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Thomson Reuters StreetEvents Event Transcript
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E D I T E D V E R S I O N
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Q4 2013 Amazon.com Inc Earnings Conference Call
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01/30/2014 02:00 PM GMT
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Corporate Participants
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* Tom Szkutak
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Amazon.com Inc - CFO
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* Dave Fildes
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Amazon.com Inc - Senior Manager, IR
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Conference Call Participiants
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* Robert Coolbrith
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CRT Capital - Analyst
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* Tom Forte
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Telsey Advisory Group - Analyst
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* Scott Devitt
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Morgan Stanley - Analyst
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* Justin Post
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BofA Merrill Lynch - Analyst
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* Greg Melich
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ISI Group - Analyst
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* Chad Bartley
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Pacific Crest Securities - Analyst
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* Brian Pitz
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Jefferies & Company - Analyst
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* Douglas Anmuth
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JP Morgan - Analyst
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* John Blackledge
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Cowen and Company - Analyst
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* Youssef Squali
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Cantor Fitzgerald - Analyst
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* Gene Munster
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Piper Jaffray & Co. - Analyst
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* Heath Terry
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Goldman Sachs - Analyst
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* Ronald Josey
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JMP Securities - Analyst
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* Mark Mahaney
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RBC Capital Markets - Analyst
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* Brian Nowak
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Susquehanna Financial Group - Analyst
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* Ross Sandler
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Deutsche Bank - Analyst
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* Mark May
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Citi - Analyst
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* Carlos Kirjner
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Sanford C. Bernstein & Company, Inc. - Analyst
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Presentation
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Operator [1]
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Thank you for standing by. Well, good day, ladies and gentlemen, and welcome to the Amazon.com Q4 2013 financial results teleconference.
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(Operator Instructions)
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Today's conference is also being recorded.
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Now for opening remarks, I will turn the call over to the Senior Manager of Investor Relations, Dave Fildes. Please go ahead, sir.
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Dave Fildes, Amazon.com Inc - Senior Manager, IR [2]
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Hello, and welcome to our Q4 2013 financial results conference call.
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Joining us today is Tom Szkutak, our CFO. We will be available for questions after our prepared remarks.
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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.
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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.
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Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2012.
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Now I will turn the call over to Tom.
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Tom Szkutak, Amazon.com Inc - CFO [3]
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Thanks, Dave.
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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.
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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.
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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.
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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.
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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%.
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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.
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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%.
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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%.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Thanks. And with that, Dave let's move to questions.
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Dave Fildes, Amazon.com Inc - Senior Manager, IR [4]
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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?
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Questions and Answers
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Operator [1]
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Absolutely, Mr. Fildes.
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(Operator Instructions)
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Our first question will come from Mark May with Citi.
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Mark May, Citi - Analyst [2]
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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?
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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?
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Tom Szkutak, Amazon.com Inc - CFO [3]
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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.
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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.
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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.
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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.
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Operator [4]
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Our next question will come from Neil Doshi with CRT Capital.
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Robert Coolbrith, CRT Capital - Analyst [5]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [6]
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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.
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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.
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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.
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Operator [7]
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Moving on to Douglas Anmuth with JP Morgan.
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Douglas Anmuth, JP Morgan - Analyst [8]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [9]
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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?
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Douglas Anmuth, JP Morgan - Analyst [10]
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4Q, I think you talked about sign-ups being constrained in the quarter?
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Tom Szkutak, Amazon.com Inc - CFO [11]
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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.
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Douglas Anmuth, JP Morgan - Analyst [12]
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Thank you.
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Operator [13]
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We will move on to Scott Devitt with Morgan Stanley.
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Scott Devitt, Morgan Stanley - Analyst [14]
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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?
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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.
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Tom Szkutak, Amazon.com Inc - CFO [15]
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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.
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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.
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Scott Devitt, Morgan Stanley - Analyst [16]
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Thank you.
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Operator [17]
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Our next question comes from Justin Post with Bank of America Merrill Lynch.
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Justin Post, BofA Merrill Lynch - Analyst [18]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [19]
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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.
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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.
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Justin Post, BofA Merrill Lynch - Analyst [20]
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Great. Thank you.
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Operator [21]
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We will now hear from Brian Nowak with Susquehanna.
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Brian Nowak, Susquehanna Financial Group - Analyst [22]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [23]
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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.
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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.
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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.
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Brian Nowak, Susquehanna Financial Group - Analyst [24]
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Thank you.
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Operator [25]
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We will now hear from John Blackledge with Cowen and Company.
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John Blackledge, Cowen and Company - Analyst [26]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [27]
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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.
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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.
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John Blackledge, Cowen and Company - Analyst [28]
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Great, thanks. And the North American and electronics and other goods segment, just wondering if there are any particular categories that drove the growth?
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Tom Szkutak, Amazon.com Inc - CFO [29]
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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.
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Operator [30]
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Mark Mahaney with RBC Capital Markets has the next question.
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Mark Mahaney, RBC Capital Markets - Analyst [31]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [32]
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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?
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Mark Mahaney, RBC Capital Markets - Analyst [33]
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Did you want to call out anything related to weather and UPS?
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Tom Szkutak, Amazon.com Inc - CFO [34]
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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.
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Mark Mahaney, RBC Capital Markets - Analyst [35]
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Thanks, Tom.
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Operator [36]
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Moving on to Carlos Kirjner with Bernstein Capital
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Carlos Kirjner, Sanford C. Bernstein & Company, Inc. - Analyst [37]
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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?
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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.
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Tom Szkutak, Amazon.com Inc - CFO [38]
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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.
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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.
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Operator [39]
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Greg Melich with the ISI Group has the next question.
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Greg Melich, ISI Group - Analyst [40]
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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?
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Tom Szkutak, Amazon.com Inc - CFO [41]
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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.
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Greg Melich, ISI Group - Analyst [42]
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There is no prohibition to that, but you sort of like it the way it is?
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Tom Szkutak, Amazon.com Inc - CFO [43]
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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.
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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.
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Operator [44]
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Moving on to Ron Josey with JMP Securities.
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Ronald Josey, JMP Securities - Analyst [45]
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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?
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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.
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Tom Szkutak, Amazon.com Inc - CFO [46]
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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.
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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.
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Ronald Josey, JMP Securities - Analyst [47]
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Thank you.
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Operator [48]
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We will now hear from Chad Bartley with Pacific Crest.
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Chad Bartley, Pacific Crest Securities - Analyst [49]
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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?
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Tom Szkutak, Amazon.com Inc - CFO [50]
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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?
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Chad Bartley, Pacific Crest Securities - Analyst [51]
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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?
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Tom Szkutak, Amazon.com Inc - CFO [52]
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They were independent decisions. They weren't related.
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Chad Bartley, Pacific Crest Securities - Analyst [53]
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Thank you.
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Operator [54]
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Thomas Forte with Telsey Advisory Group has the next question.
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Tom Forte, Telsey Advisory Group - Analyst [55]
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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?
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Tom Szkutak, Amazon.com Inc - CFO [56]
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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.
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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.
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Tom Forte, Telsey Advisory Group - Analyst [57]
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Thank you.
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Operator [58]
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Moving on to Brian Pitz with Jefferies.
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Brian Pitz, Jefferies & Company - Analyst [59]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [60]
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Hello? Could you repeat the question, please?
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Brian Pitz, Jefferies & Company - Analyst [61]
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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?
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Tom Szkutak, Amazon.com Inc - CFO [62]
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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.
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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.
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Operator [63]
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Heath Terry with Goldman Sachs has the next question.
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Heath Terry, Goldman Sachs - Analyst [64]
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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?
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Tom Szkutak, Amazon.com Inc - CFO [65]
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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.
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Brian Pitz, Jefferies & Company - Analyst [66]
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Great. Thank you.
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Operator [67]
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We will now hear from Yousef Squali with Cantor Fitzgerald.
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Youssef Squali, Cantor Fitzgerald - Analyst [68]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [69]
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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.
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Youssef Squali, Cantor Fitzgerald - Analyst [70]
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And on the PLAs?
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Tom Szkutak, Amazon.com Inc - CFO [71]
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I can't comment.
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Youssef Squali, Cantor Fitzgerald - Analyst [72]
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Okay, thank you.
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Operator [73]
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Our next question will come from Ross Sandler with Deutsche Bank.
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Ross Sandler, Deutsche Bank - Analyst [74]
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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.
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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.
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Tom Szkutak, Amazon.com Inc - CFO [75]
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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.
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Operator [76]
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Now ladies and gentlemen, we have time for one additional question from Gene Munster with Piper Jaffray.
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Gene Munster, Piper Jaffray & Co. - Analyst [77]
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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.
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Tom Szkutak, Amazon.com Inc - CFO [78]
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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?
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Gene Munster, Piper Jaffray & Co. - Analyst [79]
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Yes.
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Tom Szkutak, Amazon.com Inc - CFO [80]
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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.
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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.
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Gene Munster, Piper Jaffray & Co. - Analyst [81]
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Got it. Thank you.
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Dave Fildes, Amazon.com Inc - Senior Manager, IR [82]
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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.
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Operator [83]
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And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.
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