likelihood, have an impact on the stickiness of deposits because customers value that kind of convenience very highly. I would also say one other thing about where we are right now, is that, as you know, as much as you're right about the sort of potential demand for these sort of high-liquidity value deposits, there's a lot of excess liquidity in the banking system. And although loan growth is solid, it's solid. So we aren't seeing a frenzy, albeit that we're very proud of our deposit growth.
+
+Answer_7:
+
+          Yes, welcome back.
+
+Answer_8:
+
+          I don't have that off the top of my head, but we can get back to you.
+
+Answer_9:
+
+          I fear -- here's what we'll do. I fear if I give you a ballpark, I'll get it wrong. While we're on the call, we'll get someone to send the details and let you know.
+
+Answer_10:
+
+          So we're doing a bit of all of the above. So I'll start with the comment which you heard from us before, but which we still strongly defend, which is that branches still matter. That 75% of our growth in deposits came from customers who have been using our branches. That, on average, a customer comes into our branches multiple times in a quarter. So I know that all sounds like old news, but it's still new news at -- or current news. So the branch distribution network matters. Customer preferences are changing, and we are not being complacent to that. So we are, underneath the overall 5,000-plus branches, continuing to consolidate, close, move, grow, change all of our branches in line with the opportunity in the market that we're in. So net for the year, we'll be down about 125 branches. We've closed more than that, consolidated some and added some. So we're not being complacent to the consumer preference story. But branches still matter a lot, and we're building out all of the other sort of omni-channel pieces, as you know, so that we have the complete offering. And if the customer behaviors start changing in a more accelerated fashion, we will respond accordingly.
+
+Answer_11:
+
+          Yes. So I would characterize this as -- over the 2 quarters of normal. So you may recall last quarter, there were a couple of things that we talked about. First was that there was a $75 million sort of onetime interest adjustment in mortgage, which artificially reduced loan yields for the quarter. And secondly, that seasonality and mix in Card similarly. So we would normally, in the law of extraordinarily big numbers, expect for a 25 basis point rate hike that we'd see about 10-ish basis points of improvement in loan yields across the whole portfolio. We didn't see that last quarter. What you're seeing this quarter is the reversal of those factors and the normal benefit of the June rate hike.
+
+Answer_12:
+
+          Yes. So as we look at the loss rates for this year, they're coming in, as we expected, at less than 3%. And as we look out to next year, based on what we know today, it's still in that 3% to 3.25% range, albeit maybe at the higher end of that range. So it's broadly in line with our expectations. So the reserve build -- and we -- in the consumer space, we move our reserves in -- not in dollar increments. But the reserve build is about a little less than 1/3 on the growth and a little more than 2/3 on normalization of rate.
+
+Answer_13:
+
+          I think that was about...
+
+Answer_14:
+
+          Yes. So -- yes, NII, so a couple of things. The first is just to sort of repeat the standard. Just as a sort of macro matter, we're more sensitive to the front end of rates than to the long end of rates, particularly over any short period of time. And so intra-quarter volatility in the 10-year, while it's not nothing, it's not like it would have a material impact on the run rate. We're -- clearly, an overall generally flatter long end of the curve, in general, on average, through the year, all other things being equal, will have had a dampening pressure on our expectations. And it's part of the reason why they went from 4.5% to 4%, not the only one, as we progress through the year. But generally speaking, intra-quarter volatility is not something that would have a meaningful impact on our run rate.
+
+Answer_15:
+
+          Okay. So on the first, I think it's quite important to, like, not look at the average and to kind of decompose it into constituent parts. Because we've talked before about the fact that we use our balance sheet strategically in CIB, but loan growth is not really a thing there. And so this quarter, we saw no loan growth in CIB. So no big deal, but it means that, that 7.5% core growth for the whole portfolio would have been, outside of CIB, closer to 9%. So start with that. Consumer has been pretty consistent. So across the consumer space, whether it's our jumbo mortgages, whether it's the Business Banking, Card, Auto loans and leases, they've been growing at reasonably solid and consistent high single-digit territory or even low double digit for mortgage over the last several quarters. And at this point, we don't really see anything that is suggesting that, that will moderate meaningfully. So where you're seeing -- and similarly, in Asset & Wealth Management on the banking side. So really, where you're seeing the growth moderate is in commercial, and it's in both the C&I loans and the commercial real estate loans. And they each have a story. With the commercial -- with the C&I loans, for us, the story is about moving from meaningfully outperforming the industry to being more in line with the industry. So over the course of the last couple of years, as we've added expansion market, opened new offices, added a couple hundred bankers, developed our specialized industry coverage models, we've been growing meaningfully better than the industry. And so you see that even in this quarter in our year-on-year growth, 8%, as compared to the quarter-on-quarter growth, where it is flatter. And that, to me, is really a factor of the fact that in this stage of the cycle, our clients have strong balance sheets. They have a lot of liquidity. They have had access to the capital market. And so GDP-plus growth is not unlikely to be a level for the foreseeable future. With commercial real estate, it's slightly different. We're still outpacing the industry, but we've kind of gone from very strong to strong, and we would continue to expect that to slowly moderate. And that's a number of things. It's some higher rates. It's actually a lot of competition. And then it's a lot also about client selectivity given where we are in the cycle. So we are being very cautious about new deals that we add to the pipeline and the client selection that we have. So all of those factors, I think, weigh into the commercial real estate space. Just -- tax reform, so fiscal stimulus. The reality right now is, although I think everyone and ourselves included are hopeful, obviously, that tax reform is done for the right reasons and that the economy responds accordingly, at this point, it's not front and center in the dialogue we're having with our clients about whether they should or shouldn't do a strategic deal or take an action. So I would say it's neither holding up business, nor spurring business, but that could change. So at this point, I'd say it's a factor, but not a driving factor, and that could change.
+
+Answer_16:
+
+          Well, so -- I mean, we'll just deal with the fourth quarter because I think the landscape of rate hikes for 2018 is an open question. But no, we would expect loan yields to hold relatively flat, all other things being equal. It's a very competitive environment. We aren't seeing -- we're seeing some pressure in commercial real estate spreads. We're seeing, generally, spreads holding up. But I would expect competitive pressures to keep loan yields relatively flat.
+
+Answer_17:
+
+          Yes. So we are -- at this point, we are, at that 3% charge-off rate, rising to 3% to 3.25% next year and growing, so you should continue to expect that we'll be adding to reserves. Our outlook for reserve adds next quarter is below this quarter. But obviously, we will continue to observe that. And with respect to the hurricanes, right now, in this quarter's results, in the credit lines, in mortgage particularly, and to a much lesser degree, in wholesale, we built -- effectively built $55 million of reserves. To sort of contextualize that, we have used our unfortunate experiences of Sandy and Andrew and other natural disasters to calibrate the assumptions we're using. At this point, it's early to be able to say how the losses will actually manifest themselves. It could be that it's lower than that, but that's also the central case right now, $50 million in mortgage and just a handful of million in the wholesale space.
+
+Answer_18:
+
+          Yes. So I'll just start with a bit of a philosophical discussion, which is it is our opinion that now, as much, if not more so than ever, the investments we're making in technology will effectively breed and deliver the efficiency. So to the degree that we are able to find incremental investments or accelerate them, we'll be willing to do that. And our expense numbers, our outlook has never -- have never been target. So that's just a sort of mental -- philosophical point of view that we would deliver any technology innovation and investments that we could execute well, that we think would be either accretive to our returns through revenues or efficiency. Specifically, when you look at the simulation, this is a point of technicality. In 2018, middle -- probably middle to third quarter of 2018, we are expecting that the FDIC DIF fund will reach its level at which the surcharge will be able to be reduced. That's a meaningful positive for us. And so if you look at the implied growth in expenses from '17 through the medium term, they are larger than is implied. But if we found the opportunity to do more or to accelerate more, we would do it and explain it to you. So we'll come back to that at Investor Day.
+
+Answer_19:
+
+          Yes. I think I'm -- so when we did some conferences at the end of the last year, I think that we said that we'd expect the revenue rates for the full year this year to be 10.5%, and it will be a little better than that. And the revenue rate increase in the quarter speaks to a little bit of spread and a little bit of lower premium. It will go down the next quarter because of the fourth quarter effect of the Sapphire Reserve travel credit for overall, call it, 10.6% for the year. But yes, we do expect to hit the 11.25% in the first half of next year. And we've reached the inflection point end of the third -- second quarter and into the third quarter, where growth is offsetting the impacts of the significant upfront investments in Sapphire Reserve. Then we'll see revenues grew from here.
+
+Answer_20:
+
+          Yes. So I'll just start with credit for a second because although we absolutely expect at some point that we're going to see normalization of credit -- we haven't seen that yet, I just want to make that clear, that we are appropriately cautious in sharing everything, but we're not seeing any deterioration or any thematic fragility in our portfolio that we're concerned about at this point. With respect to the revenue side of the story and the efficiency side, I mean, it really is a story of all of the things you mentioned sort of all coming together at the same time. So we have been adding to -- we have our expansion markets from the Walmart acquisition. We've been adding new markets and opening offices. We've been adding bankers. And as you know...
+
+
+          We're in all 50 of the top MSA now.
+
+
+          Yes. We are in all 50 of our top MSAs now. And we've been adding bankers. And as you know, when you add all of these investments, for a period of time, when they are still in the buildup mode, you don't see that drop to the bottom line or to the top line. And now we're starting to see our bankers hit their stride, become very productive, the balances are building. And then I would also say that this is a -- the epicenter of delivering the whole platform to our clients. So if you think about what we're able to offer our clients in terms of international capabilities, banking coverage across industries, core cash, global payments, we have a platform offering, I think, that is -- well, it's certainly complete, and it's somewhat differentiated. And then the third thing I would say is that it's a buttoned-up business. We have been looking at efficiency and expenses and really working on making sure that due to simplification processes that we went through in 2013, '14 and '15, that we are focusing all of our efforts on our core strategic clients, and it's paying off.
+
+Answer_21:
+
+          Yes. So I would say it's almost -- like you said, there are so many uncertainties that it's almost talking about hypothetical at this point, as encouraged as we are with the ongoing dialogue. My view is sentiment is relatively high. In fact, it's ticked up slightly over the course of the last short while. So from that vantage point, we're in a position of strength. And there would necessarily be some lag, so whether that is a couple of quarters or longer. So certainly, in the foreseeable future, you would hope to be able to see increased demand and confidence leading to action.
+
+Answer_22:
+
+          Yes. So I'll start with the excess liquidity question because while we feel very, very good about our liquidity position, and you will have seen in the recent disclosures where everyone is positioned and necessarily, even if LCR was the only consideration, people would want to be running a Basel II LCR. So -- but LCR is not the only consideration. And the other most notable one I would point out to you would be resolution planning. So know that when we have our overall liquidity position, we're taking into consideration a combination of constraints. And so what may look excess in one -- on one lever may not be as excess on another. The second I would say is that when we look at the deployment of our HQLA, we look at it in the context of our sort of target for what we want the duration of equity for the company to be over the course of the normalization in rates. And obviously, it's not just about liquidity. It's also about duration. So we're comfortable with our liquidity position. We have a framework for deploying it and for thinking about the spot and forward-looking duration of the company. That's not to say that we are not opportunistic in taking advantage of moves that are technical in the long end of rates to either deploy or to undeploy dry powder, and we still have some. So it's more than just liquidity. It's also duration, and we've taken the overall balance sheet and our expectations and our target into consideration, albeit that we still have some dry powder.
+
+
+          And we maximize for between loans, securities.
+
+
+          Yes, yes.
+
+Answer_23:
+
+          So it will be over the short while, and our full expectation outside of any other, like, stimulation is that as the front end of rates goes up and as gradual QE unwind happens, that you're going to see the long end of rates go up, albeit more slowly. So it's pretty typical at this point in the normalization cycle to have a curve flattened. That's what we're seeing. That's what we would expect. I would expect to continue to see the long end rise. And yes, it should be NIM-accretive.
+
+Answer_24:
+
+          So I would say it's wallet share. It's blocking and tackling. We did pretty well in Europe, and -- but there is still a lot of competition. So I would say it's less about the specifics of any one competitor because the environment is pretty competitive and just about sort of reasonably broad strength. Two things that I would also point out is, the first, in equity underwriting, similar to -- in FICC, we gained a couple hundred basis points a share in the third quarter of last year. So on an apples-to-apples basis to where we would normally expect our shares to be, we're still doing very well.
+
+
+          I would just say, I think the competition is fundamentally fully back.
+
+
+          Yes.
+
+
+          It's not that they're -- or most of these players are all out there. Some specialize in certain areas, but it's fully competitive. And you have new entrants soon, like the Chinese banks, et cetera.
+
+Answer_25:
+
+          Okay, that was a lot. So look, first of all, we welcomed the report. And it's a long report, a couple hundred pages. There's a lot of recommendations, very comprehensive. So kudos to the Treasury for delivering it. And we are supportive of those recommendations kind of at large. And I think the most important thing to remind you is that this is not about materially changing the legislative landscape. It's about recalibrating -- sensibly recalibrating the specifics of individual rules over time. And so we're still digesting the report, but we are supportive. It is very comprehensive, and it could be very beneficial to the liquidity and depth of the capital market, which is what we should all hope for and not contrary to safety and soundness. So in that sense, very supportive, all good. It's going to be complicated, and it will take time, but the will is there. And so whether it's the administration or the regulators, there's a general recognition that there's the ability and the appetite to want to make rational change. And so if that helps to grow the economy and all the things that come with that, we're working as constructively as we can on that.
+
+Answer_26:
+
+          Yes, so we're building, obviously, kind of beta platforms for trading and investing and things like that. And also, the P2P, Zelle which is doing quite well. We look at all those things as things you want to -- from the client standpoint, we want to offer to a client. And at one point, we'll be talking about a more -- testing what we think might or might not work, and then we'll give you more of a strategic view of that probably around Investor Day.
+
+Answer_27:
+
+          So we have a fairly large mortgage loan portfolio in addition to having a large portfolio in our investment securities in MBS. So we are already reasonably equivalently mixed in terms of our percentage of mortgage exposure to our total assets or loans to the competitive landscape. And so trust me when I tell you that you talk about excess liquidity because of LCR and we are thinking about more than just LCR. And we do -- as I said, while we do maintain a short position and the cost of being short is relatively cheap, we don't have the kind of capacity to invest $100-plus billion in MBS right now or anything that's meaningful like that to generate higher returns without blowing through our duration target.
+
+Answer_28:
+
+          No, no, no. We haven't. We -- as we talked about before -- a while ago, we made some surgical changes to our credit box in the Card space, but that's, if anything, I would say, incredibly granular, incredibly surgically tightening, not the reverse. Whether that's in Card, in certain micro sales or whether that's in Auto, I would say we've been pretty conservative. And we're probably doing, at the very margin, a little bit of tightening.
+
+Answer_29:
+
+          No. So I mean, congratulations to them if they have a high degree of confidence on what 2018 CCAR is going to look like. So I will tell you this. We said very clearly that we feel that the company should operate within the range of 11% to 12.5%. We feel like it should be lower in that range. And having a capital plan approved of $19.4 billion of share buybacks over the next 4 quarters and over 100% payout based on analyst estimates is a start. So nothing has changed about that objective, but we would want to be measured about the pace at which we do it until we have a bit more final clarity on what the new generation of capital rules will look like. So we hopefully will know more as we go into the next cycle of capital planning. We haven't changed our point of view that we should be able to continue that journey down into the range, and that would be our objective. To tell you that we can give you the road map for that today, I think, is not accurate. So -- but you can do your -- you can and you have done your own math. You can -- your base -- look at our earning outlook in your earnings models and payouts of over 100%, and you can see that we can move down in that same time frame to something much lower than we are now. It's not towards the bottom, but that's not to say that we will be able to do that. We need to go through tests.
+
+Answer_30:
+
+          Yes. So I think I got that. So the compliance burden and the readiness and the work to be ready is a significant heavy lift not just for us, but, as you say, for all market participants. And so there is the possibility that effective at the beginning of the year, there will be ongoing work that needs to get done. We feel like we're reasonably well positioned and -- to defend our position. But there's no doubt that over the course of the year and beyond that people get clearer and clearer on transparency and cost to execute versus advice versus content that there may be competitive dynamics to change. And we feel like we've been building for the last several years to be ready for those dynamics. So there could be some bumps. I don't think it's anything that we're concerned about at this point, and we will all learn a little more as we go through 2018.
+
+Answer_31:
+
+          So I would say that, for sure, has to be part of it. And even with the auto situation, what you're seeing is, I think, a marketplace that is much more responsive. So while we felt like we got ahead of the issues and tightened early, you've seen the sort of industry generally move in that direction. So I think there's no doubt that the environment, in totality, sort of capital liquidity controls regulation has led to higher-quality loan books. And so yes, we have been pressure-tested. Energy was a 1 in 100-year flood. And I think the industry, and specifically our portfolio, performed really quite well. And that's not to say that there isn't a point of pain out there somewhere we just -- that we won't see. We just feel like we'll be in a good position to get through that.
+
+Answer_32:
+
+          Yes.
+
+
+          Yes, but no. Yes, (inaudible). So I would tell you that we are seeing that rotation start. If you go back even 3 years ago, we kind of gave you an outline of what we thought would happen. We said we're going to see rotations from the high wealth segment into investment assets, followed ultimately by the consumer space. We'll see retail deposits move into money funds. We'll see outflows of wholesale, not deposits, as the Fed shrinks its balance sheet. But those things are going to play out over the course of the next -- depending on the rate cut, over the course of the next 2 to 4 years. So we've begun to see it. It should be expected. I don't think it tells us anything new or different necessarily at this point.
+
+Answer_33:
+
+          Yes. So look, our card spend growth at 13% up year-on-year is still very strong. So when we say moderated, it's from very strong to very strong. And it is in part due to the number of new products we've had. So we would continue -- the Sapphire Reserve card spend engagement is very strong, and we're very pleased with it. So it's not -- I wouldn't say it's a moderation necessarily. It's just, at these very high levels, from a slightly higher to very strong is still a great story.
+
+Answer_34:
+
+          So if you think about -- our first acquisitions were in August and September. So we're kind of at the early stages. So far, very encouraging. So far, better than our expectations. But a little early to sort of draw firm conclusions on it, but very encouraging.
+

exam/original-files/Problem_2_3_Sample_QandA/20_questions.txt

@@ -0,0 +1,136 @@
+Question_1:
+
+          Two questions. One, on the revenue lift in the Consumer & Community Bank. I know on Slide 4 you highlighted that the 6% up year-on-year is driven by the higher NII and deposit margin expansion. Could you just describe a little bit if this is just the start of an improvement in transfer pricing that the Consumer Banking division is benefiting from? And is there a lag that, we should expect, would continue to drive up this revenue lift over the next several quarters?
+
+Question_2:
+
+          And then -- right, but that FTP methodology should continue to drive up margin -- deposit margin over the next couple of quarters.
+
+Question_3:
+
+          Okay. And then the second question is just how you're dealing with the Equifax fallout. The real -- the question here is, does the breach that occurred drive any changes to how you are assessing credit requests that come in, how you're filtering for what you perceive as fraud risk and how you're managing the book of outbound credit requests that you're looking for from a proactive perspective on your loan book?
+
+Question_4:
+
+          And as a result, expense impact, loan growth impact, de minimis from your perspective?
+
+Question_5:
+
+          I wanted to follow up to your responses, Marianne, on no pressure on deposit pricing. I'm wondering if you could -- especially in light of your deposit growth strength, and especially in the Consumer, give us a sense on how repricing trends are today in terms of the consumer wealth management versus wholesale deposits.
+
+Question_6:
+
+          Got it. And my follow-up question on that is you're one of the few firms that have been really talking about anticipating the impact from a Fed balance sheet reduction over the next several years. And the question I often get from investors is, obviously, in particular, retail is valuable not just for the price of it today, but on an LCR basis. And how would you respond to the question, given the 6% growth in digital in the consumer bank and 12% growth in mobile, does technology help with the stickiness of the consumer deposits? Or does it potentially aid in the velocity of switching?
+
+Question_7:
+
+          Can you hear me?
+
+Question_8:
+
+          My question is on the consumer and the community bank, a 3-part question. First, what percent of your customers have online bill pay? I'm trying to get back to that stickiness of the deposits.
+
+Question_9:
+
+          Okay. Can you give a ballpark? I don't think you've disclosed that before. Is it, like, to the nearest quarter or...
+
+Question_10:
+
+          Okay. And then the second part is -- I mean, you're talking -- the deposit beta has been lower. You gave your caveat. But mobile bank customers are up 12% year-over-year. Why do you still need 5,200 branches? Isn't this a good time to close branches when deposit competition isn't as tough as it might be in the future?
+
+Question_11:
+
+          A question first on the loan side, on the yields. So last quarter, they held flat. And this quarter, they're up 16 basis points. I just wonder if you could help us understand, was that more just the mechanics of timing of hikes moving through your variable rates? Was -- is it any element of pricing? Or any other things you could just help us understand why we saw that great, nice improvement there?
+
+Question_12:
+
+          Got it, okay. And my second question, with the Card build, you took the reserve for Card to around 3.3%. I know you had talked about staying below a 3% Card loss rate for this year. But I'm just wondering, as we get into next year, you kind of had a medium-term idea of 3% to 3.25%. How are you feeling about that in terms of the seasoning of the Card book and loss rates?
+
+Question_13:
+
+          I don't know. Maybe it's a little nitty-gritty, but you're definitely the person for this. Point to point, the yield curve was about the same. 10-year was about the same.
+
+Question_14:
+
+          10-year was about the same, point to point. However, throughout the quarter, the curve was much flatter. I'm just curious if that has any dampening effect in any given quarter. And maybe the better way to ask it is, could it have a little bit more of a positive run rate as we go forward?
+
+Question_15:
+
+          Okay, cool. And in terms of the loan growth, I think it's completely normal to see some moderation, and you're still doing reasonably better than the industry. I'm curious on the main source of maybe the moderation ticking down a little bit. And then more importantly, is it too soon to ask if any of this talk on tax reform and decent economic data is having a pickup in the conversations on the loans growth side?
+
+Question_16:
+
+          Maybe just a quick question on the outlook on the net interest margin, if -- should we still expect some grinding higher of asset yields even without rate hikes? How do we think about that trajectory, assuming we don't get any more rate hikes from here?
+
+Question_17:
+
+          Okay. And just maybe on the reserve build outlook. Should we still expect it to kind of track with growth and keep the reserve ratio kind of similar in Cards where we are now? Or do you still anticipate some additional building? How do we think about that? And if you could size the hurricane impact, that would be great this quarter.
+
+Question_18:
+
+          Marianne, I was wondering if you could discuss how you're balancing all the investments you're doing in IT and business growth with the efficiency mindset that you guys always have. I guess one of the frameworks is if I look at the 3-year simulation you provided in February, a lot of the expense growth seemed to happen this year. We have kind of a $2 billion increase in adjusted expense. And post-2017, the expense growth looks very modest. So maybe just talk about -- a little bit about the leverage you're using to keep expenses in check as you're doing all the investments.
+
+Question_19:
+
+          Okay, and then just a follow-up. You mentioned the Card revenue run rate has moved up again nicely this quarter. It seems like you might be able to get to your target by the early half of next year. Is there upside to that revenue run rate target? Is that -- are things coming in better than expected in terms of the moderation of promo rates and things like that? Or maybe could you just give a little color there?
+
+Question_20:
+
+          Just following up on, Marianne, on the Commercial Banking business. You've had -- you've obviously -- you've had very good momentum there over the last couple years, and you did talk about credit dynamics in moderation in credit growth and sort of a normalization back towards industry trends. But can you just comment a little bit more broadly about some of the initiatives you've had there from a revenue standpoint, whether it be the middle markets initiative, BI -- the growth in IB, international and whatnot? The earnings growth has obviously been very, very strong in this business, and it's starting to move the needle a little bit. But if you can just give us a little bit of color on the opportunity set you see there.
+
+Question_21:
+
+          No, that's great. I guess sort of a related question on the Commercial Banking business that's a little bit of a follow-up as well on tax reform. Obviously, the Congress -- or the administration and House Ways and Congress released a blueprint so Congress can now start to flesh out a tax plan. And obviously, there's a lot of uncertainty as to the content, the timing, heck, whether it even happens or not. But how -- if we do see something that is sensible, however you want to define it, how quickly do you think that we could start to see that beating through into better sentiment and ultimately, into better demand or increased demand for credit?
+
+Question_22:
+
+          Can you talk about how your -- can you just talk a bit about how you're managing the excess liquidity? You've obviously continued to build cash. The securities book has shrunk. It makes sense given the flatter yield curve, but you combine that with still good deposit trends and a strong loan growth and obviously, a challenge as you think about protecting them going forward. So maybe you just talk about the dynamics there and how you're thinking about the yield curve, how to manage that.
+
+Question_23:
+
+          And then just a follow-up on the rate sensitivity. I mean, you mentioned before -- or you reiterated before you're more leveraged through the short end of the curve. If we get continued increases on the short end of the curve but the 10-year doesn't go anywhere, is that still NIM-accretive as it's been thus far?
+
+Question_24:
+
+          You touched on this a little bit, but maybe you can give us a little more color. You mentioned in your opening remarks you increased your market share in investment banking. Can you share with us, is it -- are you getting a bigger wallet share? Or are you winning more customers? And also, are -- some of your competitors are still struggling. Is that also a factor?
+
+Question_25:
+
+          Very good. And then possibly, Jamie, if you want to weigh in on this, what's your guys read of the new Treasury report on changes coming in the capital markets that was released in early October? Any specific items in there that you guys looked at that would be specifically beneficial that you'd like to see change? And what's the probability of it happening? And could it happen sometime next year?
+
+Question_26:
+
+          Jamie, I was actually hoping you could update us on your efforts to launch your online brokerage offering, it's something that you had mentioned in your last letter, and was curious, since it comes up with investors quite often, how you view the opportunity set in that business for JP, whether it's an effort to just build a moat around your current client cash balances and maybe fill a void. Or is your intention to become a bit more disruptive in the space and actually attract many more customers and potentially even offer more aggressive pricing and terms?
+
+Question_27:
+
+          Got it, okay. And Marianne, just wanted to follow up on some of the discussion around excess liquidity management. And I appreciate the fact that you guys certainly want to be conservative in thinking about duration and maybe taking a more holistic view of the asset side of the balance sheet. But looking at the LCR disclosures and just given the stark contrast in terms of how much you have parked in the way of excess reserves and relatively low levels of MBS compared with your peers, how you're thinking about duration management and whether you do have additional capacity to actually remix some of that cash of the Fed into higher-yielding MBS, especially as we think about the Fed balance sheet unwind dynamics.
+
+Question_28:
+
+          Just a quick question on loan growth. You just had another decent quarter of the growth in residential mortgage. Maybe looking across Consumer, is there anywhere where you've had to kind of open up a credit box in order to growth there? I know you mentioned that loan yields are expected to be tight on competition, probably not increase as much, but have you had to go down market at all for loan growth?
+
+Question_29:
+
+          I was wondering if you could talk a bit more about the quantum and timing of return of excess capital. Of course, one of your notable competitors has given a very detailed strategy of how to do this by the end of 2019. Are you in a situation to adopt a similar strategy?
+
+Question_30:
+
+          Okay, fair enough. And I have a different question. MiFID II is high on everybody's minds. I think everyone's focused on the impact on equity research and FICC research. But I mean, there's broader implications possibly for how that might impact trading, not just from your own point of view but also from the point of view of clients who might not be compliant by the end of the year. How does that weigh on your mind? And what impacts could we expect there?
+
+Question_31:
+
+          I was going to ask you about the credit. You pulled out and highlighted auto after we went through kind of an episode of possible deterioration. You put that together with energy and what we experienced last year, those are our first 2 pressure points on the credit cycle. And really, we've come through without any real heartburn from either. Does that tell us something about the derisking and underwriting discipline that the banks in particular have adopted since the financial crisis?
+
+Question_32:
+
+          And then flipping over to deposit growth. What we saw -- as you kind of layer deposits and institutional deposits, corporate deposits, retail deposits, we're starting to see a little bit of a pressure in the sense of institutional deposits and wealth management began to decline. Corporate and retail still show a lot of strength. Just kind of think about that dynamic because that's really where you begin to see pressure on betas as typically when you see pressure on volumes, we just haven't seen it in the core deposit base yet. So a premium for liquidity that's been kind of pushed into those core customers from corporate and retail seems to be pretty persistent, which will mean the duration and the length and the growth of deposits will be much longer than what we probably anticipated before.
+
+Question_33:
+
+          A follow-up question. So Card revenues are tracking well per your other comment, but the year-over-year Card spend growth has moderated some. Can you talk about the trend with the Sapphire Reserve card?
+
+Question_34:
+
+          And with such a great deal a year ago, are you -- what's the attrition like with the customers?
+

exam/original-files/Problem_2_3_Sample_QandA/21_answers.txt

@@ -0,0 +1,105 @@
+Answer_1:
+
+    Yes, Bill, I think -- I've recently been to Korea, to Australia, in the last 10 days to also southern Russia and Sochi, but I think essentially in Europe, there is a sentiment there that people are beginning to feel that it's not going to get any worse, that there will be some expansion happening as we move forward instead of just purely fiscal restraint and monetary restraint. So there is that feeling beginning to emerge, but I think it's going to be a long recovery. 
+Certainly in China, we are seeing the transition happen from a purely export-led economy to one that is more balanced with consumer spending and a combination of consumer spending, as well as export-led a balanced economy. I think there were some challenges in that transition initially where there was a divergence between GDP growth and pure disposable incomes for a while. But I think long-term, that's going to be very beneficial for everyone, this transition in China. I think in general, Japan is going to also -- I think the consumer sentiment will continue to be modeled and volatile there and subdued. 
+The rest of the world, whether it's Africa, the youngest billion, Latin America, Eurasia, Middle East, we see -- and of course Asia, Southeast Asia and other parts of Asia, Indian subcontinent, we see growth. We see very disciplined monetary policy, balanced budgets, good banking system, and the consumer is more positive. And so it's modeled and it's mixed. 
+And here in the United States, we see some signs of improvement. We need to wait and evaluate the impact of the payroll taxes, as well as the higher gasoline prices. It's too early to say, but it's a recovery that is at best lukewarm, but we feel that it could get better. That's how we see the world. And based on that, we continue to invest for opportunity. We continue to invest based on our long-term models and plans with our bottling partners, to continue to generate both volume, top line, and income growth. 
+
+Answer_2:
+
+    Are you just -- sorry. Are you talking about just the restructuring? 
+
+Answer_3:
+
+    Yes, it's got nothing to do with that at all. Think of it as last year we announced a new productivity and reinvestment program that includes continued synergies from our North America CCR, Coca-Cola Refreshment operations, to be able to enable us to continue to invest in our brands to grow in North America. 11 quarters of consecutive quarters of growth. When we first talked about growth in North America back in '09, people thought that we were trying to go to the moon with a glider. And now, it's reality. 
+11 quarters of consecutive growth. And we intend to continue that. We see this as a growth market. And therefore, to enable us to continue to invest in our brands, this is just ordinary course of business. Think about it exactly like that. It's not a big deal, ordinary course of business, and therefore, it's got nothing to do with the United States bottling structure. It's just part of ongoing business and I'll have -- Steve Cahillane is here with me on this call, as well as Ahmet Bozer and Irial Fanin, so I can ask Steve to also comment. 
+
+
+    Muhtar, you said it very well. This is very much an effectiveness play. Two years ago when we put these businesses together, we had a simple mantra. First, we were going to make it work. Then we were going to make it better. Then we were going to make it best. 
+We've learned a lot over the course of the last 2.5 years. One of our most successful organizations is our food service organization, which is aligned around three geographic units. We're moving our national retail sales and our field sales organizations also around the same three units, which will really build our total efficiency and effectiveness, our ability to work together, our ability to continue to invest in this market, invest against our brands, put more feet on the street. So we're very excited about the new organization and think it will get us from making it better to making it best. 
+
+Answer_4:
+
+    Thanks, Bill. Yes, and I was trying to be pretty clear, but let me be very clear. We expect to hit our long-term growth targets both in 2013 and in long-term. But that applies to 2013 as well. So we're comfortable with that and would expect to be able to deliver that. 
+The second thing is we have always had a mantra that you invest through a crisis. We've been in a global crisis for a number of years now. But we've got history and we've seen what happens when you invest through the crisis, when you come out the other end. As Muhtar says, we think -- see things slowly improving across the world, but we expect to come out at the other end much stronger than we were even going in. So we're going to continue to drive efficiencies, productivity, and then reinvest that back to grow the business and growing the brands. The brands are stronger than they have ever been, but we think we can drive it even further so. We're going to continue to invest behind the brands. 
+
+
+    And just one point to add on that, Bill. I always say, as you go up, the air gets thinner. Always remember, we're adding on top of significant increases from prior year all the time. Just on sparkling beverages alone, we've added 500, over 0.5 billion cases each year. So we are cycling that every year and we're continuing to grow. I think that is really important. 
+And in three years, the worst, I guess,  probably macroeconomic environment, we've seen for a long time. We're able to generate volume growth in line with our growth expectations, revenue growth in line with our growth expectations and income growth. Generating record revenues of $48 billion, record income, as well as record cash growth. It needs to be taken into that context, continue to crack the calculus for growth. 
+
+Answer_5:
+
+    I think in the United States, we are -- as you have heard, we've gained -- continued to gain both volume and value share. And in all over the world, our share is at an all-time high, everywhere across the world, in NARTD, as well as in the different categories that we're operating in and competing in. We choose to compete in. And therefore, and similarly in China in sparkling, we've widened our gap to our nearest international competitor in sparkling. In Europe, I think there have been a month or two where we've had some challenges. But overall for the whole year, we've, again, gained share across the whole of broader Europe, in Western Europe, as well as Eastern Europe, and in Southeast Europe, across the whole continent in both volume and value share. 
+And to be -- I think to be frank, we see competition is healthy, and it keeps us on our toes, it keeps us executing better and being better, becoming more efficient and more productive, and that's all we strive every single day as a business system, together with our 275 bottlers around the world, is that we strive to get better. Better at making decisions quicker, so that we can be more nimble and more innovative and, as you know, we've launched more than 800 different products over the last four or five years. Many of them are new, innovative products that are gaining great traction, as they are in the United States. 
+Look at the still -- performance of our still business. Look at the relative performance of our sparkling business. I mentioned that between 2009 and 2012, spend per person on our brands went up from $56 to $60. So transactions are up in the United States. Our brand price pack channel location architecture is working in the United States. So both in China, transactions are ahead of our volume, as well as in the United States immediate consumption business. 
+So judge us not only by pure volume. Judge us by the quality of our volume and transaction growth. We sell -- in the end, consumers buy packages and products, combination of packages and products, each one at a time. They don't buy liters. That is really important, I think, to understand and how we think about our business. 
+
+Answer_6:
+
+    Judy, we're actually fully hedged on the Yen, Euro and Sterling, and in fact, the Yen positions that we have are actually in the money. They are in good play. That's not an issue. When you look at the first quarter, it was actually -- I said 4%, it was 3% pre-Venezuela. It is 4% now. The Venezuela devaluation obviously is a big one, when you devalue 50%. So that's number one. 
+But number two, the real impact is not what you would expect, is not the Yen. The impact are the rates that we're cycling in the emerging markets, particularly Latin America. If you look at Brazil, look at Mexico, those -- look at the rates at early last year, and then they started devaluing South Africa as well. If you look at those, you'll see there's an improving trend. So towards the latter part of 2013, based on where spot is today, we actually turned positive with kind of even to minus one for the full year. But it is front end loaded negative and then improving throughout the year. 
+
+Answer_7:
+
+    We've got a loss on monetary assets. That was the 100 to 125. And so if you look in the Wall Street Journal article this morning, we just joined a list of other companies that have the same issue. So that's kind of a one-time item that I'm just telling you has occurred and will occur. And then the translation impact of the revenues will be about a 1% drag in the first quarter. 
+
+
+    Thank you. 
+
+Answer_8:
+
+    John, let me see if I can get the first half of your question. First, below operating income growth, you're right, because we will see net interest flip from interest income to interest expense. There are a couple of things going on in there. Primarily, it's rates. And just rates are down, particularly in some of the emerging markets where we've got some cash which was generating a lot of the interest income. You saw that happening during the latter part of this year. 
+And the reason that interest income was actually a lot better than in the fourth quarter than I told you to expect it to be was actually we put on some interest rate swap hedges a couple years ago. There's a small ineffectiveness piece to that hedge and the ineffective piece has to go through the P&L. That was actually pretty large this quarter positive, and it gave us a lot of interest income. So that's part of what you're seeing. So -- but then equity income, you're going to get some leverage. It's going to be up because of the structural items that I talked about from some of the transactions that have occurred. 
+Then if we go to, all right, the second half of your question was -- tell me again. 
+
+Answer_9:
+
+    Well, I think there are a couple of different things. There, I think we're going to see improving and slowly improving trends in many of the markets around the world. Europe, I think will improve. My expectation is that Europe will improve in 2013 from well -- pretty good improvement form the fourth quarter of 2012, so I would say you're actually going to see sequential improvement in Europe. You're going to see sequential improvement in China for sure. I think the US is poised now also in a pretty good place. 
+So I think number one, I think volumes in 2012 dipped a little bit in the fourth quarter. Our view is that is not the start of a trend, that we think that's just -- it happened, but it's not the start of a trend. And we would expect volume actually to be okay in 2013 and we think it will sequentially start coming back and be better, be okay in 2013. 
+
+
+    John, just, just to add on that, I think very little is always said about the 120 or so countries which have a per capita of around 125 in our business, where volume growth for 2012 was, again, 7%. These countries represent about a little more than one third of our total global volume, countries that we never talk about, whether it's Sub-Sahara, or whether it's in Asia or Middle East or central Asia and so forth. But -- and we grew in these countries 9% in 2010, 7% in 2011, 7% in 2012, and we keep on growing. This is the beauty of our portfolio impact. 
+So while you may have a quarter where China doesn't grow or where Europe doesn't grow, we still continue to be able to deliver on our long-term growth model for volume and also for revenues, and I think that is -- imagine what would have happened to our volume if Europe did grow this past quarter and China. So this is the benefit of having this portfolio, which is getting stronger and bigger, as we continue to invest with our bottling partners in alignment. 
+
+Answer_10:
+
+    Yes, John, that's exactly right. When I said hit the target, we hit the target before structural, but then you would have to adjust for structural. But with pretax or net income being the same, it's just what is the geography within the P&L. 
+
+
+    Perfect. Thank you. 
+
+Answer_11:
+
+    Ali, I've always said the fact we are total believers in the franchise system. It is a beautiful system when you can get it to work as we have aligned towards the vision, aligned with its goals and aligned in its ownership objectives and goals. That's what we have. And therefore, we will continue to drive this bottling system towards an aligned vision, which we have. And as I said, we've got three years that we've accomplished that and seven years to go and we're confident that we can continue to accomplish it. 
+As we move through the system, you've already heard us talk about what we see, envisage for the US system, where we have a role again for bottling partners. We are on -- we still have the same time table for that. I won't repeat what the time table was. We said about four to five years since the time we closed the transaction. And you can figure we're still -- we still believe that is doable. And as we move along different parts of the world, you see us creating stronger systems, like Brazil, stronger systems like Kanto. That is a huge milestone in the 55-year history of our Japanese business, getting the four Kanto bottlers to unite and to take costs out of the system to be able to continue to invest to drive top line growth for our system. 
+And you will see us doing more of those as we move forward. And again, refranchising Philippines is another example. So don't think of this as seismic changes in our bottling system. We will continue to fine tune and evolve as needed, as necessary to drive the goals that we have outlined. 
+
+Answer_12:
+
+    First, let me just say that everything we're doing, none of it is reactionary. It's proactive, whether it's Brazil, whether it's Philippines, whether it's Japan, and we've got more to talk about that we're not in a position to talk about right now. All of that is actually proactive. And the US is all about proactive. 
+And I can tell you very clearly, once again, that as I mentioned in Judy's question, judge us not only by the leaders, judge us also by the transactions, judge us by how we are doing in terms of the value of the business that we are creating and the consumer spend that's coming into our business, into our brand and the health of our brands. This is ultimately a brand business. Our brands are healthier than they have ever been, both in sparkling, as well as in still beverages. So I think that we see -- I repeat, we see opportunities in the United States for it to keep growing and also for us to keep generating value in both sparkling and in still beverages. And that's how we see it and whatever it takes for us to be able -- investment, proactive long-term investment is the key. Whatever it takes for us to be able to continue our targeted, thoughtful, purposeful investments, you will see us continuing to do that so that our brands remain healthy, our system remains nimble, and flexible, as far as throughout the market, as far as production and as far as distribution and sales. 
+
+Answer_13:
+
+    Brian, this is Gary. No, no changes at all. We -- you're exactly right. What we announced the beginning of last year in productivity and reinvestment was $550 million to $650 million for total company, including North America. We are still on track. In fact, well on track on that program. It was a 2012 through 2015 program and we are continuing to execute against that. 
+We're on track. We are taking the savings and from the supply chain optimization, the marketing effectiveness, operational excellence, data and IT systems standardization were the areas of that whole program, in addition to what we're doing in CCR, and we're taking that and reinvesting behind innovation, as well as marketing of our brands and that's still working well. What we talked about in North America today is just a normal part and evolution of that program and we'll continue to do that around the world to drive effectiveness, because it really helps us in several different ways. It's not only about saving money. It's about operating more effectively so we can operate faster. Being more productive means we can make decisions quicker, and those are the things we are driving for. We want to be fast, flexible and very big. 
+
+Answer_14:
+
+    Outside of North America, we probably had about $40 million to $50 million in savings in 2012, and then North America continues to drive synergies and did fairly well against their part of their targets as well. 
+
+Answer_15:
+
+    Yes, it will be. It will be. 
+
+Answer_16:
+
+    Let me, Brian, answer it this way, because as we continue -- I'll continue to update you on where we are and how big the plan is. So let's call it $550 million to $650 million today, but as you know, a few years ago, we had another program as well that we kind of concluded and then started this one. So we continue to look for efficiencies and effectiveness. But everything we look at when we evaluate it, we would expect that the one-time costs ought to be in a ratio no more than 1 to 1.5 to 1 payback. So you're talking about a 12 to 18-month payback on something that's then continuous benefit to the P&L going forward. 
+
+
+    Okay, great. Thanks, Brian. 
+
+
+    Thank you, Gary, Ahmet, Steve, Irial and Jackson. In closing, we had a strong 2012 and have once again delivered quality full-year performance results. Our business continues to grow, even in the midst of ongoing global economic challenges. Our system is aligned. And it's on track to achieve our 2020 vision. 
+Together, we are consistently investing in our brands on a global scale through world class marketing and commercial strategy. And as we get closer to the midpoint of our 2020 vision, our system remains resolutely focused on refreshing our consumers, creating value for our customers, maintaining strong partnerships with our bottling partners, strategically investing for the future, and expanding shareholder value. As always, we thank you for your interest and your investment in our company and for joining us this morning. 
+

exam/original-files/Problem_2_3_Sample_QandA/21_questions.txt

@@ -0,0 +1,67 @@
+Question_1:
+
+    Hi, guys. Good morning. Muhtar, I know you have been doing a lot of globe-hopping lately, so could you talk about the global macro, maybe some granularity about regional growth rates? I know you were at [sohishina dobos], just to give us some color on how you think things are going to trend over the next year. I know you kind of covered it big picture, but maybe some more granularity. 
+
+Question_2:
+
+    Great. Thanks very much. And can I follow up with the change in the structure of CCR North America? Does this change your sort of philosophy on sort of how long you're going to own the asset and maybe how it's going to be operated going forward? 
+
+Question_3:
+
+    Yes, exactly. Like for the three different regions. There were seven different businesses before and now there's three. Does that sort of change your view on how long that asset stays with TCC? 
+
+Question_4:
+
+    Good morning, everybody. I just wanted to clarify one thing first, Gary. When you are hitting the long-term FX neutral operating target, you expect to do that in 2013, as well as in the long run? Then with close to zero operating expense leverage guidance of '13, despite the savings, you're signaling stepped-up spending. Wanted to get an idea of where you're focusing that incremental spending on. Thanks. 
+
+Question_5:
+
+    Thanks. Good morning. So Muhtar, I know you spoke a lot about the macro environment, but maybe you could speak a little bit about the competitive environment, particularly around US sparkling, China, and parts of Western Europe where you have seen some step-up in competitive pressure and how that's affected your volume performance and how you see that sort of trending in 2013. 
+
+Question_6:
+
+    Okay, and then Gary, following up on currency guidance for the full year. It seems like the first quarter guidance is actually a little bit worse than I thought. Can you help us understand, is it based on your hedge position and with the Yen moving pretty sharply, how much are you hedged on the Yen? 
+
+Question_7:
+
+    And in Venezuela, Gary, just the impact you're purely looking at transitional impact or some sort of margin impact as you have the pricing control in place? 
+
+Question_8:
+
+    Thank you. Just two questions here. Gary, just sort of more of a housekeeping type of thing. As you look at the commentary on the net interest line, seems as though that's going to create a situation where there's probably not much leverage, if any, below the operating lines. If you could just sort of confirm that. 
+And then secondly, as we look at the organic top line growth in terms of just simply the bottler case sales volume plus price mix, it decelerated looks like to me at least every quarter this year. So can you talk about how you see that trending up as we go through the course of 2012? You've got difficult comparisons in the first half of the year and sort of how that's going to play into your comfort level of hitting that 6% to 8% currency neutral operating profit target. Thanks. 
+
+Question_9:
+
+    Just looking at the deceleration in the organic top line growth and how that maps out over the course of the year and the comfort on let's say the 6% there. 
+
+Question_10:
+
+    Okay, and then finally, one housekeeping question. Gary, you mentioned the equity income line. That's coming out of the operating profit line. So is it -- as you look at hitting your target, I'm assuming that's before the bottler deconsolidation, right? So that's 6 to 8, sort of minus 1 for the bottler, minus 1 for the FX is how we should look at it? 
+
+Question_11:
+
+    Hi, guys. Can you give us a little bit more of a sense of the go-forward evolution of the bottling system globally and in the US? And you look at Germany that shrank this quarter and you want to do some system changes there. Japan certainly has seen some system changes and that's had some struggles. China is struggling a little bit and there were competitive system changes there. US sparkling volumes are still a little bit tough and you bought TCC about two years ago. 
+And whether, to Gary's point, these volume trends are a trend or not, it just seems to us that given all of that, you might actually see the next few years with very large changes to the Coca-Cola system and the industry overall. So if you were to kind of close your eyes and see with us, how would you see the structure of the system, of the future looking versus what it is today? 
+
+Question_12:
+
+    So it's helpful, and I'm still struggling with what's -- what can we look forward to changes in terms of not being as reactionary, but maybe thinking going forward. Maybe if you can help me, you mentioned the US and Steve mentioned it a little while ago, so it's been about two years since you closed the CC North America transaction. 
+Can you give us a sense of where you think you are ahead of plan and where you are behind plan? Certainly for many investors, this quarter was probably pleasing, because operating margins start in reflect positively, but is this sustainable without any more meaningful restructuring, bigger things? And how do you think about the volume trends we've been seeing so far in sparkling and whether that changes anything about how you think -- not reactionary -- but going forward about the structure here, as just another example of what you're describing, Muhtar? 
+
+Question_13:
+
+    Hi, good morning. I've got a question on the, just the productivity program, just really looking for an update. First, I think if you took the two elements of it, both what was initially announced last year plus the extension of the CCR integration, your expectation was $550 million to $650 million of annualized savings by the end of 2015. So is that still the same size or has there been any change to what you're expecting in terms of total savings? 
+
+Question_14:
+
+    How much did it drive -- how much savings did you drive in 2012? 
+
+Question_15:
+
+    Fair to say you think '13 will be a bigger aggregate pull to savings to spend back than you had in '12? 
+
+Question_16:
+
+    Okay, and then just one last one. How much in terms of charges are you expecting to take over the life of the plan relative to the savings? 
+

exam/original-files/Problem_2_3_Sample_QandA/22_answers.txt

@@ -0,0 +1,100 @@
+Answer_1:
+
+    Hi, John. Good morning. This is Muhtar. First, I think it's important to realize that there's not one model for the world. There's many different models for the world, as you can see. What's happening, this has been an exciting last several months with respect to the evolution, actually continuous evolution, of our franchise system. We manage our business to create sustainable long-term value, and evolution of our franchise system continues to play an absolutely critical role in that process.
+And so what you have seen recently, the [Contal] merger in Japan, the Brazil merger of three bottling partners creating a large Brazilian-led bottling business, the Iberian merger of seven bottling partners in Iberia, the sale of the Philippines -- of the majority shares of the Philippines and the control to FEMSA, and now the US process, the journey starting in the United States, are all part of our vision, our plan, and to ensure that we can continue to deliver on the commitments we've made for our vision.
+They use, in some cases, they use partially our capital. In some cases, where there's a sale, obviously, we bring back capital back into The Coca-Cola Company, but all the time ensuring that our bottling business is fully suited for the needs of the 21st century, delivering what is necessary ahead of consumer expectations, customer expectations, and so not one size fits all. And in the case of the United States, again I'm pleased to report, we are pleased to report today, that we've reached agreement in principle to start this journey. All along, since the first day we've closed the transaction with Coca-Cola Refreshments, I've always said there will be a meaningful role to invite partners back into the business.
+When I was -- when we were asked about the timing, we've always said around the four- to five-year timeframe from the time we've closed, the close of the Coca-Cola Refreshments was, as you will recall, back in the latter part of 2010, and we are well within that timeline. And it's a continuous evolution. And sometimes it will necessitate for us to use our own capital, sometimes a mix, and sometimes no capital. And again, not one size fits all. The US model is very different, but it is, again, a model that invites partners to serve with us passionately the communities that we operate in.
+
+Answer_2:
+
+    Yes. I think from -- we can't comment on the timing for the end game, but all I can tell you is that we are intent on creating the evolution necessary for us to be able to serve both our large customers and small, independent customers in the best possible way with our bottling partners. Again, we've always said that, right from the beginning, and we're consistent to that, that the US will be slightly different. We want to create the best-in-class production, optimum cost production system, coast-to-coast, from the East to the West. That will be nationally managed.
+We also want to create a nationally managed large customer -- customer management system that will essentially have the responsibility to put together a 21st century customer plans with our large partners in the United States, and at the same time invite partners to come in and be part of this new evolution in the United States. It will take as long as it is necessary. And that is not our focus. It's going to be about doing the right thing as quickly as possible, as efficiently as possible, and as effectively as possible, and that's what we are going to be doing.
+
+Answer_3:
+
+    Bryan, thanks. There are a couple of things to consider. First is, as I mentioned previously in the prepared remarks, that we reversed some compensation accruals in the first quarter. So that gave you more leverage in the quarter, but you will not see that. That's more of a one-time impact, if you will. So it's more leverage in the quarter.
+The other significant piece is you're going -- the currencies had an impact as well, and currencies moderate going out. But the biggest thing will be geographic mix. And we would expect to see geographic mix changing throughout the year as we go through the year. And as that happens, it will have an impact on gross margin and operating leverage.
+
+Answer_4:
+
+    Yes, that's exactly right. And think about North America, actually. I would expect North America, actually in the first quarter of this year, North America's operating income on a recurring kind of comparable basis, was down 3%, and it's down 3% primarily because of two fewer selling days. So if you adjusted for those selling days, it would have been positive. But I would expect North America to actually improve versus where they were, the minus 3%, but as they improved, because it's a finished product business, it's going to have negative gross margin impact, and it'll be reduced leverage.
+
+Answer_5:
+
+    Yes. Yes, that's what I was trying to say more in code in the prepared remarks.
+
+
+    We normally don't think North America, but that's what it was.
+
+
+    Thanks, Bryan.
+
+Answer_6:
+
+    Yes, I think, Dara, I think -- this is Muhtar, I think that we haven't seen anything markedly different from previous quarters as far as the competitive environment is concerned. China remains a very competitive environment. Actually the whole world, and again, this is a competitive environment that is a mix of large international companies, but also very much local companies, very much local companies in Asia, in parts of Africa, in the Middle East. We also see a somewhat more rational pricing, particularly in Europe, as well as parts of -- other parts of the world, in Latin America, too.
+And I think -- so the way we see the environment is, it will continue to be challenged from a consumer perspective. Whether you're talking about Asia coming back, or whether you're talking about Europe, consumer sentiment in Europe, will continue to be volatile and mixed at best. And therefore, pricing is going to be critical, and therefore also ensuring leverage and ensuring productivity can be generated out of operations for us to be able to continue to invest, is going to be critical. But we are intent on continuing to invest in this environment. I'll let Steve Cahillane talk a little bit about how we manage the pricing environment in the United States (technical difficulties) price mix of 3% in terms of leverage in pricing for sparkling beverages in the past quarter.
+
+
+    Yes, thanks, Muhtar. We would -- we have seen a rational pricing environment in the United States over the course of a good period of time right now. We would expect that to continue, and I've said many times that if commodities go down, don't look for us to reinvest that in price. We've worked very hard to earn the price that we take in the marketplace. We don't have an affordability problem in the United States with our sparkling beverages, and we would look to continue to invest behind our brands.
+We've got a terrific summer program for the Coca-Cola brand. We've got an exciting new partnership with Taylor Swift around Diet Coke. We'll invest around activating those types of program to continue to focus on our most important objective, which is to continue to support, develop, and drive the sparkling, our sparkling category, inside the United States business.
+
+Answer_7:
+
+    Hi, Bill. This is Muhtar. Good morning.
+
+
+    I would say to you that this is, again, we're at the beginning of this journey. We have reached agreement in principle with these five US bottling partners. It is very important that we did reach that agreement in principle, and now we can actually ensure that we put all the details into motion, and we can implement effectively. We have always said production is, in the United States, is critical to our success in achieving a optimum cost, 21st century production system, nationally managed coast-to-coast. That is going to take place.
+We've also said that managing large, 30 or so, of our largest customers in the United States is going to be done nationally. That's also going to take place. In terms of who else would be coming in, we can't comment on that. In terms of what will happen, in what form an architecture production is going to take place in terms of what our current bottlers own, I can't comment on that. All I can tell you, and I can assure you, that we are intent on ensuring that we make the necessary changes in the format and architecture of production to achieve what I just said, which is a coast-to-coast, nationally run production system that generates the efficiencies, synergies, productivities that allow us to continue to win in the marketplace. And again, there may be a future where our partners in the United States take certain ownership in the national production. I wouldn't rule that out also, but it will be managed nationally from one point, single point.
+
+Answer_8:
+
+    Okay, Judy. I'll have Steve answer the first part of your question before Gary comes in and sheds some light on the question on profitability. Steve?
+
+
+    Yes. Thanks, Judy. First quarter clearly had a lot of noise in it. We expected a benefit from Easter being in the first quarter. It's never as big a benefit when it comes that early in the year. Easter's always better when it comes later in April because of the warmer weather. But obviously you reference the weather.
+We saw some very dramatic changes. Last year we benefited from one of the hottest summers -- sorry, hottest winters, warmest winters in the United States, and we cycled that with one of the coldest winters in the United States. So clearly that had an effect. And we saw any benefit from Easter really being washed away, if you like, by the poor weather.
+There was clearly an effect in the payroll tax. It's a little bit of art and science, trying to pick apart what's weather and what's payroll tax. We would figure about two-thirds is probably weather-related and one-third of the slowdown is based on the economy. We are, though, optimistic, guardedly optimistic, that the consumer is coming back, that the payroll tax and the economy is kind of a short-term, need to get used to the discretionary impact that that has had. So we remain optimistic that we've got the right programs in place, that the economy is on the mend, and we would expect continued good performance as we go out into the next three quarters.
+In terms of, I guess, questions around profitability, I'll turn that over to Gary.
+
+
+    Yes. Judy, I would say a couple of things on profitability. It's really kind of repeating what Steve just said. If you take the first quarter and you throw in lousy weather, payroll tax, actually the price of gasoline, what that then does to your immediate consumption versus future consumption business, it's going to have an impact on your profitability. Now, if I go back to the answer I gave to Bryan earlier, though, when I was talking about geographic mix and it's North America, I would expect North America to be improving, actually, from the first quarter and from where we were. And then North America also has this two fewer days.
+Now, I can tell you, Steve's got a number from minus 3%. I said it would have been positive. Steve's got a number, but you can calculate it several different ways as to what would the impact of the two days be. We would all agree, I think, it is positive. They would have been positive at the operating income line. But you put all that together, the weather, by the way, as lousy as it's been, and the impact on Steve's business, has been given a lot of moisture to the Midwest for the drought for the corn crops. So you look for commodities, and we'll see what happens there.
+Payroll tax, consumers hopefully are starting to get used to it. Gasoline prices, looks like they are starting to trend downward somewhat. So I think there are some reasons to be cautiously optimistic. CCR continues to execute with excellence, continuing to improve capability. So I think there are lots of reasons to be optimistic on North America.
+
+Answer_9:
+
+    Judy, I would actually say the biggest impact on the first quarter for North America was two less selling days, by far, as a whole company as well. But by far, the biggest impact was the two selling days.
+
+
+    Judy, I didn't answer this part. A secondary impact is clearly weather-impacted food service and immediate consumption more than the take-home channel. So we would expect as weather moderates, those profitable parts of our business will start to normalize as well. But, as Gary said, two less selling days, when you've got the fixed cost assets that we have in the North American business is really quite significant. Those extra two days are golden cases that are going out. And when you lose those two days, it obviously has a big impact.
+
+
+    Thanks, Judy.
+
+Answer_10:
+
+    Yes. Caroline, I think first in terms of our capability in our system in the United States is I would say the best in the consumer products world in terms of how we go to market and how we can get the product from production facilities. I would like to comment on how we can improve that. If there is a way for us to even improve and generate more productivity, we'll certainly look at it. I think the most important thing, though, is that there is room to generate significant further synergies in production. I think today I wouldn't say that the United States production system, after three years of having integrated Coca-Cola Refreshments, it is where we need it to be. And we need to achieve that -- continue on that road map to proceed towards a modern and best-in-class optimum cost production system coast-to-coast.
+That will mean, obviously, a lot of changes. That will mean building new plants. That will mean combining some facilities, but I would like to also comment, in terms of hot-fill and aseptic versus sparkling beverage plants, we will look at ensuring that we have the most modern, most productive facilities in place. I don't believe the answer is to combine all under one roof. I think the answer is to combine many that are scattered across the country, both in terms of still and sparkling separately, into some consolidation process, and I can't comment any further.
+What I can tell you is that there is room for costs to come down. There is room for efficiencies to increase, and we will achieve all of those. This is all in line with our 2020 Vision. We laid out a plan when we took over the business of Coca-Cola Enterprises. We laid out a plan when I took over as the CEO back 4.5 years ago, and we are executing it meticulously, and we are doing what we have said we will do, and we're doing it ahead of time.
+
+Answer_11:
+
+    Absolutely. I think we can improve service levels. I think we can improve execution inside the point of sale. I think we can improve availability. I think we can improve availability of cold drink. I think we can improve how we serve independents, and all of those things are going to be played out as we implement, execute this new strategy in the United States. And I don't know, Steve, do you want to comment?
+
+
+    I agree completely. Part of what we're doing with this new bottler arrangement focuses on that up and down the street, where bottlers and CCR add the most value, which is not only big customer sales, but up and down the street execution. And we've got also our venture and emerging brands unit, which you're familiar with, which brings brands like ZICO Coconut Water, it brought Honest Tea. So in those spaces that you're talking about, we are very much innovating. We've got glaceau fruitwater, which we just launched to great success a couple of weeks ago. That's being executed, not only in the large stores, but importantly in the up and down the street, food service on-premise accounts as well. We see that as a very important capability. We see ourselves as having a competitive advantage there when it comes to not just shelf space, but cold drink space and overall availability.
+
+
+    Yes, and just to finally add on to that point, Caroline. Rest assured, we are in a mode of evolution, rapid evolution, not just in the United States, across the whole world. But, and you will see us adapting, reinventing how we go to market, how we serve customers, and also how we communicate with consumers, very importantly. Our brand's at an all time high in terms of health and we will continue, again, to evolve and bring out the best modes of communication with our consumers as well.
+
+Answer_12:
+
+    Yes, I think, Mark, it's -- I can't -- we can't comment on the details. What we can say is that it will be a model that will align us fully with our bottling partners to do what is right in the marketplace, and to focus on what is right in the marketplace, with full alignment model, and I think I can't just comment any further than that. But you will see us executing better, serving the customers better, with a better production template, as well as a customer service template.
+
+Answer_13:
+
+    I think all of that will come into play, best practices, everywhere around the world. And I am certain that in four or five years time, many people will come into the United States to see the best practices, and as it used to be back in the 1980s when I used to bring bottlers, new bottlers, from Eastern Europe to see best practice in the United States at that time.
+
+
+    In closing, I would like to thank Gary, Ahmet, Steve, Irial, and Jackson, and to again say that we're pleased with our solid first quarter. We are working as a system to unlock real value, further strengthen execution, and to win at the point of sale. We are confident that a focus, a relentless focus on growth, will enable us to build capable, resilient, optimized, advantaged, and sustainable systems that are well positioned to deliver results in 2013 and achieve our 2020 Vision. As always, we thank you for your interest and your investment in our Company, and for joining us this morning.
+

exam/original-files/Problem_2_3_Sample_QandA/22_questions.txt

@@ -0,0 +1,53 @@
+Question_1:
+
+    Sorry. There's a lot of static. As you look at the bottle consolidation piece, is Spanish or Japanese bottler consolidation just sort of the beginning of the next wave of, let's say, a bottler-driven consolidation? And how much are you pushing this, as opposed to letting the bottlers lead where the system's going?
+
+Question_2:
+
+    Great, and if I could just ask a follow-up on that, which would be as you look at the different options you gave for the US pieces here, in terms of sub-bottler agreements, asset sales, swaps, things like that. Is there some way to think about the financial impact as you do this? I mean, this is a small piece of it. How long does this timeframe take out, as you sort of push these US pieces out? Thanks.
+
+Question_3:
+
+    Hi, good morning. A question for you, Gary, just on the operating leverage in the first quarter, and maybe more specifically, the gross margins. If I understood it right, this quarter would have been one of the highest in terms of the impact from commodity inflation? We also really had no positive benefit from price mix, and as we kind of look out going forward, right, we should get some benefit from price mix later in the year, and maybe some relief on commodity inflation. So why wouldn't there be maybe more leverage going through the year than we originally expected, given the leverage you had in the first quarter?
+
+Question_4:
+
+    So the geographic mix would be more negative going through the back half, the rest of the year, is that --?
+
+Question_5:
+
+    Okay. So more growth from lower margin geographies going forward, and that's what will affect sort of that margin impact?
+
+Question_6:
+
+    Good morning. I was hoping to get an update on the competitive environment around the world, both in China and Western Europe, which have been hot spots recently. And also just your thoughts around how you manage the pricing environment in the US sparkling business in 2013 and beyond, in light of the moderate commodity pressure, and if that solid 3% sparkling growth we saw in Q1 could continue in the balance of the year?
+
+Question_7:
+
+    Morning, everybody. I wanted to follow up on the US bottling announcement. Coke held onto the production assets for the territories the five bottlers picked up. Do you see these bottlers eventually contributing their manufacturing assets into a national production company to get at the cost savings opportunity that you've talked about on the manufacturing side? And also, would Coke be willing to let new partners bring in outside capital to help finance some of the additional territory sales, given the size of the territory that Coke still holds onto in the US? Thanks.
+
+Question_8:
+
+    Thanks, good morning. I just had a couple of questions on North America. First, in terms of volume performance, I think the macro data points and consumer data points have been a little bit choppy more recently. So maybe if you could give us a little bit color just in terms of category of your performance, immediate consumption versus take-home. And sort of the expectation as you get out into the back half of the year, lapping of some of the transitory headwinds, whether it's payroll taxes or weather-related, if you expect volume performance to improve.
+And then, Gary, just on the profitability in North America, I know you talked about this a little bit, but I look at first quarter. You had 1% volume growth, 2% price mix, and you did say profitability was up a little bit, but just why aren't we seeing the profitability really improve more meaningfully and what drives the sequential acceleration in North America profitability going forward?
+
+Question_9:
+
+    Okay. But from a profitability perspective, though, the bigger delta is really the mix shifting towards more immediate consumption as weather normalizes, or is there step-up in cost savings or timing of marketing investments that help the profitability?
+
+Question_10:
+
+    Good morning, Muhtar, Gary, and team. I would like to just understand, Muhtar, your vision, again, going back to the United States. You talked a little bit about how manufacturing is going to evolve. A little bit of understanding the benefits of merging the operations of food service, your non-carbs, and your CSDs into one production facility. Just can that actually be done? And are there synergies there? And then secondly, do you feel strongly that your own people have to get the product to market from the plant, or could you use a third party, such as a Sysco?
+
+Question_11:
+
+    That's excellent. I was just wondering, in terms of getting shelf space, you see a big opportunity up and down the street, and to get better pricing, much as you've done in LatAm. I'm often asked how you compete with all the new things that come in, be it coconut water, energy drinks. I know you have some, but are you convinced you can keep or improve shelf space for your carbonated soft drinks?
+
+Question_12:
+
+    Yes, thanks. Good morning, everyone. Also a question on the US re-franchising, Muhtar or Gary. You talk about this new beverage agreement being ultimately what's at play here. Could you speak a little bit to how you're thinking about that, and the role of incidence-based pricing in that? Is it right to think that continues to have prominence in this new agreement, and any distinction you might draw between how stills and carbonateds are treated as you move production more squarely to staying, if you will, at least for a little while inside Coca-Cola?
+
+Question_13:
+
+    Is it fair to think that other markets, there's a sort of a fact pattern, an experience set, to draw on as you implement this new form of agreement here in the US?
+

exam/original-files/Problem_2_3_Sample_QandA/23_answers.txt

@@ -0,0 +1,123 @@
+Answer_1:
+
+    Yes, hello, Bill, thanks. Overall both from -- in Europe, United States, India, some other parts, we did have a pretty significant impact from weather -- unusual weather, monsoons coming very early in India as you probably all read, many thousands missing in flooding, worst flooding since the tsunami back 10 years ago. So -- and then Europe -- also Central Europe, Germany, all the issues around the river beds rising and flooding and very heavy, wet conditions. So we did, yes, have impact both from a consumer sentiment, both from a mobility sentiment in the United States also, and both also from just the pure, in some cases, distribution issues that hindered our performance and as you know, when we lose a sale that doesn't recur any more, we lost it that day and so. And also in some cases we were cycling very unusually warm and favorable weather conditions from prior year in some cases like India last year the monsoons actually started later, that gave us a 20% growth in India, unusual for the second quarter in India. Usually the first half in India is always less than the second half in India because of the anomalies of the weather. So, yes.
+And then macro conditions, we all have felt it in social issues in Southeast Europe, demonstrations across the Middle East, and then more recently in Brazil, but we feel confident both in terms of looking at our plans in place, looking at current dynamics, that both Brazil will have a better second half, China will have a better second half, Russia will have a better second half, and certainly a better quarter than this last quarter where we grew volume 3%. Overall, Mexico as well as India. So while we have -- we continue to invest in our brands, our brands are stronger than ever before, we have taken market share, our system is stronger and so all these key markets we believe will perform better in the second half. In fact, as I've said, we have seen this -- we always know that the second half in a country like India is significantly better than the first half. In any case, if you look back at our performance over last few years. So -- and then in the United States, we've got very robust plans to return back to growth.
+So we feel pretty confident that this was a confluence of events that happened all at the same time. The portfolio effect of our global business did not work in our favor in this particular case in the second quarter and I feel and my colleagues feel and our bottlers feel very confident. I have been across many markets recently. I've traveled to China, Japan, Thailand, Myanmar, many other parts of Asia, I have been in Southeast Europe, I've been in France, and all in the last four, five weeks and I feel that we will look towards a definitely a better quarter volumetrically, and again, we can talk to you about how we feel about the financial numbers too later in the call and I can ask Gary to reflect on that too in terms of the second half. You want to -- Gary?
+
+
+    Sure. Well, let me continue on [then] versus the volume. On the second half on the P&L, we had a very solid first half, we would expect to have a solid second half of the year as well. We have said there would be bumps along the road, the industry had one, obviously and it slowed. But we continued to take share and we feel very confident about the second half. As we look at the second half financial results, we will be very close to our long-term growth targets, particularly in volume and earnings per share should be coming back in line with what we would all have been expecting at the first of this year.
+
+
+    Yes, I would just add, Bill, that this is more an anomaly. We should not see this as a trend or a systemic issue and that is simply how I believe one should think about it and again I can ask Steve and Ahmet to reflect upon how they see the second half from their vantage point in both Americas and International. Maybe Steve, you can start?
+
+
+    Sure. Thanks, Muhtar. Starting with Latin America, Muhtar said it well. We saw things in Brazil that we hadn't seen before the economy slowed. There was social unrest. It didn't last very long, things are slowly getting back to normal, and we expect a better performance sequentially as we progress through the year in Brazil and in Mexico. In Latin Center and in South Latin, we have seen very good results. High single-digit results continue so there's a lot still going very well that continue to go well in Latin America and Brazil and Mexico, getting back to what we would expect to see on a normal basis. In North America, Muhtar said it, it's -- we don't like to talk about the weather, but the first half of last year saw unusually good weather conditions. We had warm weather, we had dry weather coming out of winter and going into spring. This year in North America we had some of the worst weather and you've all seen it. It's been very wet, it's been very cold, it's been historically wet and cold, which obviously impacts our business.
+On top of that, we had the payroll tax effect which started at the beginning of the year, which affects lower income households, obviously much more, affects their disposable income, their ability to spend. We saw late payroll tax -- late payroll -- or tax refunds coming into the marketplace. But as we look forward we expect the weather pattern to obviously normalize. The weather will not continue to be a factor in a country as big as the United States like it's been and from an economic standpoint, people are used to the payroll tax now. They have had four to five months to moderate their household budgets, to get used to it. The refunds, obviously, have been back in the marketplace and we are already starting to see better trends in QSR, better trends in Convenience Retail, better trends across our business. So we look forward to the second half of the year across the Americas, much more favorably than the first half. Muhtar used the word anomaly -- especially an anomaly in North America and we see ourselves coming out of that.
+
+
+    Ahmet?
+
+
+    Thanks, Steve. Thanks, Muhtar. Yes, just to build further on Muhtar's comments, I'll start with India, that's definitely completely weather-related. All our investments in the route to markets coolers and capabilities will continue to deliver the kind of levels that we are used to having from India in the rest of the year. So we are quite comfortable on that. On China, there were probably impacts of -- as you hear, the continuing slowdown in macro levels, as well as there was some weather impact, but we do expect volume to return for a number of reasons. First of all, China is a country with very, very low per capitas. I have been there a number of times in the last three, four months and we have been working on evolving our strategy with better OBPPC, more price points, and more packs, as well as improving our capability.
+As Muhtar mentioned, we have recently strengthened our Management team there, and I'm very confident that in the second half of the year we are going to start returning to growth in China, maybe not at the levels of double-digits that you might have been seeing but we will certainly be looking to returning to growth in China. Now, the other anomaly in the International results was Europe. I could comfortably say that a very, very big part of that 4% decline was driven by unseasonable weather, as it has already been mentioned. It shows the strength of our system that we were able to gain volume and value share in both sparkling and NARTD and as we see weather normalizing we again look forward to coming back to our normal range of growth in Europe. The rest of International territory, such as EAG continued to deliver at historical growth rates.
+
+
+    And Bill, this is Gary. Just add one or two other quick data points as well. When we talk about 1% volume, you have to wonder, is that a weak 1% or a strong 1%. Let me just assure you, it's as strong as it can be and still be 1%. So that's number one. The other thing is we talk about some of these anomalies on some of these markets. One of the things that gives me some confidence as well because there's been a lot of discussion about what's happening with the emerging markets and all around the world with the slowdown from China, et cetera, but we have always talked about the markets where the per capita consumption is less than 150 and has always been a real strength of ours. Well again even in the second quarter, if you looked at those markets under 150 and exclude China and India, which we have just discussed separately, if you excluded those, our volume in those markets was plus 7% in the second quarter, so it still shows underlying strength of the markets in those emerging markets.
+
+Answer_2:
+
+    Yes, John. Thanks for the question. Here's how I would say it. We are actually very close in the first half of the year, year-to-date, if you look at operating income, I think year-to-date ex structural, currency neutral is plus 5% and our volume is plus 3% so we are not that far away. So our view would be that we should be and in fact year-to-date earnings per share ex currency is 8%, rounds up to 8%. So we are not that far away in the first half. That's why I was saying, solid results, and when I say it's solid -- you've followed us long enough, we like to be at the top end of ranges and not at the bottom end of ranges. Unfortunately, we are at the bottom end right now but that's the world we are dealing with but we feel very good about the second half.
+
+
+    John, this is Muhtar. Just one point that I can add to that is the following. It's customary sometimes that when in the kind of businesses that we are in, when you have a blip in your volume because of a confluence of events, some of which are not in your control, the first thing you do is go out and cut marketing and if you look at our numbers, we have continued to invest aggressively in our brands through the second quarter, through -- in the first half and, as you know, every investment in marketing does not pay back in that quarter. It pays back in future quarters and therefore we are confident that with the share gains, we are confident with the strength of our brands, we are confident about the metrics on our brands both in sparkling and stills across the world and we are confident in our bottling partners' investment plans that are taking place in the second quarter that we can continue our momentum going into the second half of the year and also improve on it, volumetrically, but also continue with our mission to achieve our 2020 Vision through the next -- the years ahead.
+
+Answer_3:
+
+    Okay, John, first I want to compliment you on your creativity with that first question and then here's the real question. But anyway. Great question, actually. And the first thing I would say around pricing is we believe strongly that we have premium brands and our brands should command a premium in the market. And they do command a premium across the world. Number one, we are seeing pricing across -- rational and within the industry we think pricing is rational, particularly in the United States. But if you look at price mix and I'm going to go year-to-date, but the second quarter is essentially the same thing. If you look at price mix, price mix year-to-date is even. But within that you've got positive pricing and you've got negative geographic mix.
+So year-to-date consolidated, we actually have positive 1% pricing. If you look at it by region, year-to-date North America has positive pricing up 1%. Eurasia and Africa has positive pricing up 8%. Europe has -- looks like positive pricing up 2%, although I'll tell you a lot of that is because of Innocent and our acquisition of Innocent so absent Innocent, I think Europe is closer to flat. Latin America is positive 8 points of pricing year-to-date. The Pacific is even. And Bottling Investments Group is plus 2% as well. So we are actually getting very nice, positive pricing as well as category mix, brand mix, channel mix, all of those things are working.
+What's happening to us and where the ding comes in, if you will, is that we've got negative geographic mix so we've got significant negative geographic mix across many of those regions, which brings us back to even when you put price and geography together overall at the consolidated level. As I've often said, geographic mix would -- is always going to be probably negative because you're going to expect those emerging market countries to be growing faster than the developed market countries and you've got better pricing in the developed market countries. What's amplified it a little bit this quarter particularly was the result in Europe that we talked about and North America being -- coming out even where they were. So, you put all that together, we are actually getting the kind of pricing we would expect to be getting in the market.
+
+Answer_4:
+
+    Should I take this?
+
+
+    Yes. Judy, let me just reflect on that and I'll ask Ahmet also to comment. But what we have said again is there was a coming together of many events that usually don't come together all the time. We have performed overall globally at rates that are much more commensurate to what you've been used to in the last three, four years despite the fact that we've had issues, some of these issues happening to us from quarter to quarter, but you haven't felt them because of the fact that the portfolio worked. And this time, you have the issues around in Latin America and the two key markets -- Brazil and Mexico -- on slowing down and on also consumer spending being impacted because of the Brazilian crunch in consumer credit that was taken away from the consumers and generally the consumer spending went away. And then you also had China, the issues in China that was consumer spending is actually much below GDP levels and that is documented across the macro numbers in China and as well as the weather issues related to India and also other issues coming together in North America where it went for the first time in 12 quarters from a plus to a negative, which we don't expect.
+All of these things we don't expect to continue at the same time. Some of these things may still continue to impact us. Therefore, the portfolio will work. Now, related specifically to China, we are participating in two great categories in China and we are the leaders, which is sparkling and juices, those categories we have grown in and they are adding tremendous value to our portfolio and to our business in China. We have also, as we said, retargeting all our efforts in China, refocusing all our efforts. Yes, there's a different competitive landscape. We feel that actually that is not -- has not been the issue for us. The main issue for us is to ensure that we can continue to distribute in outlying areas in China that we have had some issues and we are correcting those and also that our marketing is working, which we feel definitely our brands are stronger, our innovation pipeline is working in terms of what we are providing to the consumer, also in terms of packaging.
+And we feel confident that those two categories -- playing in those two categories -- and then also innovating across some other categories like dairy is going to create the growth and the value for us starting in the second quarter but also continuing and we also feel confident that the Chinese leadership -- the new Chinese leadership -- are going to ensure that they take the right actions and we are seeing that to reposition and transform the economy without creating a major bump as they transform the economy from a purely export-led economy to a more balanced economy with also consumer spending and both Deputy Vice Premier Yang in charge of the economy, as well as the new team, we feel confident and have the plans in place to ensure that that takes place. So again, Ahmet, you can reflect more on that, as well as any other markets you want to.
+
+
+    Yes. Thanks, Muhtar. Thanks, Judy, for the question. A couple of messages here, Judy. Message number one is that the economy may be down but the growth prospects in China, even in the short term, is there simply because of the very low level of per capitas and strength of our system. Point number two, if you look at all the competitors in China, nobody really participated in all the categories. All the players have one or two categories that they are strong in and then they drive their businesses through those categories and maybe extend them to others. Our position is the same so our strategy is basically first of all, we definitely can do better in the categories that we already exist, such as sparkling. So to give you some specific actions we are taking to do that, I have highlighted the OBPPC and that's actually accelerated, we have pilots running on various multi-serve and single-serve packages for different price points in different parts of China. And as those things roll out of the pilot, we will be rolling some of them nationally, so those are already in a way in the market and they will be accelerated into the second quarter. We have also relooked at our communication strategies and we are going to be communicating more intensely on the intrinsics of our products as well as extrinsics.
+You might have heard about our nickname promotion, that's the similar promotion to the Share a Coke promotion around the world elsewhere, which is getting incredibly positive reaction from the consumer, and all the other things of improving our route-to-markets, et cetera, those are all underway and we are very confident that that's going to give us our strength in sparkling. Now we also play in juices as you know, and we, as Muhtar mentioned, we are the number one player there. We are refocusing our efforts back around Pulpy and we are just looking at an extension of that into Mango, which is getting very strong consumer reaction. So as we consolidate our efforts behind that you would see a continued increase.
+Now, obviously we are not only focused on just our existing categories. We have a pretty successful brand in Super Milky Pulpy, which is a value-added dairy, and we are beginning to increase our focus on that and we are getting high single-digit growth of that brand and we are building our innovation pipeline for the future. So it's a fairly robust strategy and, yes, under lower economic environments we might have lower growth rates than what you're used to, but we are ever strengthening our position in China to capitalize on this market for not just immediate future but the very long term.
+
+
+    And we have Irial also, which oversees Bottling Investments Group and, as you know, we are one of the three system players in China in terms of bottling. Maybe, Irial, you can comment on what you're seeing down on -- very close to the ground?
+
+
+    Yes, Judy, good morning. Just to build on something Muhtar said earlier, which is around investment and I would say from a bottling perspective, we continue to invest heavily in the market and particularly in our execution capability, route-to-market capability, and critically in developing the talent to be successful in the next years ahead. So when you add those to the revitalized marketing strategies, OBPPC, I actually feel very confident about the future. Yes, we have bumps along the way but our Business is growing, our challenge is to grow a healthy long-term Business and I think, from a bottling perspective, we are really putting in place the infrastructure and the capability to really drive a success for the future and that's basically where I would leave it.
+
+
+    Judy, what I would just say finally is I wouldn't read anything more into this than what it is. As Gary said earlier, we were fractionally away from rounding up to 2% and we could -- it would not have been hard for us to do something which would not be right for this Business and take the volume up to 3% and selling low, cheap product. That is not what we are about. We are about investing. We are about doing the right thing for this Business and we are about -- and I've always said there may be a bump along the road, the one bump along -- we have grown this business consistently in line every year on an annual basis since 2008 on our way to our 2020 Vision in the range -- in the upper range of our long-term growth plan despite very, very challenging macroeconomic conditions and that is going to happen in 2013 also.
+
+Answer_5:
+
+    Yes, let me just comment on what you just said. We are not -- this is not about managing on a day -- yes, we manage this business on an hourly basis but it's not healthy to comment on what has happened in the last two weeks. Yes, of course, we expect the weather to normalize. As you know, whoever is in the Northeast now and whoever was in the West Coast of the United States in the last 10 days, you know that weather has -- it does normalize. That's probability and statistics, so it just happened all in a very short period of time where everything was negative in many major markets, it's -- and it will turn -- it will normalize and that's what we are saying, part of what we are saying, so I have every confidence that with the normalized conditions, as I've said, we will again, 2013 will be another year when volume will grow at the range of the long-term growth model. As far as the margins are concerned, I will turn it over to Gary in terms of what -- the margin of what you mentioned in terms of the margin numbers in Europe.
+
+
+    Yes, in Europe it's a structural anomaly. It's actually Innocent. So when the juice business, juice having lower margin, when it came in, that's what changed the margins. It's nothing more than that.
+
+Answer_6:
+
+    Yes.
+
+
+    And that's actually the flip side, if you will, of what I said when I was answering John's question, that if you looked at price, the price inside of price mix in Europe is actually plus 2%, but it's really Innocent giving us a lift on price but it gives the opposite effect on the margin.
+
+Answer_7:
+
+    Yes, exactly right.
+
+Answer_8:
+
+    Yes, great question, Bryan. Well, first, you will see that we did accelerate purchases in the first half of the year. As I said, if our annual target was in the $3 billion to $3.5 billion range and we actually have repurchased $2 billion in the first half, we did exactly what you said and we accelerated in the first half of the year. Where we are right now is we are sticking with the annual target, which we originally set at $3 billion to $3.5 billion and I'd just tell you, we will give you an update on that at the end of the third quarter.
+
+Answer_9:
+
+    I've learned to never say never to anything.
+
+Answer_10:
+
+    Perhaps, Mark, let me take the margin question and then we can come back to the innovation question. But this is actually -- let me get back into actually what I talked about, price mix and margins when I was talking about Innocent. The same thing applies actually at a higher level for the total Company. So what you've got is very positive pricing and you're seeing that and that being offset by geographic mix. But what you're seeing is when an operation like North America is minus 1% in the quarter, that actually -- this is counterintuitive -- but it actually improves margins, okay, because North America having the finished product business has lower margins. So in our expectation is, number one, to continue to get positive pricing and we are going to be rational in pricing and we intend to stay premium as I said earlier. But in addition to that, we expect North America's performance to improve in the second half of the year, which will actually put pressure on margins, which is why we said earlier that we would expect gross margins to moderate over the second half of the year and it's really the geographic mix of where the income is coming from. Does that make sense?
+
+Answer_11:
+
+    Yes.
+
+
+    Yes, also on innovation, as we have said before, we don't look at innovation only as ingredients, we look at it as packaging, ingredients, equipment, even in terms of the marketing, social media, the brand price pack channel, architecture, occasion architecture, all of that is working for us and also our -- in terms of our new campaign to be part of the solution around the world, working closely with local governments, national governments, working with the government of Mexico, working with mayors in Chicago, in San Antonio, other parts of the United States, in different states, in Atlanta, and you can look at the patents that we have been filing of recent. So we are working and freestyle and the next generation of what is behind -- what's coming next after that, we are working on a host of new innovations.
+Also ingredients. Continue to work with our partnerships across the world in different incubators around the world. The best -- we always believe here in The Coca-Cola Company, the best ideas are outside. So the plant bottle came from the outside from one of the incubators in India. Many new ideas are coming from different incubators in Israel or in China or in Japan or in Latin America. We have many -- we have substantial partnerships from here in -- with the University of Georgia to across many institutions around the world in techno parks. So, yes, we are very, very active and we are content that we have the right pipeline and maybe I can ask Steve to reflect on -- from just a North America and Americas perspective.
+
+
+    Yes, thanks, Muhtar. From a -- starting with the Latin America perspective, we've got Coca-Cola Light, which we are kicking off in Argentina. Which we are excited about watching the prospects of that. We are doing terrific innovation around our Jugos Del Valle platform in juices in Latin America, as well as in North America we have launched Fruitwater, a brand new product off to a very good start. Powerade Zero Drops have joined Dasani Drops as a very exciting innovation. NOS Active, with is a fusion between sports drinks and energy, kicked off in April, again off to a very good start. From a packaging perspective, we continue to innovate around our price package architecture. We've just launched 16-ounce sparkling icy cans in our major packages. We've got Taylor Swift Slim cans coming into the marketplace. We've got 19.2 ounce sparkling cans coming into the marketplace. Again, lots of excitement around the packaging innovation.
+In terms of some marketing innovations, we've got Coke Zero, which is going to be launching College GameDay this fall, which we are very excited about. We've got Caffeine-Free Coke Zero coming into the marketplace. We feel very good about that. Really building out the Coke Zero platform as an all-day brand, so we've got lots in the marketplace and lots more coming into the marketplace and it builds on one of Muhtar's earlier points that throughout this rough period of time, we have continued our marketing pressure, we have continued our marketing investment. We have not cut it. We have increased it and it allows us to continue to innovate and bring new innovations into the marketplace.
+
+Answer_12:
+
+    Yes, I would just comment on that that it's all about ensuring that you provide the right choices at the right time for the right consumers in the right environment and that you shouldn't read that we have an increased resolve to use any specific ingredient. It's all about ensuring that we do have viable lights and no-calorie versions for every one of our major brands available to the consumer, ensure that we [front the pack] label transparently, ensure that we have active lifestyle programs, as per all our global commitments, and ensure that we have responsible marketing. That's our -- those are our four commitments and our Business, we've said many times, is about brands. Today, we have $16 billion brands, that are growing. We have in the pipeline another 19 brands that are bigger than $750 million in revenue and less than $1 billion. Those are all going to become $1 billion brands in the next increment of time because they are growing and we are confident that we will have multiple -- more $1 billion brands than we have today and I think that's what this Business is all about, adding value through brands to our system and I'm confident that you will see us add many more $1 billion brands to our [rostrum] in the near future.
+
+Answer_13:
+
+    Steve, you want to go?
+
+
+    Yes, thanks, Ali. I will start. In terms of pricing, we have always said that our pricing strategy in North America is consumer-based and it continues to be consumer-based. We captured, if you look at Nielsen, we captured very good pricing across our portfolio in North America and we think it was an appropriate amount of pricing by channel. The unfortunate 4% volume decline was, as we said, had a lot more to do with weather and the economy, at least 60% to 70% having to do with a one-time, really poor weather event, so we didn't put more price in the marketplace to try and chase volume that wasn't there. We put appropriate price increases in the marketplace and we maintained our margins and we maintained our price strategy going forward and we continue to bring new products and new packages into the marketplace to help our whole architecture achieve the type of pricing that we deserve.
+And we have given some examples of this in the past and a good one is our 1.25 liter, which continues to be very successful. One-third of the 1.25 liter volume is in fact incremental volume, so it is good in and of itself but it has also allowed it -- so if you look at our 2-liter pricing over the course of the past 12, 15 months, we are out of the $0.99 price promotion for 2-liter and have been for quite some time. So we are not going to put too much price in the marketplace. We take appropriate price, based on what the consumer and what's right for the consumer and what's right for the customer and we fully expect that based on the price plans we have in place for the back half of the year, based on the innovations we have on the back half of the year, that sparkling volume will in fact improve from what happened in the second quarter.
+
+
+    Ali, I would move onto your question on China. The answer is there's absolutely no plans for increased price promotion. In fact, the reason for having a evolving OBBPC is to have more sustained volume at the right price point and the right packs for all the consumers. Now, to give you an example, you might be familiar that there's been a lot of upsizing going on in China and we have launched our 300 mL package last year. Now, we will tactically respond to such upsizing to be able to balance our volume and share performance but that's a -- those are limited tactical moves rather than a strategy to have increased price promotion so that's not really in the cards. Now, to maybe build on this a little bit and also to address some of the innovation questions that I didn't have a chance to share, is that we have small cans -- either slim can or sleek can -- and small PET launches all across the International territory, all across Europe, all across Eurasia Africa Group, and some of the Pacific markets.
+That I believe is an important innovation in a way and also allows us to drive revenue and gross margin. In addition to that, let's also keep in mind that we had some very successful products such as Pulpy that hasn't been fully launched in all of our International territories. Eurasia Africa Group, for example, have taken that and they have launched it in Morocco. In a very short period of time, we were able to achieve a 20% plus market share with that launch. We've just had a recent launch of extensions of coffee into PET in Japan. In the CVS channel, the recruiting female consumers were quite happy and pleased with the results of that. We have been innovating in energy drinks in Russia and Turkey by extending them into PET packages, resealable PET packages that the consumers want so we continue to innovate in different packages, different categories across our International territory as well as using successful innovations from the previous years.
+
+
+    Thank you, Jackson, Irial, Steve, Amit, and Gary. Our Business continues to grow and to capture global volume and value share even in the midst of ongoing global economic challenges and importantly we do not manage our Business for the short term but rather for the medium and long-term and, as I mentioned earlier, our focus on achieving our 2020 Vision is unwavering with current dynamics leading us to believe that our performance will be better in the back half of this year and beyond. As always, we thank you for your interest, your investment in our Company, and for joining us this morning.
+

exam/original-files/Problem_2_3_Sample_QandA/23_questions.txt

@@ -0,0 +1,52 @@
+Question_1:
+
+    Muhtar, I was hoping you could step around the world and dive a little bit deeper into certain markets and regions to help us separate out the impact of nonrecurring factors that hit your second quarter. First is any macro related factors that can continue to pressure the business in the second half. You had mentioned macro factors in Brazil, Mexico, Europe, and China. Will those continue to be as big an impact in the second half as the second quarter and if not why? And then maybe if you could help quantify maybe what you think the weather-related impact was in the second quarter?
+
+Question_2:
+
+    Gary, I just wanted to ask a clarification about the back half of the year. Your commentary on the financials, it sounds like you're saying you're going to get to that level in the back half of the year and not the back half of the year will get you to the long-term algorithm for the full year. At least that's how I interpreted it. Can you just clarify that?
+
+Question_3:
+
+    Got it. Okay. Thanks. Then my actual question here was, Gary, you got positive price mix in the vast -- in every region this quarter with the exception of Pacific. And yet it's not going up to full positive price mix here. How do we view the regional price mix versus the geographic offset and how does this fit into your long-term algorithm? Because it seems like this is something that's most likely going to continue to be a notable overhang?
+
+Question_4:
+
+    I just wanted to go back to the second half expectations and clearly you can't control the macros and the weather, but I would just like to hear a little bit more specifically on some of the actions that you're doing to improve the volume performance, particularly in markets like China where there's a macro issue but there's also competitive issue, there's also portfolio issue just in terms of not participating in some of the fast growth segments. So can you just talk about how you're thinking about marketing investments, how you're thinking about your portfolio? Can you accelerate price tag architecture strategy more aggressively to really get the volume performance even if the macros don't come back and/or the weather continues to be challenging?
+
+Question_5:
+
+    Just two quick questions. What are the trends like recently? It seems like you're pretty bullish in the back half. So as you exited June and got into July, it looks like some of the weather normalized, so what are you seeing more recently? And then minutia but the big margin decline percentage year-over-year in Europe, what's the primary driver of that?
+
+Question_6:
+
+    Got you but so they should be down going forward though because of that because Innocent is now fully consolidated?
+
+Question_7:
+
+    Got you. So from a dollar margin perspective it's almost neutral but the percentages change because of the price component?
+
+Question_8:
+
+    Gary, just a question for you related to share repurchases. With the stock the way it's performed in the second quarter, did you accelerate or do anything different in terms of timing of maybe pulling forward share repurchases? And then the business right now is bouncing around the low end of your algorithm and the stock has bounced around in a pretty tight range here recently. So is there any consideration to maybe even buying back more stock than you originally planned just because you've got an opportunity to buy it here at the -- around the $40 level?
+
+Question_9:
+
+    Okay. But not out of the realm of possibility that you could go higher if you chose to?
+
+Question_10:
+
+    Muhtar or Gary, question on the gross margin evolution. I don't want to put words in your mouth but it seems like one of the silver linings here is that the price pack architecture work you've been doing over several years has allowed you to put up a pretty decent gross margin number and offset some of the corresponding earnings disappointment that comes from the revenues being what they were in the quarter. If that is a fair assessment, can you give us a bit of an update on what's going on in terms of innovation, not in terms of the price, the pack but in terms of what's really in the bottle because that seems to be one of the problems you're facing from a larger share performance absolute NARTD performance perspective?
+
+Question_11:
+
+    It does, yes. Absolutely. The geographic headwind is what it is.
+
+Question_12:
+
+    That's helpful. And if I could simply follow up on this subject of a stevia-based sweetener in the brand -- on the door, so to speak. Coca-Cola, we have seen what you've said recently about globally taking down the portion of your volume that is in the full-cal portion of your business. Should we infer here that there's an increased resolve to use organic sweeteners against the main brand here and there's some optimism globally for that potential?
+
+Question_13:
+
+    So the general theme of my couple questions is really what we are all trying to figure out, which is, what's going to get better from here and why, and not only in terms of volume but also in terms of some of the other key drivers of profitability. So if I may, my first question is around North America and although you say in the press release, you remain committed to rational pricing, price mix was only up 1% and do you think volumes would have been down more than negative 4% if you had taken more than 1% pricing so taken 2% to 3% pricing or can we hope for that part of the business, the pricing in North America improving going forward? And as a follow-up to that, in a completely different per cap market like China, following up to Ahmet's point a second ago, I just want to get a better sense of if evolving a strategy has anything to do with increased price promotion as well, as it sometimes does with some companies?
+

exam/original-files/Problem_2_3_Sample_QandA/24_answers.txt

@@ -0,0 +1,154 @@
+Answer_1:
+
+    Good morning.
+
+Answer_2:
+
+    Yes, Dara, good morning. I think first it's important to realize that there is different timing across the world to some of the volatility and macroeconomics, and particularly what's interesting for us which is disposable incomes. So I think China has already had a slowdown and is beginning to recover. We see that. And there's always also a lag between the GDP per capitas and disposable income. So also important to realize that they don't all happen at the same time. The numbers don't correspond to each other one-to-one.
+And so we do see an improvement in Southeast Asia and parts of certainly China, where things have stabilized and things, people are beginning to normalize their habits. And in the last three, four months we've seen a flight of currency from emerging markets, market stock exchanges in countries back into North America. That's had impact on disposable incomes in Latin America, in Eurasia, in countries like Turkey, and other countries, in certain other countries in North Africa. So, yes, those -- and you can track stock exchange indexes and you can track disposable income growth or slowdowns. They are all very related and we do see that the world is not just one city or one element of volatility. There's different pockets of volatility happening at the same time. And what is, what we are fortunate with is the great portfolio, a wonderful portfolio where India slowed down maybe seven, eight, nine months ago.
+We see some comeback in terms of disposable income I'm talking about, and China is the same. Southeast Asia I would say are similar. Philippines also pretty much in that camp. And then we certainly also see that we've still got some headwinds maybe in other parts of the world. So there's some tailwinds coming and some headwinds coming. And we continue to invest in our brands and when you look at our performance, we have sequential improvement in many parts of the world, particularly when you look at places like India, places like China, Atayan, even also developed markets such as Australia and also South Africa. And our African continent, I haven't mentioned that, countries that are some sub-South Africa that are usually south of 80 per capita, again, grew in a very healthy manner this past quarter, about 5% up. And we expect Africa to continue to generate good results and economies in Africa seem to be pretty buoyant and seem not to be too impacted. But of course they are very slow level of their per capita development as well. I hope that helps.
+
+Answer_3:
+
+    I thinks it's pretty -- as I said, different pockets showing different results, but we have a very, very sharp focus on -- I was down in Latin America recently a month ago. I visited many countries in Africa recently as well as in Asia. We have an incredibly sharp focus on brand price pack channel architecture, new price points, lower price points, more focus on affordability, more focus on returnable packs and smaller packs. Individual packs that help continue to keep the drinkers' base growing, which is key and essential to when economies also start turning up and when disposable income starts heading north.
+
+Answer_4:
+
+    Good morning.
+
+Answer_5:
+
+    Yes, thanks, Bill. First, philosophically, from a strategic vantage point, the whole story of balanced growth we believe is still very impact. Balance being growth in western markets, growth in emerging markets, balance being growth in sparkling and growth in still beverages. And you see that happening in this past quarter as well. So we've grown in markets like the United States, which we believe is a long-term growth market. When you think about it, 14 of the last -- of the last 14 consecutive quarters, we've grown in all but one of them. And now we've generated, again, 2% growth, with 2% growth of brand Coca-Cola.
+So we -- Australia grew. Many important markets in Western Europe grew. Germany grew again 3%. Countries in Northwest Europe generated good healthy growth for us. And then emerging markets. Yes, there's some headwinds that are happening in emerging markets but we believe they are very temporary. The whole demographic, the whole investment, the whole story of 1 billion new middle class still holds very strong in our opinion by 2020. Over this past decade that we're in, this decade that we're in, a billion new middle class.
+That bodes very well for the industry we're in and we believe we can continue to generate very healthy good growth. We believe we can continue to generate very healthy price earnings. I mean, I'm sorry, price mix. And we believe that, therefore, in this, like in this past quarter which was where we did see a lot of headwinds, we generated 4% revenue growth and 8% currency-neutral operating income growth. And we believe that we had a lot of headwinds. So as economies begin to move, I think we'll see a lot of improvement. And I'll ask Ahmet as well to make some comments on this and if need be also ask Steve to add his commentary.
+
+
+    Thank you, Muhtar. Bill, you mentioned a few items. I'll just focus on a couple of them. Emerging markets, as you know, if you look at the history that it goes through cycles. So it has a cycle of years and years of growth and every now and then you have economic headwind, and you manage through that. But emerging growth, emerging markets growth economically certainly isn't over, and we have a formula which pretty much closely shows that as personal consumption grows, we actually grow with it.
+Now, having said that, in some of the emerging markets where there might be personal consumption and macro headwinds, we could still grow, like India, because we have very low per caps and we have significant investments in feet on the street, infrastructure, brands. We're just really building our business. And India showed that again this year. So that's what I would say about your comment of emerging markets. The growth story there is far from over for a long time to come. And I guess the rest were about US pricing and decline in soft drinks. So maybe I should just pass that on to Steve.
+
+
+    Yes. Thanks, Ahmet. First, I would just underscore on the broader question, what Muhtar said in his prepared remarks, that in this quarter we delivered the highest number of servings ever reported in the third quarter. So I think that bodes well for our growth story going forward. But with regards to North America pricing, which I heard you ask, Bill, and in particular, sparkling price. We feel good about delivering positive price mix in the quarter of plus 1%, in line with our strategy to consistently earn at least 1 to 2 points of sparkling with consumers. And in the US Coke system remains committed to taking rational pricing and we've done this very well over the past several years. In fact, we achieved 2 to 3 points of price mix in sparkling beverages and across our total portfolio in both 2011 and 2012. Year-to-date, we're 2% sparkling price mix, which we feel good about.
+But I think it's important to remember, we've always said that we're going to focus on consumer-centric pricing. And if I can give you an example of that, the average price today of an 8-ounce serving of Coca-Cola is $0.25, exactly $0.25. This is up over 5% versus two years ago and it's up nearly 10% versus three years ago, which compares very favorably to the US inflation market. And this tells me really three things. First, at $0.25 we do not have an affordability issue. Coca-Cola remains a very affordable indulgence. Two, we've been able to earn price above inflation in the United States. And three, we still have plenty of room to continue to take price.
+But now addressing the third quarter in particular, we acknowledge we did strategically invest in select promotional activity in the back half of the summer through the Labor Day holiday. Given that we essentially didn't have much of a Fourth of July holiday and Memorial Day holiday, this Labor Day acted much more like a Fourth of July holiday. But these investments were tied to specific occasion-based brands and packages to help drive incremental household penetration, which they did, attract more consumers into the category, which happened, and is very much in line with our long-standing North American strategy. And all of these activities that we did, all of them, to take price in the marketplace, I think set us up very well to take more price in this quarter and going into 2014. So we're very confident that the pricing environment in North America remains very rational and that we'll be able to continue to earn price in the marketplace in this quarter and going forward in the next year.
+
+
+    Yes, just let me round out that question with one final remark, Bill, and that is that once again if you take our world average per capita of around 90, just under 90, and you take the most populous nations of the world that are less than half of that per capita, India, China, Indonesia. Way below that number, way below half of that number, we believe there's -- and many other parts of the world as well in Africa, the youngest billion, we believe the critics, whoever they are, are wrong. I don't understand that sentiment. We're growing while others are not at the moment. And our business and balanced portfolio is built for times like these. So we see this as a time of opportunity.
+
+Answer_6:
+
+    Good morning.
+
+Answer_7:
+
+    Yes. Look, Bryan, firstly let me just address that by saying regressive taxes do not work, period. And wherever we have seen them being implemented in some cases, they have been taken away by the government after two, three years, basically like in Denmark. They are not working wherever else they have been implemented, and so the consumer suffers in them. It's proven time and time after again. We've made our case to the government. We have tremendous respect for the government of President Pena Niento. And we need to understand that, and we've made our case that this really does not have anything to do with health policy. In order to address the health policy properly, we have to come and work together with government and with civil society to raise the awareness and to create programs that really work. That really drive physical activity and, therefore, just a regressive discriminatory tax on one part of the food industry just is not going to work and apparently that's all I would really like to say, because its discussions are in progress and I don't want to comment any further.
+
+Answer_8:
+
+    I just don't want to comment on it at this moment. As I said, there are a lot of discussions going on and it would be wrong for me to publicly comment on any of those discussions and, therefore, we'll deal with whatever the result is in the most effective way. I can assure you that we will continue to prosper the business. We're one of the largest, we are the largest consumer goods business in the country. We are one of the largest contributors to the GDP in that country by a big margin, and we support millions of retailers in the country effectively for their livelihood and, therefore, I think that we will certainly find the right way forward, whatever happens.
+
+Answer_9:
+
+    Okay, John. Let me see how well I can do on this and then you can come back and ask. But first, going to price mix, and just as a reprise in general on price mix, generally what we see, and I'm going to take this in steps, generally what we see is you see pricing. So you see rate and mix, positive rate and mix, would be positive across almost all of the groups. You would then see negative, generally, you would see negative geographic mix and it's basically a function of higher growth in emerging market countries than developed market countries, which would give you a negative geographic mix. Then on top of that, and you're absolutely right, then where we own bottlers and they're growing, and that gives you then a positive price mix because they're finished products versus concentrate.
+So a couple things. So if you go back to the second quarter, I talked about margins and I thought margins would moderate and because of geographic mix. And the follow-up to questions I remember, I said because we expect North America to actually perform better and that will actually hurt margins because it's a finished product business where margins are lower. But it helps price mix. And what you're seeing today is while price mix in North America was even for the quarter, we are getting positive price mix from our finished product businesses.
+Going forward, and not talking specifically about 2014 because we're still in the midst of planning 2014 and we'll give you a full review on our views on next year in the February call, we are planning to take appropriate pricing and Steve referred to taking pricing in North America as well. So we are expecting to take pricing. So going forward, what I would expect to see is that we should have a positive in rate going forward. We should have a positive in mix going forward. We should have a positive from finished products going forward. And we should have a negative from geographic mix. So that's the kind of -- and if you add all of that up, it should be a positive price mix. That's what we would expect and it's what we would expect as what's in our long-term earnings road model, is positive price mix long term.
+Now, let me see if I can turn to operating income. When I was talking about operating income, it was definitely currency-neutral. It was -- and ex structural. So let's be very clear on both of those, currency-neutral and ex structural So operating income was 8% currency-neutral ex structural for the quarter, and 6% year-to-date currency-neutral ex structural. And what I said was we now expect the full year to be generally in line with the first half of the year. So somewhere in that ball park and that is net of currency-neutral and net of the structural impact because I can tell you with the structural impact, it's a point of negative structural impact and so that would take our year-to-date from 6% to 5%, for example. So just to be clear, ex structural, currency-neutral.
+
+Answer_10:
+
+    Yes, without giving guidance, what we're basically saying is that the full year we think ex structural and ex currency, it ought to be in line pretty much with where we are year-to-date.
+
+
+    Yes.
+
+
+    Okay.
+
+Answer_11:
+
+    Yes, Steve, you want to address that?
+
+
+    Yes, thanks, Judy. First, I did talk specifically about diets. I would underscore that we have a very wide portfolio in North America led by brand Coca-Cola, which is twice the size of Diet Coke, and brand Coca-Cola, as you know, grew 2% in the quarter which we're very pleased with. Diet Coke is like a lot of diet products in the United States, and not just beverages but across the whole array of food, are under a bit of pressure as people are questioning ingredients, ingredient safety, and so forth. But we believe very strongly in the future of Diet Coke, the number two sparkling brand in the United States. We've got terrific programs against it. We're actually seeing increased incidents in the past quarter, between 19- and 24-year olds. We think a lot of that has to do with the exciting new promotions with Taylor Swift, some of the new packaging we're bringing into the marketplace, an increased focus on Diet Coke.
+But there are headwinds. There are headwinds that we're facing. And we face headwinds in a lot of different areas, a lot of different places, and this is just one of them. But last year it became the second best selling sparkling in the United States and we're continuing to focus on it. Coke Zero, also a part of our zero-calorie portfolio, grew mid-single digits in the quarter. So we're very happy about that. We've got a great program around Coke Zero, College GameDay just kicked off, it's really becoming ever-more relevant with young males. So we're confident that throughout our whole portfolio, we're offering consumers exactly what they want, when they want it, how they want it, at the right prices that they want it, and we'll continue to focus on any of the headwinds around Diet Coke. And we're confident that it has a bright future in this country.
+
+Answer_12:
+
+    Well, Judy this, is Muhtar. First, I think it's important to understand that, and I've said this in the past, that economies that are performing at a different pace in the continent of Europe, not everywhere is really bad, not everywhere is really good. And so you still have very challenging consumer sentiments in Spain and Italy and Greece and Portugal and the South, in Southeast Europe, in what used to be termed as the Balkans, Romania, Bulgaria, former Yugoslavia. It's very challenging environment. And then you've got a better environment in Northwest Europe and then certainly the best environment still in Germany. And so based on those, our business also reflects some of those conditions and so it's a pretty good mirror actually. And I'll ask Irial to comment on Germany and why we've been consistently performing in Germany and growing our business and, again, there is tremendous sequential improvement versus the first half in many countries of Northwest Europe, in Scandinavia and also Northwest European countries. Irial?
+
+
+    Thanks, Muhtar. And this actually goes back to one of the earlier questions. I think in Germany we've got an economy that's doing okay. We have got actually really good marketing married up with continued excellent execution. And you bring all of that together and you get great results. And for me in Germany, it gives me great confidence about the future of our business, quite frankly, because we are seeing where we put in the hard work, where we do the right things in the business, we do get good results. And Germany is just an example of what can happen, quite frankly, in many markets around the world as the economies turn and improve.
+
+
+    Ahmet, do you want to comment?
+
+
+    Yes, I just wanted to -- hello, Judy. I just wanted to add to the others that we had a very, very strong Share a Coke campaign across Europe this summer that worked extremely well. We are ever-more closely aligned with our bottling partners, really driving growth. And just on the macro, I would like to add that there's a clear divergence between North and South. So North continues to do better and South continues to do worse. So our business in the North certainly is reflective of that.
+
+Answer_13:
+
+    Good morning.
+
+Answer_14:
+
+    Yes, I think it's on target, as we have said, reported previously, where we make very sound significant good progress with, in discussions with some of our existing partners, as well as discussions ongoing with some other prospective partners. So we are on target, if not a little bit ahead. And I think you'll hear more about it in the coming period ahead of us, and I'll ask Steve just to maybe shed some more light on it.
+
+
+    Yes, thanks, Muhtar. Bill, the one thing I would really underscore is we absolutely have not hit a lull. Don't take the absence of public commentary to mean that we are not making very good, very constructive progress. All our bottling partners, both current and prospective, are extremely excited about this business in the United States, about the opportunity to continue to be franchise partners in the United States, to grow the business in the United States, and we're making very exciting progress and we'll have more to report in the coming months.
+
+Answer_15:
+
+    Talking about productivity, Bill?
+
+
+    I'll ask Gary, do you want --?
+
+
+    Sure, Bill. Within the quarter, we continue to invest in marketing, so marketing is actually up in the quarter and up year-to-date. We had significant productivity savings in the quarter. We have some previously announced productivity programs that we announced back in 2012. Those 2012 programs will go through 2015, and really focus around productivity and then reinvesting those back into the business. They were focused on information systems, marketing, supply chain, innovation, operational excellence, that sort of thing.
+I can tell you, we'll give you a full update on it at the year-end call, so I can give you the full year. But we are making very good progress against the goals and you'll see that on the February call when we go through a full update. And we've got hard savings and soft savings. So let me give you some examples of what's happening and it's adding into the productivity and some of the leverage that you're seeing.
+So in things like supply chain, if you buy things cheaper, hard savings. And we're doing a lot around supply chain and actually getting a lot of hard savings. And those you're seeing being reflected. In marketing, if you can buy media cheaper, then we just buy more media basically is what we're doing. So we're reinvesting back into marketing and being able to buy more media for the same price, if you will. So we, as I say, we'll give you a full update on all the productivity programs in February at our year-end call. But we're making excellent progress and you're seeing a lot of that just what's coming through the G&A line with, as I say, within that marketing, SG&A marketing, being up for the quarter and year-to-date.
+
+Answer_16:
+
+    Very, very little. There's a huge cycling of last year in the fourth quarter, as I've mentioned earlier. But there's very little. I mean, there's a little bit but nothing of significance in the quarter this year.
+
+
+    Thank you.
+
+Answer_17:
+
+    Yes, thanks, Ali. I think that's a fair interpretation of what I said. This was a very different summer. It's been a difficult year starting with the fiscal cliff and sequestration and payroll taxes and so forth. And then the summer was very sluggish and it's very important in our business to keep consumers engaged with our brands, to make sure that we're in the households, to make sure that teens are being recruited. And so Labor Day acted very much like a Fourth of July or Memorial Day, whereas typically it would not. It would be the end of summer.
+And Labor Day acted like the only summer, so it was more promotional than you would have seen. It would be more promotional than what we would expect going forward. But those things happen from time to time. And we think that the pricing environment will continue to be very strong, very rational, and because of all the investments we're making in our brands, we feel that we have the opportunity to earn even more price going forward in the marketplace. And that would be absolutely our intention to do that.
+
+
+    And I just want to add one thing. In terms of the Nielsen data, yes, that's exactly the reflection. But don't underestimate. We took very healthy pricing and I see also in the quarter. And so, overall, that's how you get to the one price mix positive on sparkling. And so, don't let that point go unnoticed at the moment.
+
+Answer_18:
+
+    I would say that first, we believe that our long-term growth model, with appropriate mix which we believe we can take and we can generate, it would definitely get us to our 2020 vision of, from a system revenue point of view, of doubling our business with the base of 2010. So that's the sort of trajectory, if you like, and we're on track in terms of moving ahead to doing, achieving our goal. The second piece is we'll always be looking for any kind of bolt-on acquisitions that may make sense, but that's the extent of what I would say that right now we would be looking at. Bolt-on acquisitions and if there's an opportunity, we will look at it seriously.
+
+Answer_19:
+
+    Sorry, say that again?
+
+Answer_20:
+
+    I don't think materially. You know, if you look at our long-term growth of corridor of volume plus what we've been achieving, I think the balance is still there the same as it used to be.
+
+Answer_21:
+
+    Yes, I'll have Ahmet just comment on China. Then maybe Gary can finish off the second part of the question. Sure.
+
+
+    Thanks, Wendy. You might remember that in our last call, we talked about the fact that we were evolving both our organization and our strategy in China. And what we see in the third quarter really encourages us that we had not only 9% growth in total, but also 8% growth in sparkling. And that's pretty much delivers on the expectation that we've said that we would expect sequential improvement from the first half results, in the second half of this year, and we expect that sequential improvement from the first half results to continue into 2014.
+To your question of pricing promotion, we did not have any significant marked pricing promotions in the marketplace. It was basically a combination of, A, beginning to implement parts of our new strategy in the marketplace, B, the same Share a Coke promotion as we're scaling up these wonderful global assets in all parts of the world. And then our new team beginning to gel together, connecting with our bottling system and really improving execution. So we are encouraged by those results and we expect to continue to, as I said, improve sequentially from the first half results.
+
+
+    Okay, Gary.
+
+
+    Yes, Wendy, relative to share repurchase, let me first, let me just start with a preface that don't particularly agree with you on saying our share price is relatively underperformed for the last two years. But absent that, a couple of thoughts on share repurchase. Our view on share repurchase is that share repurchase is value neutral. It is not something that grows value. It does for the short-term holder. Because maybe you can get a bump in the share price. But for the long-term holder, it is not something that is value-enhancing. It is much more like a cash-efficient dividend, which is the way we treat it in that our priorities for cash are number one, to reinvest in the business, to grow the business that would include bolt-on acquisitions, et cetera.
+Number two would be dividends which we have increased for the last 51 years, 10% this year. And third, excess cash would be put into share repurchase and just because we don't need that cash in the business. So it's a return of cash to shareholders. But leveraging the balance sheet to do something that we would view as value-neutral, we don't think is the right thing to do so we continue to just perform exactly in line with the targets that we set at the beginning of the year. Thanks.
+
+
+    Thank you Gary, Ahmet, Steve, Irial, and Jackson. We delivered sound third-quarter results within an ongoing challenged macroeconomic environment. While we saw sequential improvement in the business, we remain constructively discontent and resolutely focused on further advancing our growth trajectory. Our 2020 vision and long-term strategies remain firmly intact. And together with our global bottling partners, we're investing in our brands and our capabilities to further strengthen our system and to drive sustainable growth and value. As always, we thank you for your interest, your investment in our Company, and for joining us this morning.
+

exam/original-files/Problem_2_3_Sample_QandA/24_questions.txt

@@ -0,0 +1,86 @@
+Question_1:
+
+    Good morning.
+
+Question_2:
+
+    Muhtar, I was hoping for more granularity on emerging markets given the Q3 slowdown, particularly in Latin America, which was in contrast to some improvement we saw in China and India. So can you give us an update on the macro environment as you look around the world? And also, some of the strategies you mention you were implementing, are you gaining traction at this point from a market share standpoint? And should we expect to see volume performance in emerging markets improve as we look out going forward from here?
+
+Question_3:
+
+    Yes, that's helpful. And then some of the strategies you're implementing, do you think it's helping to drive an improvement in market growth at all or drive market share gains? And do you feel comfortable that emerging markets trends have bottomed in general at this point and we should see some improvement going forward, or is it still too volatile to call right now?
+
+Question_4:
+
+    Good morning, everybody.
+
+Question_5:
+
+    Muhtar, critics have said that Coke's growth story is over, reflected in the stock price, pointing to the slowing emerging market growth you were just talking about, declines in diet soft drinks. Some say the pricing in the US is irrational, and an inability to grow in big markets like US and Mexico. Can you explain why you still see solid growth ahead for the Company? And what the Company is doing in terms of innovation, productivity, you mentioned price pack earlier, to drive that growth and why the critics who have declared the growth story is over are wrong? Thanks.
+
+Question_6:
+
+    Hello, good morning.
+
+Question_7:
+
+    Question about Mexico and excise taxes. It's been in the press over the last, especially more so over the last couple of weeks, and in speaking to some of your bottling partners in Mexico specifically, it seems like they are more resigned to the potential that it's going to be a reality. So if you could talk a little bit about just how you see the situation unfolding in Mexico and to the extent you'll get an excise tax increase, how you plan -- or do you plan to do anything differently in Mexico in response to it? Maybe some thoughts about elasticity? And then finally, just any concern that there's spill-over into other markets would also be helpful?
+
+Question_8:
+
+    Are there any preparations for -- I guess, just trying to understand if it does become a reality, do you have plans in place to deal with it if it does occur?
+
+Question_9:
+
+    Thank you very much. Muhtar and Gary, you guys talked about the price mix number improving sequentially, which was good to see. So Gary, can you talk a little bit about how you see this playing out over the next 12 to 24 months? Where you have the negative geographic mix offset by the positive mix on a per case basis is the bottler territories, where you own the bottler gets better like North America, versus the absolute level of pricing. How should we look at those factors competing against each other to try and map something out?
+And then one other housekeeping question, which was your comments on operating profit for the year, could you just revise those and, or restate those, just because there's some confusion about whether it was currency-neutral or non-currency-neutral, what have you? Thanks.
+
+Question_10:
+
+    Okay. So, and I'm not trying to trick you into guidance or anything here, but it basically sounds like you're saying currency-neutral, ex structural, mid-single digits year-to-date. So, therefore, that implies the Q4 but then you talked about the currency impact. So as we're looking at those, should basically offset to get you to slight operating profit growth for the quarter?
+
+Question_11:
+
+    Thanks, good morning. I had one follow-up question on North America and then a question about Europe. So in North America, there's been a lot written about the declines that we've seen in diet sodas. And, Steve, I'm not sure if you went through that and whether you shared some of the similar concerns that people have written about the decline in diets and your perspective on whether the artificial sweetener issue is impacting that category at all and from your strategy in dealing with that situation?
+
+Question_12:
+
+    Okay. And then just on Europe, the improvement that we saw in Northwest Europe and Germany as well, to what do you attribute that to? Perhaps weather getting much better in the quarter as opposed to the macros in consumers and what you guys are doing to really rejuvenate growth in those markets?
+
+Question_13:
+
+    Hello, good morning.
+
+Question_14:
+
+    Hey, can you just talk about the timing of some of the refranchise in the US? Because I think we talked a lot about it earlier in the year and it's kind of hit a lull recently? And then I have a follow-up, if I may.
+
+Question_15:
+
+    Great. Thanks so much. And then just on the SG&A costs, can you just give us a little bit more color on what drove some pretty significant efficiencies, which is obviously great, but with the advertising ratio flat or up and then maybe what drove some of the other improvements on that line item?
+
+Question_16:
+
+    Got you. Was there any benefits from the incentive compensation accruals either this quarter, maybe into the fourth quarter as well?
+
+Question_17:
+
+    Hello, guys, thanks. Just one quick thing and then a real question. So I just want to underscore something again, because it's a key controversy and, look, I'll be fair. I think what Steve said a moment ago is music to a lot of investors' ears. And I want to just replay to make sure I understand. So did you say that the past couple months in North America from a price promo investment perspective, we're a little bit more of a blip and that we should expect something like higher pricing that we saw in 2011 and 2012 going forward in North America?
+
+Question_18:
+
+    I appreciate that. That makes a lot of sense. And then a broader question, and I don't know how often you revisit this, but what do you think the Company has to grow volumes between now and 2020 to deliver on the 2020 vision, given some of the recent slowdown in volumes? And I guess in that context, do you think as a Company you have to acquire more to reach that vision?
+
+Question_19:
+
+    And from a difference of volume versus price mix to reach the system doubling goal, has it shifted at all between the two?
+
+Question_20:
+
+    Well, so to double the system sales by 2020, there is perhaps an ingoing assumption of what would be from volume and what would be from price mix. Has the recent global slowdown shifted that mix at all between volume growth and price mix growth to reach the doubling of sales?
+
+Question_21:
+
+    Hello, thanks, good morning. First question on China, can you talk about the acceleration, the pickup in volumes there, whether that was driven by any change in pricing or promotional levels? And what your outlook of a normalized run rate, because that region's just been so lumpy in terms of volume growth as we go into 2014, where's a base case of volume growth?
+And then my second question is looking at the buyback program, the stock's on track for two years of relative under-performance, and we haven't seen that for a while and yet your target for buybacks hasn't changed since the beginning of the year. So I'm kind of surprised with the balance sheet you have, with the weakness in the stock, and certainly, Muhtar, with your resounding confidence about the long-term outlook, you're not getting more aggressive on the buyback here? Thanks.
+

exam/original-files/Problem_2_3_Sample_QandA/25_answers.txt

@@ -0,0 +1,121 @@
+Answer_1:
+
+    Sure, Bill. Good morning. This is Muhtar.
+Let me first just take a step back and just say that, in a way, we've had a speed bump. We know it would have come on our road to 2020. We dealt with commodities and in 2011 and 2012. Volatility in weather has become a norm.
+Uncertain economies -- internal, also execution issues caused us to under-perform versus our expectations in 2013. I'll start by saying that.
+We have looked at everything. We have looked at our people, priorities, marketing, selling, and innovation, and we have refreshed our plans with a simple but scaled up set of priorities on marketing our brands, system execution by our franchisees and bottling partners and Company-owned bottlers, and on innovation of all kinds. Business models like the one that we recently announced with Green Mountain, brands, equipment, packaging, the lot.
+Our long-term outlook is our performance algorithm which we have and will deliver going forward. And 2014 will be a year of steady improvement as we get back up to speed.
+But make no mistake, our leadership team is confident, accountable. Our system will market well. We will sell well and we are going to achieve our 2020 Vision.
+Now let me just take you through a quick tour of the world and I'll ask Ahmet also to comment. Starting with Asia, China is going to sustain its growth, India in terms of its macroeconomic outlook, and we will continue to benefit from that.
+In India, there is elections coming up and usually when there are elections, there is a little bit of easing of fiscal discipline. That will play into a little bit of added disposable incomes.
+In Southeast Asia, certainly we've seen quite a lot of political turmoil, especially in Thailand. That will -- as we go into 2014, my expectation is that, that will ease a little bit.
+Indonesia, also there's an election coming up. But Indonesia is certainly having some macroeconomic issues that will probably continue into 2014. Philippines, we'll see a slightly improved outlook in the Philippines versus 2013.
+In Japan, obviously everyone is looking very closely at the new policies of Prime Minister Abe's government. There's a new tax coming up. We'll see how that impacts but certainly we all feel -- that our operating in Japan -- feel that there is some hope for a little bit of more inflation in the economy that will benefit also businesses like ours. Although recently, the last economic numbers from Japan were a little bit below expectations.
+Africa, youngest continent, we're very well-positioned. We feel that we will continue to grow well in the years to come in the African continent and benefit from also improvements in governance across the whole continent.
+In Eurasia, there's elections coming up in Turkey. Lots of again political issues in the Middle East will continue.
+Russia, all Russians can be very proud of the Olympics that are taking place. We will as we move forward -- and I was there in Russia, looking at some of the great activations that we've had in our Business -- and Russia, our Business will continue to grow in Russia with all the investments that we're making with our bottling partners.
+Europe is a continued tale of two cities. If you take the southern zone, the high unemployment and low growth is going to continue but it's not going to get worse.
+As far as northern Europe, Britain is certainly ahead of all the other economies in terms of the growth outlook. Germany also is in that area. We will continue to benefit from the robustness of policies in those two economies and the rest of the continent is somewhat behind Germany and England.
+In Latin America, again, 2014 is going to be a year leading into an election in early 2015. We'll have also the benefit of the World Cup and our biggest ever activation globally on the World Cup. Southern Cone -- Argentina, Chile -- we should continue to see the benefit of all the programs we have in place and also continued inflationary environment in those two areas.
+Mexico, President Pena Nieto's programs are taking effect, all the reforms. Long-term, that is a benefit to our Business, to the economy, to the people of Mexico. Again, as I said in my commentary, it's too early to say about the impact of the price increase we've had there.
+So I hope that gives you a good tour of the world. Then finally, in terms of our flagship market in the United States, clearly the best right now, as far as we can see -- the best Western developed economy in the world, we think we will see slightly improved mobility in the United States in 2014 versus 2013. We hope that, that will also mean a little bit of increased spending for consumer products as we go into 2014.
+So -- and again, we will benefit from all the robustness in our marketing programs and our increased expenditure and quality of marketing as we move into 2014 for our flagship market.
+Ahmet, do you want to add some commentary?
+
+
+    Yes, I'll add a few things to really compare some of these issues that have existed even last year, how they are different now. So for example emerging market currencies, when the first news on discontinuation of tapering came out last year around May or June, there was a bit of a shock in emerging markets.
+We see that over the last seven or eight months, these emerging markets are finding ways to deal with it -- by no means it's certain, by no means it's perfect -- but it certainly feels a little bit more under control compared to when it first came up, and the interest rate and things like that have been baked into those expectations. So the message there is countries and our Business, we are finding ways to deal with that new reality of less liquidity coming out of the United States.
+I would just add, Muhtar, to your comment on Europe north-south divide, that is very much true but we are beginning to see different shades of gray in the south as well. There are some encouraging signs in Spain; less so in Italy at this point in time, although there's a new prime minister there and we're hopeful with the new programs to be announced if they are.
+And Eastern Europe -- it continues to struggle in terms of consumer confidence and economics. So North continues to do well and South is even showing different performance now.
+The other point that, Muhtar, you mentioned, is political uncertainty. It's another common theme to many of our emerging markets. They eventually could impact the economic realities, but again, so far, in countries like Turkey and Thailand, it's been fine.
+And let me, just, in the interest of giving time to other questions, let me just stop it here.
+
+
+    Sandy, do you want to add any commentary to North America? It's important to say in North America that we believe in the North American market; we believe in the demographics; we believe this is a growth market.
+We have grown in all but 2 quarters of the last 15 quarters in the United States. We believe we can do better and we're intent and resolutely focused on achieving that. Sandy?
+
+
+    Thanks, Muhtar. We have a great Business in North America. Our focus in accelerating the Business is on our brands, on our customers, and on our capability.
+I'm really happy to be working with Irial and Paul and all of our US bottlers. Irial Finan and Paul bring a tremendous amount of selling and executional energy that will help us build on our momentum.
+On my end, over the last 6 to 7 weeks, Paul and I have met with our major customers, we've met with our bottlers, and we've gone through the brand plans in detail looking at opportunities to focus and strengthen them and to move resources to emphasize advertising and brand-building on our largest brands. With the plan in place, our focus as a system -- Irial, Paul, and I, and our bottlers -- is to improve all aspects of our execution whether it's marketing or sales or in the marketplace.
+We believe as a result of that, that we will improve steadily over time, and we share the confidence that Muhtar expressed in the long-term health of North America. It's a great market, it will grow, and I think we can be confident about our long-term future there.
+
+Answer_2:
+
+    Bryan, thanks, and let me see if I can go through all of those. Let me start at the top.
+When you're the industry leader, you have to believe in rational pricing and we believe we should get pricing for our brands because our brands are worth it and we would expect to have positive price mix this year to go with the volume that we will have this year. When you look at commodities, they're fairly benign from what we're seeing for 2014 so not a big deal.
+Now let's say currency, among the worst we've seen in years. There's not a whole lot you can do about it when all the emerging market currencies melt down as they did earlier at the end of December, early January. With that said, let me be very clear. Ours is a growth business, is a business model that is built on growth, and we know that we cannot save our way to prosperity.
+We will have productivity, but that productivity will be reinvested for growth. While we are reinvesting for growth in our marketing, we have -- our goals are also, in addition, while we're increasing the marketing, we will also have a goal and it is the goal for this year of hitting our long-term growth models this year. So we're going to significantly increase our marketing but at the same time the goal is we will hit long-term growth model this year.
+
+
+    Right. Thank you.
+
+Answer_3:
+
+    John, this is Gary. Thanks for the question.
+First, as Muhtar said in the prepared remarks, it's too early to tell what's going to happen in Mexico. We have planned around Mexico of what we believe is the most likely case, but we have a portfolio of brands that are marketed and sold across 200 countries, and our job is to manage that portfolio.
+So unless something unforeseen should happen, the answer has to be yes. It includes what could happen in Mexico. If that changes, we'll update you obviously, but we're going on what we believe would happened today.
+
+
+    And just to add to Gary's answer and to the second part of your question, John, I'll just tell you very simply that the Coca-Cola way is to grow our way to success. We invest for growth together with our bottling partners and we have the greatest system in the world.
+We have a tremendous amount of experience to say that good marketing, good selling works for our Business. And it will work for our business. We have numerous cases to prove that.
+We're going to continue to build on our marketing in both quantity and quality. This is a global increase in marketing.
+In every country that we operate in, large or small, we know it works. When we invest in marketing, our global partners invest in feet-on-the-street, in more coolers, in more trucks, in more [lines], and that's what we see happening. That's what we will see, we believe, happening to our Business as we restore steady momentum in through 2014 and beyond.
+
+Answer_4:
+
+    Judy, it's Gary. Let me take the first part of that question on the fourth-quarter operating profit declined was down 12% in the fourth quarter. By the way, I know the answer to this one specifically because I asked the same question some time back and got into the minute detail on it.
+100% of that change is because it's in all in OpEx, or primarily all in OpEx and it's what we're cycling from 2012. There were some incentive compensation accrual reversals in the fourth quarter of 2012 that did not happen in 2013. That cycling caused a significant change in OpEx swing year-on-year in the fourth quarter only and it's what swung North America to that 12% operating income loss.
+So it's much more reasonable to actually look at North America, look at it for the full year, and you'll get a better picture of actual performance versus the fourth quarter. When you look at the full year, then you will see that is where we've got some challenges, as Muhtar said, around volume and particularly in sparkling -- around diets and lights. But that's what we're specifically on.
+
+
+    Yes, just let me add to in terms of the outlook, and that is that, as I said, we are confident about and excited about, first, our performance our algorithm worldwide. But also in terms of steady improvement as we get back up to speed in the United States and that will -- when we start restoring the momentum in the United States, which we believe is going to happen, that will also bring the financial results that we will be happier with as we move into 2014 and beyond.
+It's going to take a while. This is not an immediate fix but we know that it's going to be a steady improvement.
+
+Answer_5:
+
+    Can't give you the specifics on the geographic mix, Judy, but as we announced, it's about $1 billion by 2016. And it is a global number.
+Again, there will be a good distribution. We will be again also looking and tracking through franchise leadership, resulting also system increase in investment in all the key markets.
+
+
+    Yes. See you Friday. Thanks.
+
+Answer_6:
+
+    Thanks, Dara. Sandy, you want to take the (multiple speakers) and then, Irial, you want to comment?
+
+
+    The key to the North America growth algorithm is investing in our brands and our feet-on-the-street. A key element to that is getting our pricing so that we can have the revenue to be able to reinvest in sustainable growth.
+Where we've had issues over the years, in my experience, in North America, is when we did not get the price we needed, when our marketing execution was not what it need to be, and therefore the feet-on-the-street started to get reduced and ultimately it hurt sustainable growth. Our plan going forward, and it's going to take some time, and we're focused on improving it, is to make sure that we get the price and that we execute the marketing well and feed the feet-on-the-street, which creates the virtuous cycle in the United States just like it does around the world. Irial, do you want to add to that?
+
+
+    The only comment I'd say -- Muhtar already mentioned that we are an industry leader. And industry leaders have to set the tone in terms of price, in terms of how to market the brand in any given markets.
+Actually less than 50 days in to my new involvement in North America, I'm really excited about the future. I'm excited about the enthusiasm, the passion of our people, our job -- mine, Paul's, Sandy's -- is really to make sure that excitement translates into performance and to results.
+As Sandy said, it's not going to happen overnight. I feel we've already started on the journey, and over the next quarters and next couple of years, you will see very positive momentum in our market in North America.
+
+Answer_7:
+
+    Yes. Nothing different than before. So no change.
+We're obviously very excited with our new opportunities for consumption as will be brought to us by the partnership with Green Mountain over time. The key is to fuel the power of partnerships.
+The Coca-Cola Company and system is an incredible integration of power of partnerships in every respect. And therefore, this is yet another one. So think about -- if you look at household consumption, in particular the Western markets, there's a tremendous opportunity to gain incremental consumption occasions for our brands through these kind of partnerships.
+This is what the Green Mountain partnership is all about. When you look at how beverages are consumed at home and when you look at trends in the next 10 years, people are going to spend more time at home.
+They're going to work more from home. Home is going to be an even more important place for people, for consumers. And we need to be present there with different technologies, different packaging, different ways to serve our brands, and that's why this is important and partnerships like these are going to be important for us over time going forward.
+Our thinking has not really evolved or changed in terms of bolt-on acquisitions. If we see opportunities, we will get them, like Innocent, like [Oshan] and so forth. And we will continue to seek new power partnerships -- to leverage new power partnerships also going into the remaining part of our 2020 Vision for the next six years.
+
+Answer_8:
+
+    First, Ali, I disagree with you. We have a great portfolio of brands; we have a great system, the best consumer product system in the world; and I believe that our programs will work and have worked.
+We've significantly outperformed and grown since 2010. Yes, we've had a speed bump and certainly that makes us even more focused and more resolute to continue on our road to 2020.
+We have -- I will share at CAGNY on Friday, the real reasons why we believe in our future. And so that's all I would say.
+
+Answer_9:
+
+    I understand. I understand it's easy for people to have very short memories. But we have the experience and we know what we are doing and we will continue to do what we believe and we are focused and we will execute the best and we will achieve our 2020 Vision.
+That's what this is all about. So that's what I will say.
+And we have talked about pricing. You've heard my colleagues also talk about pricing. And we don't want to repeat ourselves.
+
+
+    Thank you, Gary, Ahmet, Sandy, Irial, and Jackson. We've delivered sound full-year financial results. We're implementing the strategic actions that will enable us to restore momentum in 2014 and we see many reasons to believe that we can accelerate our growth over time, achieve our long-term growth model targets, and realize our 2020 Vision.
+Our global beverage industry is healthy. The trends that have historically fueled it continue to be strong, and our global systems' commitment and reach are unparalleled. This commitment has never wavered and the strategic decisions that we have made over recent years have not only enabled us to deliver solid financial results, they've also advanced our competitive position, enhanced our capabilities, and strengthened our resolve as a global system to achieve our 2020 Vision.
+That is our promise to our investors, to our customers, to our consumers, and the daily objective of the more than 700,000 associates of the Coca-Cola system all around the world. As always, we thank you for your interest, your investment in our Company, and for joining us this morning.
+

exam/original-files/Problem_2_3_Sample_QandA/25_questions.txt

@@ -0,0 +1,40 @@
+Question_1:
+
+    Can you please talk about the outlook geography-by-geography and then maybe how the pace of growth is going to differ between volume and pricing given some of the big currency moves and also obviously the tax in Mexico? I have a follow-up if I could?
+
+Question_2:
+
+    Just a follow-up to Bill's question, if we think about 2014 there's a lot of moving parts, with exchange rates and some of the volatility in emerging markets. Gary, could you talk a little bit about how we should think about currency-neutral and also maybe neutral of the effects of structural change?
+Are you still looking at a currency-neutral on-algorithm year in operating profits? And also just some of the other major drivers behind volume that might influence that cost of goods sold inflation, price mix, country mix, that sort of thing? That would be helpful?
+
+Question_3:
+
+    Just one quick follow-up to Gary's question and then a question for Muhtar or Gary to answer, rather. Gary, does that include a Mexico impact in hitting your long-term algorithm program in 2014?
+Then Muhtar, responding to Gary's question about ramping up the marketing, how do we view -- there's a sense out there in the market that given the headwinds for the category, that adding more marketing could be pushing on a string, so to speak. So what is it that you're seeing that says these headwinds that you are facing can be offset with higher marketing? Thanks.
+
+Question_4:
+
+    A few questions. First, just the North America, Gary, the profitability decline in fourth quarter was pretty surprising. So maybe you could give us a little bit color in terms of the components of the profit decline in North America?
+Just broadly in North America from a profitability perspective, the Business hasn't really grown since the acquisition of the bottlers. So as you think about the next couple of years, thinking about the refranchising opportunities, and all the productivity savings, are we at a point where we can actually see growth in this Business from a profitability perspective in 2014, or is this more of a transition year still with the investment that's going on?
+
+Question_5:
+
+    And just in terms of the media investments, is there any color you can give us in terms of the breakdown by regions, by categories? Is North America likely to get a disproportionate amount in terms of the media spending increase in 2014?
+
+Question_6:
+
+    I also wanted to touch on profit in North America. It sounds like, in 2013, you view the profit challenges as more driven from a volume perspective, but given that diet soft drinks worries seem to be more secular around longer-term health concerns, I'm just wondering if going forward, you may manage more for profitability and lean more on pricing than driving volume growth. Is there any change as you look at the algorithm between pricing and volume and which metric you'll focus on going forward?
+
+Question_7:
+
+    Okay, and then Muhtar, post the investment in Green Mountain, I was just hoping to get an update on how important a role acquisitions might play in meeting your 2020 Vision goals. You mentioned the focus on partnerships earlier in the call -- I was hoping you could elaborate there? And if acquisitions are a greater priority here given some of the difficult macro conditions and a somewhat favorable environment with your healthy balance sheet and still low rates here?
+
+Question_8:
+
+    The frustration I'm hearing from many investors and a lot of questions on this call is just that there's a feeling that the Company isn't doing enough to change itself, despite that the world around it has clearly changed and many, like us, believe secularly. There is continued emphasis on the Coca-Cola way and history, which is respectable in volumes, market share, spending even more on marketing, blaming some short-term externalities. But it's been a little while now that we've seen tougher volumes, North America profit pool continues to shrink, there's only $1 billion cost savings, when some of your competitors are doing more [only] from a pro rata basis. There is limited movement on refranchising your health innovations so far.
+So might the Company ever believe that it needs to focus on new levers of shareholder value creation, like pricing up even more, lower promotions, massive cost cutting, big portfolio or innovation change, and indeed returning more cash to shareholders? I know there's lots there, but should investors expect bigger, bolder change at KO to meet this truly different world and if so what should specifically should we be looking forward to, to just sharing in your confidence about the story, or should we just expect the same status quo, going forward?
+
+Question_9:
+
+    But I don't disagree with you about the strength of the brands at all actually, Muhtar. And I don't disagree with you about the strength of the system. I'm just looking at the results and I'm trying to figure out whether enough is changing, enough is different and whether you guys actually do you the world as different enough and so you're taking action but I actually don't disagree with you--?
+

exam/original-files/Problem_2_3_Sample_QandA/26_answers.txt

@@ -0,0 +1,120 @@
+Answer_1:
+
+    Thank you, Bill. 
+
+
+    Thank you, Bill. 
+
+Answer_2:
+
+    Thanks, Bill. Good morning. First let me say again, that I am pleased to report that our growth momentum is improving in line with our expectations. And in the midst of still -- continued volatility headwinds, achieving sequentially stronger 2% volume growth, that means delivering an incremental 100 million unit cases in the past 90 days or so. That means incrementally, every single day, an additional 27 million actual servings per each day. As the base grows, we are still very proud that we can continue to drive growth. 
+This is a quarter that is where Easter has shifted, where we were cycling 4% from prior year, whereas I said macro volatility continued, and where we had the harshest winter in northern hemisphere particularly in the US. We don't think this is a great result, but satisfying, as one step in the right direction to restore momentum. Germany, US was flat. In the past quarter, we think, given where -- what we went through and what economies and consumer and climate. Turkey was up 2%, Japan was up 3%. France was up 4%, Brazil was up 4%, India and Russia was up 6%. China was up 12%. These are -- these show, and give us the proof points that our actions are working. 
+And I think this is a quarter again where only a small fraction of our incremental marketing went -- was deployed. I would say probably around -- so 5% of our total incremental marketing for the year was deployed in this quarter. As we ramp up the quality and also quantity of our marketing, I believe that certainly we are going to drive better alignment. We have really good plans in place, fully aligned with our bottling partners. And I would be disappointed, as would be all my colleagues and associates, if we don't go back into the corridor of our long-term growth algorithm for volume growth. 
+But also importantly, we are driving not just volume growth, but we are driving immediate consumption growth. When you look -- which is really important for our business. When you look at -- say in this past quarter, of top five countries growing as -- China up 18% in IC growth. Indonesia up 9% in IC growth. Vietnam up 8%, Brazil up 5%. 
+These are really important numbers, because it is sustainable growth. It is profitable growth, and it is growth in transactions, which is directly married to the health of the brands, and the health of our portfolio. So from that perspective again, I want to just register cautious optimism that I feel we would be disappointed if we do not fall back into the corridor of our long-term growth algorithm for the remainder of the year, in terms of the volume growth picture, and also the other key metrics that follow on from there. 
+
+Answer_3:
+
+    Thanks, Bryan. 
+
+Answer_4:
+
+    Bryan, good morning. Last question first on Brazil, I think Brazil was out the gate first, in terms of the FIFA World Cup activation, a lot of noise around that, a lot of activation in stores. And I think that certainly, we also see a little less malaise in terms of the macroeconomic environment. So and again, in terms of also the relationship between durables and nondurable consumer goods was a little bit more in favor for us. 
+So we feel that is going to continue, and that Brazil will have a better year. And I think the government is also aware of what they need to do, as they lead into one of the biggest events in their history, which is hosting a memorable event like the World Cup. 
+As far as Mexico is concerned, I think sparkling volume for us was sort of in the mid single-digits decline for the first quarter. The important thing here is that, because of the strength of our brand, because of also the incredible richness of our packaged portfolio, and our occasion brand price pack channel architecture, the strength of that in Mexico, we are seeing that we are gaining market share, versus both local competitors and our international competitor in Mexico as well. And that -- and again, we -- it is too early days related to Mexico. But I would say that we are again, executing with great precision and passion in Mexico with our great bottling partners. 
+And then, in terms of price mix, including a favorable geographic mix, other points came as the result of high inflation in local markets. And again, I will ask Gary to comment related to the Venezuela piece. 
+
+
+    Yes, Bryan, Venezuela definitely contributed positively in the quarter to positive price mix. Now with going forward, that will no longer really be the case, because we have adjusted the -- as of the end of the quarter, we have adjusted the exchange rate and we will be using the [VEF]10.8 exchange rate going forward for most of the revenues, a large part of the revenues in Venezuela. So that will come down. But that impact is included in the latest currency forecast that I gave you. So again, some of the other currencies actually have improved from what we talked about in the February call, that offset now by Venezuela. So still at the same 7% impact. 
+
+Answer_5:
+
+    Oh, yes. (Multiple Speakers). Definitely positive price mix going in there. And I think the other thing to point out, and Muhtar said it, I said it. But I think it is really important as you look at this quarter how we drove value share ahead of volume share. So we are definitely focused on rational pricing across the world, and getting -- earning price. 
+
+
+    Thanks. 
+
+Answer_6:
+
+    Thanks, John. 
+
+Answer_7:
+
+    Yes. Well, I will try John, and we will see how this goes. But basically, they are -- let's go to marketing first, and let's talk about it in two different ways. One is, how much of the marketing is actually in the market. And that is what Muhtar was referring to, how much is -- of the marketing is actually hitting the consumer, and a lot of our incremental spend actually has not hit the consumer yet. It will -- it is much more weighted, starting in the second quarter going through Q4. A lot of the first quarter really focused on getting the quality of our marketing up, and that sort of thing. 
+That is different from the way we account for marketing, and marketing as you referenced is on the sales curve. So on the sales curve, that incremental marketing is included in what we expensed in the first quarter. Now, then we get into the marketing that we are cycling quarter by quarter from last year. And so, it was an increase in marketing. In the first quarter, the increase will significantly grow during the year based on what we are cycling. That is part of why I said, that 4 points of operating leverage will go to even to slightly positive, and we are also benefiting from some other timing in the first quarter in just some of the OpEx expenses as well. 
+
+Answer_8:
+
+    Yes. I would say the mood is positive, in terms of their willingness to invest, their appetite for new territories. I have always -- you have heard me say this before in terms of litmus test for the health of the business. There is a lot of appetite for growing in -- horizontally in territory, and trying to get -- expand. And I think in terms of the quality of our marketing, in terms of the quantity of our marketing, I feel that based on all the bottlers that I have [priced] in this past quarter, I feel good. 
+I feel positive about the sentiment, both here in the United States, as we start our path to franchising, and as we look at how we expand and how we hasten the pace of franchising, but also across the world. I have recently have been with many bottling leaders, and talked to many of them. We have a global system meeting next month. Also, about 50 of the top bottlers get together with their CEOs and Chairmen, and we are there to further align our plans for 2015 and beyond. But I feel good related to the plans in place, related to everyone's desire to execute better and to invest more into the future. 
+And again, based on the investments that have gone into the marketplace, in the third and fourth quarter of last year. I feel -- that is why I feel confident that you are going to see us back into the corridor of the 3% to 4% long-term growth algorithm for the balance of the year, as we keep restoring momentum. So that is what I would say. 
+Do we have some pockets of challenges? You mentioned Coca-Cola Amatil. I feel, again, very cautiously optimistic as Alison Watkins assumes her new role there, and we are working very closely with her and her team. And again, we are very much aligned as to how we move forward with SAB Miller and their management team related to their nonalcoholic beverage business. 
+
+Answer_9:
+
+    Thank you, Judy. 
+
+
+    Thank you. 
+
+Answer_10:
+
+    Thanks, Judy. I will ask Ahmet to give you a response onto your question. Ahmet? 
+
+
+    Yes, thanks, Judy. Yes, the results obviously for Europe for the first quarter was less than what we would have desired, with the minus 4%. A lot of things came into play with that. You mentioned that Easter obviously, that was definitely a factor. And Muhtar has mentioned the transition into a new future consumption pack in GB. 
+I would add to that, that there was sort of a pricing activity in the marketplace on future consumption packs that had also had some impact. And we are in very close discussion and alignment with our bottlers to make sure that we actually sort of respond in a way that we maintain rational pricing in the marketplace, but also balance volume growth and value growth at the same time. So that was one. 
+You mentioned southern Europe. The slight improvement that everybody sees in Iberia and Spain, that we see as well. Our numbers had a bit of noise in it, with regards to the strike in our Iberian bottling partners that you all have heard about before. We have had great mitigation plans in place and executed them. And the negotiations --  or sorry, the restructuring is expected to end in May, and we continue to see improvements in our Iberian business as well. So we expect, as we move into Quarter 2, remove the effect of Easter, fully implement our OBPPC in GB and continue to finish our restructuring in Spain, we expect to see improvements in Europe over the next quarter and the rest of the year. 
+
+Answer_11:
+
+    Yes, Judy, this is Muhtar. Let me frame again, just a couple important takeaways. For Britain, rational pricing was really the theme for us in Q1. And the very -- the strength of our marketing program, the strength of our commercial program leads us to believe that we will see improvement as we go into Q2 and Q3 and Q4 in Britain. That is the takeaway, I would say. 
+Again, the same phrase and motto for our US business, rational pricing. That is the takeaway. And we had 2% to 3% price mix in our sparkling portfolio in the US, and you will see that continuing. And I will ask Sandy to and Irial to reflect on further details on that for the year. 
+
+
+    Thanks, Muhtar. Pricing, we expect pricing for the full year in sparkling to actually improve from the first quarter. Our plans are in place with our customers. The market is rational. Our focus on immediate consumption growth will drive mix, and our rate should continue to be healthy, and even improve as we move through the second quarter and into the third quarter where we are lapping some promotional activity. So that is point one, 
+Point two is, on stills, the case pack water business continues to grow, so it pulls down mix. We see opportunities, however, on a targeted basis in our bottle can stills to improve pricing, and we will take action to do that. Paul, Irial and I see opportunities on a category by category basis. 
+And then finally, in our chilled juice business, we have just fielded a significant price increase to respond to the commodity issues with our orange juice in Florida, and that is taking root. And our juice business continues to be advantaged from a share perspective. 
+And I think all of that wraps up, from a pricing standpoint to a much more favorable profit outlook for the full-year. I mean, we saw some timing related issues, and obviously we have talked about having 1 less selling day in the first quarter. But all of that is going to come to do with our price and volume plan for the year to produce profit growth for the full year. Irial? 
+
+
+    Yes. The only add I would give is, we are about building a long-term sustainable profitable business in the US. And to do that, we must have a balance of pricing and volume growth. And pricing is a really critical part of that, and we will in this year end up with sparkling in the 2% to 3% range in pricing, or price mix, I should say. 
+And that is really it, and that is what we are focused on. That is what Sandy, and the team, Paul and the team, all of us together are focused on delivering that -- delivering a healthy business that is going back to growth as well. 
+
+Answer_12:
+
+    Yes. Michael, this is Muhtar I will say, just a couple of top line, and then ask again, Ahmet to contribute. But I will repeat what I said about IC, particularly pleasing was China, IC  was up 18%. Indonesia, IC was up 9%, Vietnam up 8%. These are really important for us when --  as we drive profitable growth in our business. And again, our newly architected packaging portfolio in China is really working with the smaller packs and the new price points. 
+And I think also, the new team certainly is really delivering what we expect of them, as well as our bottlers with renewed focus. Both the Bottling Investments Group but also Swire as well as COFCO are really doing a good job in the first quarter. And I think a lot of really good investments and activity and commercial leadership is in place to continue to drive that momentum, both in the stills as well as in the sparkling portfolio in China. And so, again Ahmet, if you want to just -- (Multiple Speakers). 
+
+
+    Yes. Thanks, Muhtar. Yes, I think, Michael, you have listed a lot of reasons. But my headline would be, it is all of the above. But let me color it a little bit. 
+Certainly, the new team and the new strategy that we covered with you last year is really coming together nicely, and we are happy with the quality of the growth. Sparkling is growing. Juices are growing and those are the categories that we have told you that we were betting on for our growth in China. 
+You might see us -- growth in waters. That is an important category. But we just had some recent launches into a [RMB2] water, which improves the profitability of that. Very, very early days, and it is doing well. Also, we are quite encouraged with, again very early results on some of our innovations with Schweppes and plus. And just a couple weeks out, the plans is our isotonic. So we are getting that good mix of sparkling juices and innovation that is beginning to work for us. 
+I would just caution us though, you did mention the easier cycle rates from last year. That is definitely the case, and 12% growth we are very happy with. But we would expect to see growth in China, continued growth in China, probably in the range of mid to high single-digits that we could expect over time. So that is basically -- I think covers everything. 
+
+
+    And just one other point I would highlight, Michael, is Japan, very pleasing that it grew 3%, 3% in sparkling and stills grew 4% in Japan in the quarter. And again, despite the longest monsoon that I have ever experienced in terms of seasons and how long it took, India grew 6% and should do much better going forward. So and again, I am certainly very proud that this is the 31st consecutive quarter of growth in India for us, including continued share gains. 
+
+Answer_13:
+
+    Yes, and again, Michael, that is very important market for us, and we have been focused on aligning with our bottling partner, Amatil, there on a new plan. Or let's say, an evolved plan as was the case in China with the revised OBPCC investments in sparkling and still beverages. There has been a recent change in management in -- on the ground. And all of that again, we are cautiously optimistic about the progress we are making in Indonesia, are beginning to deliver good results. And certainly, that market has a -- has so much more opportunity to grow in the coming years. 
+
+Answer_14:
+
+    Thank you. 
+
+Answer_15:
+
+    Now -- no changes as far as my perspective is concerned. And I can confirm that both our entire team, as well as our bottling partners feel the same way as a system. We are blessed to be in a great business, both in the sparkling area, as well as in the stills. We continue to innovate. I believe that we have a great future, where so many hundreds of millions of people in so many large markets haven't tasted a Coca-Cola in the last month, or in the last six months, or in the last year. 
+We have tremendous opportunity going forward. And I believe that innovation, packaging, equipment and great marketing will continue to grow our business going forward, both in sparkling and in stills. And I feel confident that we will go back into the corridors of our long-term growth algorithm this year and years to follow. 
+And with new innovations, like creating new paths to consumption, creating new consumption occasions like the Keurig Green Mountain innovation, like Freestyle that is driving, we know everywhere, every time, it is actually installed in an outlet, it drives traffic, it drives incidence, it drives increased sales, and it drives excitement for the consumer. 
+And at the same time, our contour packages, you will see us being focused much more on the contour. Next year is the 100th anniversary of the contour bottle, the iconic contour bottle. You will see a lot of activity around that also. So we feel we have a lot of work to do. But we feel that, isn't that a great place, where you have a lot of work to do, and you believe in your future. 
+
+Answer_16:
+
+    I think they will -- I am certain innovation is going to be impactful, and I can't give you any more details on timing. 
+
+
+    Yes. Sure. So just thank you again, Gary, Kathy, Ahmet, Sandy, Irial, Jackson, we are just once again, firmly committed to advancing our growth trajectory in 2014. Our strategic priorities are yielding tangible and measurable results, and they are consistent with our long-term goals, and our overarching business strategy. Increased marketing investments and a focus, a relentless focus on execution underscore the confidence we have in our systems alignment, as we seek to execute these strategies, while we further strengthen the foundation for profitable and sustainable long-term growth. 
+Our 2020 vision calls for a well-balanced growth, that is growth in sparkling beverages, and also growth in still beverages across more than 200 markets, countries, and in revenues and margins. And thanks to this balanced growth in both portfolio, as well as geographic mix, we see a path that leads to global volume, revenue and profit growth in line with our long-term targets. Our focus is unwavering, and our execution of our five strategic priorities is going to enable us to restore momentum for growth to our business. Thank you for your time this morning, and for your continued interest and trust in our Company. 
+