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Amazon.com, Inc. (NASDAQ:AMZN)

Q3 2009 Earnings Call

October 22, 2009 5:00 pm ET

Executives

Rob Eldridge - Investor Relations

Jeffrey Bezos – Chairman, President, Chief Executive Officer

Thomas J. Szkutak - Chief Financial Officer

Analysts

James Mitchell – Goldman Sachs

Justin Post – Bank of America-Merrill Lynch

Youssef Squali – Jefferies & Co.

Douglas Anmuth – Barclays Capital

Scott Devitt - Morgan Stanley

Jeetil Patel – Deutsche Bank

Gene Munster – Piper Jaffray

Brian Pitts - UBS

Heath Terry – FBR Capital Markets & Co.

Mark Mahaney – Citi

James Friedland - Cowen & Company

Benjamin Schachter – Broadpoint AmTech

Sandeep Aggarwal – Collins Stewart

Imran Khan – J.P. Morgan

Jeffrey Lindsay – Sanford Bernstein

Spencer Wang – Credit Suisse

Brian Nagel - Oppenheimer

Aaron Kessler – Kaufman Bros.

Operator

Welcome to the Amazon.com third quarter 2009 financial results teleconference. (Operator Instructions) For opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Rob Eldridge. Please go ahead.

Rob Eldridge

Hello and welcome to our Q3 2009 financial results conference call. Joining us today is Tom Szkutak, our CFO.

The following discussion or responses to your questions reflect management's views as of today, October 22, 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 the 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. With that, I will turn the call over to Tom.

Thomas J. Szkutak

Thanks Rob. I will begin with comments on our financial results. Trailing 12-month free cash flow grew 98% to $1.92 billion. Return on invested capital was 50% up from 32%. ROIC is trailing 12-month free cash flow divided by average total assets minus current liabilities excluding the current portion of long-term debt over five quarter-ends.

The combination of common stock and stock based awards outstanding was 451 million shares compared with 458 million. Worldwide revenue grew 28% to $5.45 billion or 29% excluding the $41 million unfavorable impact from year-over-year changes in foreign exchange rates. We are grateful for our customers who continue to take advantage of our low prices, best selection and free shipping offers including Amazon Prime.

Media revenue increased to $2.93 billion, up 17% or 18% excluding FX. EGM revenue increased to $2.36 billion up 44% or 45% excluding FX. Worldwide EGM increased to 43% of worldwide sales up from 38%. Worldwide unit growth was 32%. Active customer accounts exceeded 98 million, up 17%. Worldwide active seller accounts were more than 1.8 million, up 24%. Seller units were 31% of total units. Worldwide gross profit was $1.27 billion, up 27%.

Now I will discuss operating expenses excluding stock based compensation. Fulfillment, marketing, technology and content and G&A combined were $923 million or 17% of sales, down 107 basis points year-over-year. Fulfillment was $444 million or 8.2% of revenue compared with 8.9%. Tech and content was $267 million or 4.9% of revenue compared with 5.3%. Marketing was $144 million or 2.6% of revenue, up from 2.5% in the prior year.

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

In the North America segment, revenue grew 23% to $2.84 billion. Media revenue grew 13% to $1.41 billion. EGM revenue grew 36% to $1.29 billion, representing 45% of North America revenues, up from 41%. This week we started shipping Kindle with U.S. and International wireless and lowered its price to $259 from $279. This newest Kindle is available to ship to customers living outside the U.S. Customers in more than 100 countries around the world and U.S. customers traveling abroad can take advantage of Kindle’s 3G wireless technology and download a title in 60 seconds or less.

North America gross profit grew 28% to $752 million and gross margin increased 101 basis points to 26.5%, driven by increases in other revenue in 3P product sales, improvements 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 77% to $156 million, a 5.5% operating margin. In the international segment, revenue grew 33% to $2.61 billion. Revenue growth was 35%, adjusting for the $39 million year-over-year unfavorable foreign exchange impact during the quarter.

Media revenue grew 22% to $1.52 billion and EGM revenue grew 54% to $1.06 billion or 58% excluding FX. EGM now represents 41% of international revenues, up from 35%.

International gross profit grew 26% to $521 million, or grew 30% excluding FX, while gross margin decreased 108 basis points to 20%, driven by lower prices for our customers and changes in product mix, partially offset by improvements in inventory management including vendor prices and increases in 3P product sales.

International segment operating income increased 36% to $194 million, a 7.4% operating margin. Excluding the unfavorable impact from foreign exchange rates, international segment operating income increased 44%.

Consolidated segment operating income grew 52% to $350 million or 6.4% of revenue, up 101 basis points year-over-year. Excluding the $10 million unfavorable impact from FX, CSOI grew 56%.

Unlike CSOI, our GAAP operating income includes stock-based compensation and other operating expenses. GAAP operating income grew 62% to $251 million, or 4.6% of net sales. Our income tax expense was $60 million in Q3, or a 23% rate for the quarter. GAAP net income was $199 million, or $0.45 per diluted share compared with $118 million and $0.27 per diluted share.

Turning to the balance sheet, cash and marketable securities increased $1.68 billion year-over-year to $4 billion. Our cash and marketable securities primarily consists of cash, government and government agency securities, AAA rated money market funds and other investment grade securities. Such amounts are recorded at fair value.

Inventory increased 23% to $1.62 billion and inventory turns decreased to $12.1 from $12.4 a year ago as we expanded selection, improved in-stock levels, and introduced new product categories.

Accounts payable increased 50% to $3.35 billion and accounts payable days increased to 72 from 63 in the prior year. Our investment in net fixed assets increased $355 million from a year ago to $1.09 billion.

Our Q3 capital expenditures were $103 million.

I’ll conclude my portion of today’s call with guidance. Incorporated into our guidance are the order trends that we’ve seen to date and what we believe to date to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including the high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy and consumer spending. It’s not possible to accurately predict demand and therefore our actual results could differ materially from our guidance.

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

Our guidance excludes the impact of Zappos, including approximately $35 million of expenses related primarily to employee compensation costs, amortization of intangibles and merger related expenses that would be recognized in the fourth quarter 2009 if the transaction closes as planned.

Guidance further assumes that we don’t conclude any additional business acquisitions or investments, record any further revisions to stock-based compensation estimates, and that FX rates remain approximately where they’ve been recently.

For Q4, we expect net sales of between $8.125 billion and $9.125 billion, or growth between 21% and 36%. This guidance anticipates approximately 500 basis points of positive impact from foreign exchange.

GAAP operating income to be between $300 million and $425 million or grow between 10% and 56%. This includes approximately $100 million of stock-based compensation and amortization of intangible assets.

We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expenses, to be between $400 million and $525 million or growth between 11% and 46%.

We remain heads down focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.

Thanks. With that, Rob, let's move to questions.

Rob Eldridge

Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you remind our listeners how to initiate a question?

Question and Answer

Operator

(Operator Instructions) Your first question comes from James Mitchell at Goldman Sachs.

James Mitchell – Goldman Sachs

Thank you very much for taking my question. It looks like you enjoyed very strong sequential North America revenue growth, both media and EGM, much stronger in fact than you have enjoyed in previous quarters. Could you talk about what drove that quarter-on-quarter growth in North America revenue?

Thomas J. Szkutak

Sure. If you take a look at -- if you recall from 90 days ago, we did see a nice sequential increase, but as a reminder, Q2, we had a strong -- a difficult compare from the previous year, Q2 of 2008. But even we still saw acceleration if you look at Q1 of 2009 or Q4 of 2008. And it was very broad, you know, within the media categories. In fact, all the major categories within media saw an acceleration from Q2 to Q3, so it's very broad and it was driven by a lot of the fundamentals. You know, having great low prices, certainly we had selection increases, in-stock increases during the quarter, as well as Prime is certainly having an impact. So all of those things certainly had an impact.

Also as a reminder, you know North America as we finished Q3 of last year, certainly the last few weeks of the quarter were softer, given what was going on economically. But again, we saw very strong growth in the quarter.

Operator

Your next question comes from Justin Post with Bank of America-Merrill Lynch.

Justin Post – Bank of America-Merrill Lynch

Great, thank you. My question is on the margin outlook for the fourth quarter. We have heard some competitors out there are getting more aggressive with price, on books especially but other areas. Maybe if you could characterize your view on the margin environment in the fourth quarter.

And then secondly, on unearned revenue, it looked like it was up $197 million, a little less growth than in second quarter or in absolute dollars. Is that reflective at all of the Kindle, or are there other things in the unearned revenue line we should think about? Thank you.

Thomas J. Szkutak

In terms of your first question, you know, what we anticipate will happen, Q4 was reflective of the guidance that we gave you. It's obviously a challenging, in any Q4, to give guidance and given what's going on externally, from a macro environment standpoint, it's certainly a challenging time to do so. But we still feel -- that being said, we feel very good about what we saw in Q3; customers responding very positively, and right now we're heads down focused on making sure that we have a great customer experience during Q4. Around the world right now we're focused on making sure that we have great low prices, that we are getting our inventory, making sure that our in-stocks are where they need to be and selection on hand. You can see our inventory did increase as we -- as it has in previous Q3s and that's really getting ready for Q4. So we're optimistic and we've given a wide range, given that optimism, and we're focused on customers. So again, hard to predict what will happen.

But in terms of competitive environment, certainly it is very competitive. It's been very competitive since the day we launched and we have many different competitors in all the different categories that we operate in around the world.

Justin Post – Bank of America-Merrill Lynch

And then on unearned revenue?

Thomas J. Szkutak

Certainly there are a number of things that go into unearned revenue and certainly we have some marketing relationships. Kindle goes in there, Prime goes in there. So there are a number things going in. It can be a little bit lumpy, because of some of the things that go in, but certainly the principle pieces being, that we have certainly have talked about in the past being Kindle and Prime, are doing very well and we’re very, very pleased with the growth that we’re seeing in both of those and we’re excited with the announcement that we have related to Kindle that we can offer our newest Kindle at $259 effective today.

Operator

Your next question comes from Youssef Squali from Jefferies & Co.

Youssef Squali – Jefferies & Co.

Would you consider opening up Kindle to supporting other formats, considering the increasing availability of content from other providers? And related to that, is there a threshold above which you’d start actually breaking out Kindle sales for us to gauge the level of your success?

Thomas J. Szkutak

In terms of breaking out Kindle, certainly as you get to certain sizes, we’ve done in the past, we’ve broken out various countries and we would follow whatever is required to do so, and obviously in the results that we give we try to be as helpful as we can.

In terms of opening up Kindle, there’s not a lot I can add to that. I wouldn’t want to speculate what we might or might not do there, but what we are focused on Kindle is obviously to make sure we offer customer experience and we’re heads down focused on making sure that we do that.

Operator

Your next question comes from Douglas Anmuth from Barclays Capital.

Douglas Anmuth – Barclays Capital

Can you talk about your profitability and the margins in particular being about 60 points above the high end of your range? I’m just curious on what the biggest delta was on your results versus what you were expecting for the quarter there. And then secondly, it looks like your accounts payables days went to 72, which is a pretty significant increase. What were the key drivers in that?

Thomas J. Szkutak

In terms of the margin, what you really are seeing, a number of factors but certainly a principal one is you’re seeing we had very strong growth. You’re seeing very good leverage in our operating costs and if you look at our gross margin, we’re essentially flat year over year and you saw good leverage in operating costs, and really across all the key items. So we had very good leverage. Certainly when you look at our operating costs, there is a variable component and there’s also a fixed component and so the fixed is where you’re seeing the largest leverage.

In terms of AP, we did see a very big increase. That’s also reflected in the inventory that we brought in at the end of Q3, getting ready for the holidays. Keep in mind that when you compare that to last year at this time, there’s a little bit of some seasonality, if you will, because if you recall particularly in the U.S. we saw a little bit of a slow down near the end of Q3. And so when that happens and there was certainly uncertainty related to what was going on in Q4, you’re seeing probably a little less replenishment than you would see given the results that you just saw in Q3.

So part of that is certainly just more timing related as it relates to the two types of quarters we’re dealing with. There’s also some mix of business there, as well as some better terms with suppliers.

Operator

Your next question comes from Scott Devitt from Morgan Stanley

Scott Devitt - Morgan Stanley

Understanding there’s been unique volatility in business conditions in currency, when you gave first quarter guidance it was a range of 6% to 17%, then you did 14% and when you guided the recent quarter, you gave 11% to 23% and did 28%. I was just wondering if you could comment on your visibility into 4Q, given the still wide revenue range that you’ve given and the back-end loaded nature of the quarter, and the way that it seems business improved meaningfully throughout Q3, even after accounting for the September 15th event of last year.

Thomas J. Szkutak

I think the only thing I could say is we’re giving a wide range. The range is 21% to 36% growth on a dollar basis. We have reflected what exchange rates are recently which is approximately 500 basis points of impact, which would be 16% to 21%, and that wide range reflects, as I talked about a little bit earlier on the call, that uncertainty.

That being said, we like what we saw in Q3 and as you also mention and inherent in your question, it is a back-end loaded quarter. It is very seasonal and December is by far our largest month in terms of overall revenue, and so it is all in front of us. That is why for us right now it is a very busy time as you can probably imagine, and we are focused very heavily on how do we make that experience as good as we possibly can for customers. We try to give guidance that reflects very good growth for the quarter but a wide range, given the uncertainty.

Operator

The next question comes from the line of Jeetil Patel from Deutsche Bank.

Jeetil Patel – Deutsche Bank

A couple of questions -- you have hit the two-year mark for Amazon Prime in Japan and almost in Europe. Are you seeing the same type of frequency lift you saw with Prime in the U.S. in terms of magnitude of change in behavior? Second question, on FBA, are you seeing the ramp in FBA influence frequency as a whole on the business as you look at the U.S. market as you have better in-stock on products available from you guys?

Rob Eldridge

Consistent with what we have said, we are still very happy with the Prime programs worldwide. When we look at the international Prime programs, not only in Japan but also in Europe, we are seeing similarities in terms of subscriber growth as well as renewal rates. Across the geographies, Prime members tend to come to the site more often, shop with us more frequently and also explore more of the different stores. So you tend to see more cross-shopping. We are very, very happy with Amazon Prime across the globe.

In terms of FBA, we think it is a win for the seller so we think it is a win for the customers. You saw in our results today that we still are seeing good growth with the FBA program here with where we are in this period of time. We are going to continue to put a lot of energy into both those programs for the benefit of our customers.

Jeetil Patel – Deutsche Bank

Are those influencing frequency or attach rates?

Rob Eldridge

You are talking specifically about FBA?

Jeetil Patel – Deutsche Bank

Yes.

Rob Eldridge

It is -- Again, I talk to you in the context of whenever you have the opportunity to deliver product to a customer in the United States with a guaranteed 2-day delivery or even faster if people are looking for express delivery, it is a positive thing for customers.

Operator

The next question comes from the line of Gene Munster from Piper Jaffray.

Gene Munster – Piper Jaffray

Back on the margin side, some of the things you have been changing within the business model in terms of private labels and the product adds, which conceptually carry a higher margin, is that starting to have an impact on margin or are they just too small to be adding up to anything?

Thomas J. Szkutak

We haven’t broken out the impact of either of those two but again in terms of private label, we certainly like that selection that we have but it is still a relatively small part of our overall selection. That is certainly something you can see by just browsing our website. You can look and it is still a relatively small part of the selection.

Gene Munster – Piper Jaffray

Is there any growth in terms of the SKUs you have for private label you can disclose?

Thomas J. Szkutak

No, we haven’t -- you know, we aren’t breaking out any of the individual categories or also sales by vendor at all.

Operator

The next question comes from the line of Brian Pitts from UBS.

Brian Pitts - UBS

A question on your shipping costs -- if you look, your outbound shipping as a percentage of sales was about 6% in the quarter. That is the lowest we have seen in quite some time. Are you seeing much better shipping efficiencies or is it really a function of higher digital media sales as part of that?

Thomas J. Szkutak

I think at the end of the day there is lots of factors that go into our shipping costs. Part of what I think you are seeing during the quarter is we again saw good unit growth and we were able to leverage that sort of volume throughout the entire logistics chain.

Operator

Your next question comes from Heath Terry from FBR Capital Markets.

Heath Terry – FBR Capital Markets & Co.

Great, thanks. Can you give us a sense of the traction that you are getting within the various components of Amazon Web Services? And then just to what extent that business as a whole is contributing to the margin out performance that we are seeing this quarter?

Thomas J. Szkutak

I’m sorry, Heath, I missed the first part of your question -- it was about?

Heath Terry – FBR Capital Markets & Co.

Sure -- within Amazon Web services, the individual services that are available within that, which ones are you seeing the most traction with and have the highest level of expectations for?

Thomas J. Szkutak

It’s similar to the rest of our business, we don’t discuss the specific results of the different services. But we are seeing lots of demand around EC2 and S3 and SimpleDB. Developers use these services in different ways to create their own unique applications so we have a range of enterprise customers, start ups, academic institutions who are using AWS for a diverse set of use cases and using these building blocks to create unique solutions. I think it’s very early with AWS but we’re very encouraged by the response that we’re getting from our customer base right now and we’re going to continue to innovate on their behalf.

As I mentioned, part of the margin would certainly be part of the other revenue increase, some of the other things we talked about including marketing, Amazon enterprise services, web services, this would be larger pieces of the other.

Operator

Your next question comes from Mark Mahaney with Citi.

Mark Mahaney – Citi

Two questions please -- the fulfillment leverage, I think that 8.1% as a percentage of revenue is the lowest you’ve ever had in the third quarter, so is there something that’s sustainable there? Could you talk about whether that’s a base to think about it? I know there’s seasonality in that line but that seemed to strike us as a bit of an outlayer.

Secondly, international, you’re showing this accelerating international growth without the recession. We probably would have seen it the last couple of quarters. Have you decided from now on you’re just going to ship your way to growth internationally and you don’t need to expand beyond the countries that you are in? I only ask because you haven’t expanded to a new international market with a base station there in about four years but you seem to be doing fine without it, so is that the strategy from now on?

Thomas J. Szkutak

In terms of fulfillment, the operations team has done a great job in improving our overall efficiencies and so you’re certainly seeing that reflect in our fulfillment. One reminder as you look at fulfillment expense as a percentage of revenue versus last year, last year we had just opened up three FCs and that’s reflected in the Q3 balance of last year in terms of expenses.

In terms of international, no, you should expect to see that we will launch new geographies over time. What you’re seeing reflected in the growth right now is some of the things I talked about earlier, but we have added a lot of selection. We’ve added a lot of new categories over the past couple of years and because of the opportunities we have in the existing countries that we operate in. So the team has done a great job at adding many new categories, adding selection within those categories, adding selection within the categories we are already in, making sure that we have great low prices and executing operationally, as well as certainly prime is helping us internationally as well, so all of those are combining in the results that you see.

But no, you should expect to see more selection expansion going forward within the categories we are in, as well as geographical expansion over time.

Operator

Your next question comes from James Friedland from Cowen & Company.

James Friedland - Cowen & Company

A question as long as we’re on the topic of international, the Kindle going in to international markets, in terms of getting foreign language rights, what are the hurdles to achieving that especially in your core international markets like Germany? What are the hurdles, what might be the timing to launch foreign language titles? Thanks.

Thomas J. Szkutak

Certainly, it's an opportunity for us, and not unlike, you know, we have very good relationships with a lot of the publishers and content owners in the geographies that we operate in and certainly it's an opportunity for us over time to expand selection.

Again, keep in mind from a Kindle perspective, our long-term vision is to have every title ever printed in any language available on Kindle in less than 60 seconds. It's certainly a big goal and something the team is certainly working towards.

Operator

Your next question comes from Benjamin Schachter from Broadpoint AmTech.

Benjamin Schachter – Broadpoint AmTech

Last quarter you called out video games as impacting the quarter and I was wondering if you could update us on how that category impacted this quarter.

And then also, given the success of the Kindle, what are the types of criteria you use to decide any other types of devices you might try to sell directly to consumers? Thanks.

Thomas J. Szkutak

In terms of video games, we are not breaking out any categories specifically this quarter, but what I would say is within media, we did see an acceleration in all of the key categories from Q2 to Q3. [inaudible] speculation on any other devices, I wouldn't want to speculate what we might or might not do there.

Operator

Your next question comes from Sandeep Aggarwal with Collins Stewart.

Sandeep Aggarwal – Collins Stewart

Thanks for taking my questions. Tom, can you talk about contribution from any one-time items in your media segment during the quarter, i.e. any popular gaming or books title, or maybe pre-sale of Window 7 contribution?

And then second is on Kindle -- can you talk about the linearity over the quarter? Did the lower price help you to hit maybe the tipping point sooner?

Thomas J. Szkutak

I'm sorry, I missed the -- in your first question, you asked for any one-time items in the growth that we saw?

Sandeep Aggarwal – Collins Stewart

In the media segment.

Thomas J. Szkutak

I'm sorry, was there more to it? I missed the last part of that first question. I apologize.

Sandeep Aggarwal – Collins Stewart

That's all right, Tom. So I was -- basically I wanted to know the contribution from one-time items in your media segment during the quarter, such as pre-sale of Windows 7 or any popular gaming title, such as maybe the V-Sports Resort or any popular book titles.

Thomas J. Szkutak

Sure. We did see -- you know, it was -- we did see better releases than we've seen in previous quarters, particularly in the second half of the quarter, which is contributing to the growth that you see. But if you look at the growth that was essentially flat in Q2, to the 13% on a dollar basis of 14% on a local currency basis, the lion's share is not these-- some of the new titles that were out there, but certainly contributed to the growth rate.

Operator

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

Imran Khan – J.P. Morgan

Thank you for taking my questions. I have two quick housekeeping questions and one more [inaudible] question -- so in terms of the international gross margins, it seems like international gross margins are down 100 basis points on a year-over-year basis. I tried to better understand what's driving that disparate growth in the third-party business.

And secondly, user growth 17%, active user growth, can you help me understand, is it more tilted toward international or are you seeing broad-base growth?

And more of a big picture question is regarding Web services -- it seems like talking to the developers that Amazon Web services is getting a lot of critics. Can you give us some sense, like what do you think is the gating factor that still only low-single digit percentage of IT spending is Cloud computing, why it's not moving faster?

Thomas J. Szkutak

In terms of international gross margins, one of the things certainly we are seeing is impacting it is lower prices to customers, changes in product mix. If you look at our EGM growth in Q3, it was up 58% on a local currency basis. That compares to 48% growth last year. International media was up 22% in the quarter, up 18% versus last year. So that mix of shift towards a higher percentage of EGM is certainly impacting gross margins in the quarter.

That, between lower prices and change in mix, was partially offset by improvements in 3P as well as vendor pricing and inventory management. So that's really what's impacting gross margins.

In terms of Web services, we are very optimistic about Web services. We have some great services that are getting some very good traction. It’s very early and the teams have done a great job in terms of executing on those services and making those reliable. There’s great pricing on those services and the team has continued to innovate in that space. So the team is very excited about it and we like what we see there.

Operator

Your next question comes from Jeffrey Lindsay from Sanford Bernstein.

Jeffrey Lindsay – Sanford Bernstein

Will it be necessary as in previous years to significantly increase staffing for the holiday season, or do you think you’re already happy with current staffing levels? And then could you give us any kind of comment on how progress is going with [Goyo] Amazon, given [Cabo’s] recent payments to have 78% of e-commerce in China? Thank you.

Thomas J. Szkutak

In terms of staffing, every year we supplement our teams and our FCs around the world with additional staffing and this year will be no different, and we’ve continued to add some capacity, particularly in international recently to get ready to serve our customers.

In terms of [Goyo], we’re not breaking out in terms of giving any statistics on any of the growth in each of the geographies today but in terms of how we feel about [Goyo], we think our business in China is very good. We have a very good team there. Their focus is consistent with other geographies in trying to make sure that we have good customer experience and we think that China is a great long term opportunity and the team is working very hard on behalf of customers.

Operator

Your next question comes from Spencer Wang from Credit Suisse.

Spencer Wang – Credit Suisse

I was wondering, given how much free cash flow you guys are generating, if you could just update us on your thoughts in terms of uses of cash and maybe how acquisitions fit into that, and then how you maybe think about whether to build versus buy when you think about product category expansion. Thanks.

Thomas J. Szkutak

In terms of use of cash, I wouldn’t speculate what we might do except for we still have an authorization for share repurchases, that there’s $900 million remaining on the authorization, so certainly that would be potentially part of our plans.

When you think of acquisitions, we look at those opportunistically. It’s not something new. We’ve been looking at acquisitions for a number of years now and when we find ones that we like, we’ve done some to enter new geographies over time. We’ve done some where we think speed to market is important. We’ve done some where we like the team has a very specific skill set. So there are a number of different types of ones that we’ve done and there’s not much I can add to that. We will continue our focus there like we have over the past years and as there’s opportunities, we’ll certainly look at what makes sense.

Operator

Your next question comes from Brian Nagel from Oppenheimer.

Brian Nagel - Oppenheimer

I wanted to focus on the book category, obviously a lot of press lately about the new pricing strategies. The question would be, as we think about our models, both from a sales and maybe even a margin perspective, near and longer term, how should we think about some of the changes that have been made in book pricing lately?

Thomas J. Szkutak

I’m sorry, could you repeat the second half of that question?

Brian Nagel - Oppenheimer

I was saying as we think about models, and particularly in sales growth, or in margins, in books, how could the recent actions on book pricing affect those numbers?

Thomas J. Szkutak

I apologize. We haven’t broken out the growth rates or the margins of the book category. It’s included, the books margins would be included in our North America gross margins for those sales in North America and the corresponding ones in international.

I think the way you should think about any of our categories is that we operate in competitive environments and that is something that has existed since the day we opened our doors. From our perspective, we are going to continue to focus on what is right for our customers and as I have mentioned a number of times on this call, and that is in all of our categories and all of our geographies, and so those are the things that because it is important to customers.

In terms of also, when you talk about margins, one thing we clearly do is our focus is on primary [areas] is free cash flow and free cash flow per share, and so we focus on those operating profit dollars and free cash flow dollars and not individual margins.

Operator

And our final question comes from Aaron Kessler from Kaufman Bros.

Aaron Kessler – Kaufman Bros.

First, any update on Checkup by Amazon? Clearly there seems to be some resistance from some pure play competitors and maybe expanding outside of their core retail market. I’m not sure if you commented but U.S. other revenues is up about 20% sequentially. I just wanted to see if you had an explanation for the strong growth in that category.

Thomas J. Szkutak

Checkup by Amazon is -- you know, it’s very, very early and the team is doing a good job there but it is very early and we think it is a nice opportunity and the team is executing well there but it’s -- again, it is very early for us.

In terms of other, beyond what we have said already I don’t have a lot to add there. Certainly the pieces that roll into there are our web services business, which is getting good traction, our co-branded credit card arrangements, we have some promotional and marketing revenues, and then Amazon Enterprise Services. So those are the make-up of other and what is reflected in the growth that you are seeing there.

We do have -- some of that revenue is promotional in nature or marketing in nature and can tend to be, as we have seen in some quarters, a little bit lumpy and so that is the only color I could add to it.

Aaron Kessler – Kaufman Bros.

On tax rate, any guidance for Q4? It has been jumping around somewhat this year.

Tom Szkutak

No. If you look at our year-to-date tax rate adjusted for any larger items would reflect our best estimate for the year at this stage.

Rob Eldridge

Thank you for joining us on the call today and for your questions. A replay will be available on our IR website at least through the end of the quarter. We appreciate your interest and we look forward to talking with you again next quarter.

Operator

This concludes today’s presentation. Thank you for your participation.

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Source: Amazon Q3 2009 Earnings Call Transcript
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