Inc. Q2 2009 Earnings Call Transcript

 |  About:, Inc. (AMZN)
by: SA Transcripts


Welcome to the second quarter 2009 financial results teleconference. (Operator Instructions) For opening remarks I will be turning the call over to the Vice President of Investor Relations, Mr. Rob Eldridge.

Rob Eldridge

Hello, and welcome to our Q2 2009 financial results conference call. Joining us today is Tom Szkutak, our CFO. As Jeff is traveling today, Tom and I will be available for Q&A.

The following discussion or responses to your questions reflect management's views as of today, July 23, 2009, 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 call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter.

During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this Web cast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2008. Now, I'll turn the call over to Tom.

Thomas J. Szkutak

I will begin with comments on our financial results.

Trailing 12-month free cash flow grew 89% to $1.54 billion. Return on invested capital was 42%, up from 29%. ROI fee is trailing 12-month free cash flow divided by average total assets minus current liabilities, excluding the current portion of long-term debt over five quarter ends.

The combination of common stock and stock-based awards outstanding was 451.0 million shares compared with 446.0 million.

Worldwide revenue grew 14% to $4.65 billion, or 20%, excluding the $227.0 million unfavorable impact from year-over-year changes in foreign exchange rates.

Media revenue increased to $2.44 billion, up 1% or 7% excluding foreign exchange rates.

EGM revenue increased to $2.70 billion, up 35% or 41% excluding FX. Worldwide EGM increased to 45% of worldwide sales up from 38%.

Worldwide unit growth was 28%. Active customer accounts exceeded 94.0 million, up 16%.

Worldwide active seller accounts were more than 1.7 million, up 21%. Seller units were 30% of total units.

Worldwide gross profit was $1.13 billion, up 17%.

Now we will discuss operating expenses, excluding stock-based compensation. Fulfillment, marketing, technology, and content and G&A combined was $829.0 million, or 17.8% of sales, unchanged year-over-year.

Fulfillment was $389.0, or 8.4% of revenue, while tech and content was $253.0 million, or 5.5% of revenue. Marketing was $124.0 million, or 2.7% of revenue, up 23 basis points from the prior year.

Now I will talk about our segment results, and consistent with prior periods, we cannot allocate the segments or stock-based compensation or other operating expense, income net line item.

In the North America segment revenue grew 13% to $2.45 billion. Media revenue was flat at $1.15 billion with declines in some categories, particularly video games and video game consoles offset by growth in books.

EGM revenue grew 29% to $1.19 billion, representing 48% of North America revenues, up from 42%.

Kindle sales continue to exceed our expectations and we reduced the price of Kindle, the number one best seller in our consumer electronics store, to $299.

North America gross profit grew 20% to $672.0 million and gross margin increased 161 basis points to 27.4%, driven by increases in third-party product sales, improvement in inventory management, including vendor pricing, partially offset by lower prices for our customers and changes in product mix.

North America segment operating income increased 30% to $125.0 million, a 5.1% operating margin.

In the international segment revenue grew 16% to $2.2 billion. Revenue growth was 28% adjusted for the $221.0 million year-over-year unfavorable foreign exchange impact during the quarter.

Media revenue grew 3% to $1.29 billion, or 12% excluding FX, and EGM revenue grew 45% to $882.0 million, or 60% excluding the impact from foreign exchange rates. EGM now represents 40% of international revenues, up from 32%.

International gross profit grew 13% to $461.0 million, or grew 27% excluding FX, while gross margin decreased 56 basis points to 20.9%, driven by low prices for our customers and changes in product mix, partially offset by improvements in inventory management, including vendor pricing and increases in 3-P product sales.

International segment operating income increased 20% to $179.0 million, an 8.1% operating margin. Excluding the unfavorable impact from foreign exchange rates, international segment operating income increased 43%.

CSOI grew 24% to $304.0 million, or 6.5% of revenue, up 51 basis points year-over-year. Excluding the $30.0 million unfavorable impact from foreign exchange rates, CSOI grew 37%.

Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense income. GAAP operating income fell 27% to $159.0 million, or 3.4% of net sales. Second quarter 2009 operating income included the impact of our settlement with Toys R Us for $51.0 million, substantially all of which as expensed during the quarter. A one-time payment from will take place in the third quarter of 2009.

Additionally, included in the second quarter of 2008 GAAP operating income, was a $53.0 million non-cash gain recognized on the sale of our European DVD rental assets.

Our income tax expense was $39.0 million in Q2, or a 22% rate for the quarter. GAAP net income was $142.0 million, or $0.32 per diluted share, compared with $158.0 million and $0.37 per diluted share.

Turning to the balance sheet, cash and marketable securities increased $831.0 million year-over-year to $3.21 billion. Our cash and marketable securities primarily consist of cash, government, and government agency securities, triple- A-rated money market funds, and other investment grade securities. Such amounts are recorded at fair value.

Inventory increased 20% to $1.32 billion and inventory turns decreased to 12.4 from 13 a year ago as we expanded selection, improved in-stock levels, and introduced new product categories.

Accounts payable increased 28% to $2.51 billion and accounts payable days increased to 65 from 58 in the prior year.

Our investment in net fixed assets increased $330.0 million from a year ago to $981.0 million. Our Q2 2009 capital expenditures was $78.0 million.

Yesterday we announced the acquisition of Zappos. Zappos is a customer-focused company. We see great opportunities for both companies to learn from each other and create even better experiences for our customers.

I will conclude my portion of today's call with guidance. Incorporated into our guidance are the trends that we've seen today and 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 and therefore our actual results could differ materially from our guidance.

As we have described in more detail in our public filings, issues such as settling intercompany balances and foreign currencies amongst our subsidiaries, unfavorable resolution of legal matters, and changes to our effective tax rates can all have a material effect on guidance.

Our guidance excludes Zappos' financial results and assumes that we don't conclude any additional business acquisitions or investments, record any further revisions to stock-based compensation estimates, and that foreign exchange rates remain approximately where they've been recently.

For Q3 we expect net sales of between $4.75 billion and $5.25 billion, a growth of between 11% and 23%. This guidance anticipates approximately 150 basis point of negative impact from foreign exchange rates.

GAAP operating income to be between $120.0 million and $210.0 million, or between 22% decline and 36% growth. This includes approximately $95.0 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 $250.0 million and $305.0 million, or between 7% decline and 32% growth.

We anticipate our free cash flow growth rate to trend similar to our operating profit growth rate over time with some variability, including some changes in working capital and excess tax benefits from stock-based compensation.

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.

With that, let's move to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Mark Mahaney - Citi.

Mark Mahaney - Citi

I would like to ask about North America trends, particularly gross margins and media sales, and to what extent there's a link there. Last quarter you had a pretty positive gross margin trend. You repeated this quarter. But last quarter it seemed to be because of some unusual access to inventory. Was that effect still in place in the second quarter, or is there something going on in terms of the mix shift within media sales towards digital products that's really boosting those gross margins?

Thomas J. Szkutak

I'll start with the gross margin question. We saw in North America, and in international, we saw very solid 3-P product sales so 3-P is certainly impacting margins. We had very execution on a lot of other areas, including inventory management. We had very good pricing with our suppliers, which was offset partially, certainly, by lower prices for our customers, as well as product mix.

So that's really what is driving the gross margins.

In terms of the North America media growth, we saw, and just as a reminder, as I mentioned on the last call, we had very strong revenue growth Q2 of last year, which includes, if you look at it versus any other quarter over the past several quarters, it's our strongest quarter, including the growth that we saw in North America media which was up 25%.

And we had some declines in some categories, particularly video games and consoles. Video games and consoles were very, very strong last year and we had both console growth and video games themselves being strong growth. Three of our four best releases of last year were released during Q2, including wii fit. And so that was included in our Q2 last year and was driving the growth last year and we're overlapping that. And what you're really seeing is an industry slowdown in video games and consoles.

And then we had books growth offsetting that decrease. So those are the factors that were included in there.

And just another note. On the video games, even though we saw a decline, we're actually very happy with that category. We have added a lot of selections since last year. Our in-stock levels have improved dramatically from last year and there's a number of other things that the team has done to make that customer experience even better. So we are very pleased with the customer experience we're providing there and what we're seeing is an industry slowdown, which we saw the effect of that in our growth rates.


Your next question comes from Jeetil Patel - Deutsche Bank.

Jeetil Patel - Deutsche Bank

As you look at fulfillment by Amazon, can you talk a little bit more about the impact you're seeing from FBA on the businesses in the form of just margin contribution. Is it in the form of unit growth or just a pickup in customer growth. A little bit more on how FBA so far is influencing the businesses or effecting the business.

Second, if you look at Prime internationally, is Prime internationally helping to drive the same behavior trends by region in the U.K., German and Japanese markets as you rolled it out and you've been in there for about a year and a half to two years now.

Thomas J. Szkutak

Those two programs, specifically, we're extremely pleased with. Prime, on a global basis, is doing very well and in international we're seeing very similar trends to what we saw when we launched in the U.S. It's been very successful for us. When you look at our international growth rate up 28% year-over-year on a local currency basis, and that's with, actually if you look compared to Q2 you saw a 28% growth rate as well in Q2 but we had a favorable comparison with the Easter holiday and an unfavorable comparison in Q2. So we had very strong growth rate and certainly Prime is helping that growth rate.

In terms of FBA, there's not a lot in terms of specifics from a margin standpoint I can provide today.

But Prime is growing very well and it's certainly impacting our third-party growth and our third-party growth, from a units perspective, is 30% as percentage of total units, which was up by year-over-year, again, in Q2. So we're pleased with the growth rate and certainly FBA is contributing to that.

Jeetil Patel - Deutsche Bank

Is the biggest influence on units or customers? Customer adds.

Thomas J. Szkutak

There's not a lot I can add to that. I apologize.


Your next question comes from Mary Meeker and Scott Devitt - Morgan Stanley.

Mary Meeker - Morgan Stanley

To extend on Mark Mahaney's question a little bit, you said in effect you're not really a slowdown in your media business from any digital transitions that are taking place in music or video?

And another question, is you EGM business is doing extremely well, can you correlate any of the things that are going on with digital media transitions with upticks in your products that play those products, if you will?

And then on mobile, and question for Jeff, we're seeing tremendous e-commerce momentum in other parts of the world and we're starting to see it in the U.S. You have a great app for Amazon on the iPhone and you have a great Kindle app, you have a great Stanza app. Is it your view that mobile can be a material portion of Amazon's revenue in the next few years?

Thomas J. Szkutak

I'll take the media one first. Certainly there's, industry, there's some certainly slowness in some of the media categories. And we're seeing some of that slowness reflected in the North America results that you see. But in terms of what's happened recently, from a trend standpoint, it's clearly the challenging pair that we had versus last year, as well as the video games impact that I mentioned.

In terms of digital, it's still very early, and we're very pleased with what we're seeing in terms of growth of our various digital products that we offer, techs, video and music. But it's still very early, and we're seeing very good unit growth there and we're very pleased with what we see there.

From an EGM perspective, there's not a lot I can give you in terms of the individual growth rates of some of those items that you mentioned, but we're seeing very good broad-based growth within EGM. We did see some slowness to some of the higher selling priced items but outside of that we're very pleased with what we're seeing.

Overall unit growth globally remains very strong so we're very pleased with that.

In terms of mobile, it's a great question. And I apologize, Jeff is not on the call today. He's traveling and just from a scheduling standpoint it didn't work. But again, we certainly think that mobile is an opportunity. As you mentioned, there are a number of applications that we have. We are going to continue to innovate in that space and it's difficult to say how big that could be over time but it's certainly something that we're excited about and we are investing in.

Scott Devitt - Morgan Stanley

The operating margin guidance that you gave, the midpoint was 5.2% and this quarter, in the second quarter, the midpoint of your guidance was 5.3%. You did 6.5%, which was the highest operating margin since the third quarter of 2005, so I understand there's some one-time dynamics going on in the industry right now, but you didn't have great visibility to that over performance in Q2 and I was just wondering if you could speak a little bit to the conservatism in the midpoint of your operating income in Q3.

Thomas J. Szkutak

We gave guidance of 215 to 305 from a CSOI perspective, which is implied operating margin of 4.5% to 5.8%, so from the upper end of the guidance, at 5.8%, that's about 40 basis points above last year. And so, again, we think that reflects the right range for the quarter.

One thing to keep in mind, though, is as you look at Q2 to Q3, those numbers that we were just talking about were the absolute and then comparing them year-over-year, when you look at it sequentially from Q2 to Q3, keep in mind that Q3 historically is a quarter that we're getting ready for our largest seasonal quarter, Q4, and so there are certainly expenses that are included in that quarter to get ready for, for example, adding additional capacity, and certainly with the growth that we've seen, particularly in international, we are adding capacity to get ready for Q4. So that's reflected in our Q3 guidance and it's typical at this time to be doing that based on getting ready for Q4.

So again, that's one of the reasons why you saw a decline last year as well.


Your next question comes from James Mitchell – Goldman Sachs.

James Mitchell – Goldman Sachs

Looks like your sales and marketing costs pick up a little bit as a center of revenue by quarter-over-quarter and year-over-year. Could you talk about what's going on behind that.

And also if you could discuss your effective tax rate.

Thomas J. Szkutak

From a marketing perspective it was 2.7% of revenue. The range over the past several quarters has been in the low 2%'s, 2.2% to 2.7% I believe. So it was a little bit on the higher end of the range. But again, I wouldn't read too much into that. It's just based on the opportunities we saw within the quarter, looking at new customer acquisitions. So gain, I don't think there's anything really meaningful to talk about there.

In terms of effective tax rate, the way I'm thinking about is if you look at the effective tax rate for the half, it's a little bit over 25%. Keep in mind that we had a one-time item, Toys R Us, which was $51.0 million. Substantially all of that would be in that number, which is tax effected at the U.S. tax rate. So that's bringing it down a bit. It's a one-time event so if you back that out the tax rate would be a little bit higher than that, which would reflect essentially the projection for the year.


Your next question comes from Imran Khan – J.P. Morgan.

Imran Khan – J.P. Morgan

I think in the past you talked about how you are not seeing cannibalization from Kindle. I think you talked about like how average Kindle owners are buying 1.8 books. Can you give us an update on that number, what kind of trend you are seeing now that you have a larger Kindle owner.

And secondly, I think you talked about that you are seeing healthy growth in the third-party and international business, but international gross profit margins I believe was down on a year-over-year basis, roughly 50 basis points. Could you give us some color to understand why.

I think you talked about that you are seeing healthy growth in the third-party and international business, but international gross profit margins I believe was down on a year-over-year basis, roughly 50 basis points. Could you give us some color to understand why.

Thomas J. Szkutak

I'll take the third-party first, for international. What you're seeing there is we did actually see very good third-party growth in international. One thing to keep in mind is when you look at our overall growth rates in international, we saw extremely strong EGM growth accelerated to 60% year-over-year on a local currency basis. Many of those categories, if you look back over the past few years, we've launched a number of new categories in EGM in international. And when we launch new categories oftentimes the gross margins are lower, again, as we're starting out in those categories.

So that's reflecting the product mix. But if you look at our overall international gross margins, we certainly saw strong third-party growth, very good vendor management, very good inventory management. But certainly partially offset by the mix that I'm talking about as well as lower prices for customers.

In terms of the Kindle units, we're not doing any updates in terms of the units, in terms of specific numbers today, but we're seeing very, very good growth and we are extremely happy with the growth that we're seeing there and it's exceeding our expectations.


Your next question comes from Gene Munster – Piper Jaffray.

Gene Munster – Piper Jaffray

There's been a lot of talk about the tax rate and some third-party affiliates and the impact and some of the jockeying around where taxes are ultimately going in terms of sales tax. Can you give us how, just generally, you think about the sales tax question over the next several years.

Thomas J. Szkutak

It's one of these where we've been working for quite a few years with the states on the streamline sales tax act. Beyond that it's really hard to comment on what will happen going forward.

Rob Eldridge

It's important to remember that more than 50% of our business is conducted in areas where consumption tax, the VAT tax through the equivalent of sales tax are taking place are in international geographies. And we now collect sales taxes in five states in the United States. So we have very strong businesses in our international business as you can see from today's results.

Gene Munster – Piper Jaffray

So do you think ultimately that sales tax will be part of as 100% of sales in the next five years, say?

Thomas J. Szkutak

We can't speculate what will happen going forward.


Your next question comes from Justin Post – Merrill Lynch.

Justin Post – Merrill Lynch

On the media sales decline, when you think longer term, do you think you might see some pressure on revenues but the overall gross margins per unit going to hang in there because of digitization and could you actually see a margin improvement offset lower prices for insales.

And tech and content looks like it ticked up $24.0 million quarter-over-quarter. I wondered if you had any comments you could share with us on where you're allocating that money.

Thomas J. Szkutak

The way I think about the gross margins for our digital business is if you look at our overall digital business, it's very early. Think of it that we're investing, in the investing mode. And over time we think we can get very good returns for shareholders. And we think that there's a lot of room for us and content owners and publishers to do well there. And we think that we will get good returns over time.

In terms of tech and content, there are a number of things that are going in there. You can see from our employment numbers that the growth is approximately 14% year-over-year. It slowed from past quarters but we did still see a sequential increase of about 400 people. Some of those people are certainly going to tech and content, investing in areas like digital and Web services and other areas, which are certainly reflected in the tech and content costs.


Your next question comes from Douglas Anmuth – Barclays Capital.

Douglas Anmuth – Barclays Capital

Can you comment on the unearned revenues line, and in particular it looks like you've had a very good consistent trend there over the last several quarters, which I believe is probably fueled by Prime and the Kindle and you said that you're pretty comfortable with where both of those products are, but basically we're seeing from Q1 to Q2 a flat number in unearned revenue, so if you could provide some clarity on that I would appreciate it.

Thomas J. Szkutak

There are a number of things that go in there, including the items that you mentioned. You know, we do amortize the sale of Kindles over two years in the month following the sale, we are amortizing the Prime subscriptions. There's also other partner relationship revenues that go into that online that do some amortization and beyond that it does bounce around a bit as you can see from the trend, but beyond that there's not a lot I can add from a color perspective.

Douglas Anmuth – Barclays Capital

You mentioned earlier that Prime growth was pretty good. Is there any reason to think that there's any slowdown here in terms of new members coming on board?

Thomas J. Szkutak

No, in fact Prime growth is very strong and obviously, from our other discussions, Kindle growth is very strong. So, no, we're seeing strong growth in both areas.


Your next question comes from Youssef Squali – Jefferies & Company.

Youssef Squali – Jefferies & Company

You have lowered prices on Kindle, how should we be thinking about the driving force there? Did you get enough cost scale to still keep margins relatively unchanged or did you lower price to just increase penetration.

And secondarily, on the affiliate question, as you've pulled back out of certain states, I think North Carolina, Rhode Island, and a few others, are there affiliates in other states or are you moving some of that money to other ROI channels, like search, etc. And which one has better ROI?

Thomas J. Szkutak

We use a number of different channels on the marketing side and we are just looking at what's the most effective way to make that spend and where do we think it drives incremental value to shareholders over time. And so that's not something new. There's no change there, from that perspective. And we use a number of different channels from a paid channel perspective. We also have our associates' channel as well, so there's not a lot new there from that perspective.

And then in terms of Kindle, we certainly are getting better economies and given the growth on Kindle devices and we think that that's an appropriate price for customers and we think that it's certainly, given the growth that we're seeing.


Your next question comes from Jeffrey Lindsay – Sanford Bernstein.

Jeffrey Lindsay – Sanford Bernstein

Could you give us any sense of whether Zappos is going to be dilutive or accretive to earnings? And could you give us a sense of the post-merger integration planning for that acquisition and how we should think about it going forward, particularly if it is going to be dilutive to earnings.

And second, could you tell us if you have any plans to take Kindle overseas?

Thomas J. Szkutak

In terms of Zappos, we are extremely pleased with the announcement that we made yesterday and we are not discussing the dilutive or accretive nature of Zappos. I guess the way you should think about it is this. They had approximately $635.0 million worth of revenue last year. They had a small profit. And that would certainly be before any of the acquisition costs, which include intangible amortization as well as stock-based compensation, which would be post-acquisition.

But in terms of integration, the way you should think about it is it's going to be a stand-alone business. We are very, very excited about the value that they bring to customers. It's very unique. We're very excited about helping that team build the brand and we think it's a unique brand and culture and it will be a great fit with Amazon. We think that it's a great way to grown our overall shoe and apparel business. And so we're very excited about it and we've got a great overall team, a great leadership team, and we were extremely happy to be able to make the announcement yesterday.

In terms of Kindle international, it's certainly an opportunity. Customers have certainly expressed an interest and we have a long-standing practice of not talking about what we might do, but certainly it's clearly an opportunity.


Your next question comes from Spencer Wang – Credit Suisse.

Spencer Wang – Credit Suisse

Could you talk a little bit more about just the strategic rationale behind Zappos and leaving it as an independent brand and company is a little bit of a department, I think, in terms of how you've historically grown your business under the Amazon brand.

And secondarily, as part of that, even though it's going to be an independent unit within Amazon, are there any cost savings that we should be expecting, maybe from a fulfillment perspective?

Thomas J. Szkutak

Actually the way we're thinking about it is this. We have Zappos and 6PM which will join us. We have ShopUp, we have Endless, and we certainly have, all selling in soft lines. Shoes and apparel. And so we're very excited to have all those Web sites with—if you take a look at those Web sites, they have many different brands, they have different customers, they have a different customer experience associated with each of them. So we're very excited to have all those.

And from our standpoint, we're looking to learn from each other and we think that those categories are very interesting and we think there's a lot of growth opportunity and that's why we're doing that.

So this is not an acquisition that we're talking about, you mentioned synergies. Certainly we'll be smart about it. If there are fulfillment centers that they have, if they have additional space, we'll certainly look to use that or if we have additional space that Zappos can use we certainly will look at those opportunities, but this is not about synergies, this about growing in categories that we think are very interesting and so we're very excited about it.

I would also that this really isn't that much of a departure at all, or is not a departure at all. We've done a number of acquisitions over time. ShopUp, as I mentioned is one of those, is an acquisition that we did about three years that's in the same similar category. It's certainly in the soft lines. It's more of a fashion for women's apparel and shoes Web site and accessories.

And we've also done a number of acquisitions as we look at some of our country launches, the last one was was our launch in China. So again, we've done a number of these.

Our strategy as it relates to acquisitions hasn't changed. It's the same it's been for several years now. We start with a great fit and we were really pleased to be able to make the announcement yesterday.


Your next question comes from Sandeep Aggarwal – Collins Stewart.

Sandeep Aggarwal – Collins Stewart

As e-Bay continues to transform its marketplace, what does that mean for Amazon? I know you already talked about Prime membership doing very well, but are you seeing signs of weakness in the new enrollment of Prime membership or any visible changes in the growth of third-party merchant enrollment?

Thomas J. Szkutak

We have launched a new practice of not talking about other companies, but in terms of our seller business, we had our, as I mentioned, third party units were 30% of total units, which is up over last year. Our sellers grew 21%, which is the fastest growth rate we've seen. In Q2 it was the fastest growth rate we've seen in many quarters. And our seller team has continued to focus on how to make that customer experience for our sellers as good as it possibly can be.

FBA is an example of that. It's a great example where we provide services for sellers. It's great for customers because they get to get sellers use of our multi-no fulfillment network which allows them to get shipments using our super-saver shipping and Prime programs.

So again, our seller team is continuously focused on trying to make that experience better and that’s reflected in the metrics that you saw today that I mentioned, as well as the gross profit growth that we mentioned earlier as well.


Your next question comes from Benjamin Schachter – Broadpoint AmTech.

Benjamin Schachter – Broadpoint AmTech

Could you discuss the private label that you're creating for some products and just discuss the strategic value there and any issues that may bring up with some of the 3-P partners. And also any update you may have on your used video game efforts.

Could you discuss the private label that you're creating for some products and just discuss the strategic value there and any issues that may bring up with some of the 3-P partners. And also any update you may have on your used video game efforts.

Thomas J. Szkutak

We experimented in a number of different areas and we do have a small amount of private label product. I don't think there is a lot to talk to, but again, we are certainly doing some and we'll see what traction we get there.

And the used video games, that's certainly one of the things, when you look at our total customer experience with video games, the team, as I mentioned, has done a great job of improving the customer experience over the past few years and that's just another example of one of the things that they've done.


Your next question comes from James Friedland – Cowen & Co.

James Friedland – Cowen & Co.

Looking at the other line in North America sequentially, it showed some pretty good growth and I was wondering did that come from any of the cloud computing services. Are you seeing momentum there, or was that driven by marketing fees or something in that area?

Thomas J. Szkutak

There are a number of things that are going on there but certainly our Web services business is growing very nicely for us and that's reflected in those numbers.


Your final question comes from Heath Terry – FBR Capital Markets.

Heath Terry – FBR Capital Markets

You just mentioned that the Web services business was growing nicely. Can you give us an idea of which, if any, if there are any specific segments of the Web services business that are performing particularly well and when, looking at those on a stand-alone basis, where would you suggest we focus in terms of which ones you feel like have the most potential long term to really contribute.

Rob Eldridge

We don't go down into specific service-related financials in this market, as you well know. But we're very, very happy with EC2C3 simple database. The entire suite of services. And we've been in the market now for three+ years with our paying customers, trying to deliver reliable, scalable, fast, flexible, responsive solutions to our developer base and we are going to continue to go do that.

Rob Eldridge

Thank you very much for joining us on the call today and for your questions. A replay will be available on our Investor Relations Web site at least through the end of the quarter. We appreciate your interest and look forward to talking with you again next quarter.


This concludes today’s conference call.

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