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. -------------------------------------------------------------------------------- Definitions -------------------------------------------------------------------------------- PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the Transcript has been published in near real-time by an experienced professional transcriber. 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