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