Amazon Q1'16 Earnings Conference Call: Full Transcript

Operator:

Thank you for standing by. Good day everyone and welcome to the Amazon.com Q1 2016 Financial Results Teleconference. 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.

For opening remarks, I will be turning the call over to the Director of Investor Relations, Phil Hardin. Please, go ahead.

Phil Hardin:Director of Investor Relations:

Hello. Welcome to our Q1 2016 financial results conference call. Joining us today is Brian Olsavsky, our CFO. We will be available for questions after our prepared remarks. The following discussion and responses to your questions reflect management’s views as of today, April 28, 2016 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 and subsequent filing.

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. During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2015.

Now I will turn the call over to Brian.

Brian Olsavsky:Chief Financial Officer:

Thanks, Phil. I’ll begin with comments on our fourth quarter financial results. Trailing 12-month operating cash flow increased 44% to $11.3 billion. Trailing 12-month free cash flow increased to $6.4 billion, up from $3.2 billion.

Trailing 12-month free cash flow less lease principal repayments increased to $3.5 billion, up from $1.5 billion. Trailing 12-month free cash flow less finance lease principal repayments and assets acquired under capital leases increased to $1.6 billion, up from an outflow of $1.2 billion. Trailing 12 month capital expenditures were $4.9 billion. Capital expenditures do not include the impact of property and equipment acquired under capital and finance lease obligations.

These capital expenditures and capital leases reflect additional investments in support of continued business growth, due to investments in technology infrastructure, the majority of which is to support AWS, and additional capacity to support our fulfillment operations.

The combination of common stock and stock-based awards outstanding was 490 million shares, compared with 483 million one year ago. Worldwide revenue increased 28% to $29.1 billion or 29%, excluding the $210 million unfavorable impact from year-over-year changes in foreign exchange. Worldwide, active customer accounts excluding customers who only had free orders in the preceding 12-month period, exceeded $285 million.

Worldwide paid unit growth was 27%. Worldwide seller units represented 48% of paid units. Now I’ll talk about our segment results; in the first quarter of 2016 we began allocate stock-based compensation and other operating expense net, to our segment results. These amounts are combined and titled stock-based compensation and other in our segment results and it reflect the way we now evaluate our business performance and manage our operations.

For reference this quarter I’ll also mention segment operating income excluding stock-based compensation and other.

In the North America segment, revenue grew 27% to $17 billion. Media revenue grew 8% to $3.2 billion. EGM revenue grew 32% to $13.5 billion. North America segment operating income including stock-based compensation and other was $588 million a 3.5% operating margin compared with $254 million in the prior year.

This includes $5 million of favorable impact from foreign-exchange. North America segment operating income before stock based compensation and other was $924 million a 5.4% operating margin compared with $517 million in the prior year.

In the International segment; revenue grew 24% to $9.6 billion, excluding the $177 million year-over-year unfavorable foreign-exchange impact revenue growth was 26%. Media revenue increased 7% to $2.5 billion or 9% excluding foreign-exchange. EGM revenue grew 31% to $7 billion or 33% excluding foreign-exchange. International segment operating loss including stock-based compensation and other was a $121 million compared with the loss of $194 million in the prior year. This includes $21 million that favorable impact from foreign-exchange.

International segment operating income before stock-based compensation and other was $20 million compared with the loss of $76 million in the prior year. In the Amazon Web Services segment revenue grew 64% to $2.6 billion. Amazon Web Service to segment operating income including stock-based compensation and other was $604 million a 23.5% operating margin compared with the $195 million in the prior year. This includes $24 million of favorable impact from foreign-exchange.

Amazon Web Services segment operating income before stock-based compensation and other was $716 million a 27.9% operating margin compared with $265 million in the prior year.

Our operating income includes stock-based compensation expense and other operating expense. Operating income was $1.1 billion or 3.7% of revenue, up approximately 260 basis points year-over-year. This includes $50 million of payable impact from foreign exchange. Consolidated segment operating income before stock based compensation that was $1.7 billion or 5.7% of revenue compared to $706 million in the prior year.

Our income tax expense was $475 million, net income was $513 million or $1.7 per diluted share compared to the net loss of $57 million or loss of $0.12 per diluted share.

Turning to the balance sheet, cash and marketable securities increased $2.1 billion year-over-year to $15.9 billion. Inventory increased 30% to $9.6 billion and inventory turns were 8.6 down from 8.8 turns year ago. As we expanse selection improved in stock levels and introduced new product categories. Accounts payable increased 26% to $15 billion and accounts payable days increased 72% from 70% in the prior year.

I’ll conclude my portion of today’s call with guidance. Incorporated into our guidance are the order trends that we’ve seen to-date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economic conditions and customers spending. Both events the rate of growth of the internet, online commerce and cloud services and the various factors detailed in our filings with the SEC.

It’s not possible to accurately predict demand and therefore our actual results could differ materially from our guidance.

As we describe in more detail in our public filings, issues such as settling intercompany balances in foreign currencies amongst our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rates can all have a material effect on our results. Our guidance further assumes that we don’t conclude any additional business acquisitions, investments, restructurings or legal settlements, record any further revisions to stock-based compensation estimates and that foreign exchange rates remain approximately where they’ve been recently.

For Q2, 2016, we expect net sales of between $28 billion and $30.5 billion or growth of between 21% and 32%. This guidance anticipates approximately 70 basis points of favorable impact from foreign exchange rates. Operating income to be between $375 million and $975 million compared with $464 million in second quarter 2015. This includes approximately $825 million for stock based compensation and other operating expense net.

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

Thanks. And with that, Phil, let’s move on to questions.

Question & Answer

Phil Hardin:

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

Operator:

At this time we will now open a call up for questions. In the interest of time we ask that you limit yourself to one question. If you would like to ask a question, please press star, one on your keypad. We asked that when your report your question you pick up your handset to provide optimum sound quality. Once again to initiate a question please press star then one on your touched tone telephone. Please hold while we pull for questions. Thank you. Our first question is from Mark May of Citi. Please state your question.

Mark May:Citi:

Thanks a lot. What’s your bid international retail revenue, the international retail segment really stood out revenue accelerated some like bit of a milestone also that the CSOI turn positive and a in a non Q4 quarter. Can you shedding more light and what the key driver there was and how sustainable it is and AWS just mathematically the comps get tougher starting in Q2 just given what happened in 2014 is that something that we should be taking into account in terms of thinking about how the rest of the year may progress? Thanks

Brian Olsavsky:

Sure. You’re first question on international, yes, all three segments had very strong growth in the quarter international 26% for FX neutral growth rate was as strong as we’ve seen in 3.5 years. I would attributed to the Prime flywheel as just may mentioned in the past for the Europe and large countries in Europe and Japan are few years behind the US on the lot of key Prime metrics and we also said last year that Prime subscription if the Prime subscriptions were up 51% year-over-year in 2015 47% in the US and higher rate than that internationally.

So certainly a lot going on international a lot that’s really good adding prime subscribers at a high clip continue to add selection at FBA sellers so you see devices, you see video content so it’s the whole ray of prime offering, prime now same day everything is in Europe it’s maybe getting little slower than starting point in the US. But we see it really shown up in customer engagement and customer purchases. On the EWS side, I think the 2016 to 2015 comparison on its own and 2014 falls by the way side, so I would encourage you to look every strength, we don’t forecast obviously by segment.

Operator:

Our next question comes from Douglas Anmuth. JP Morgan. Please state your question.

Douglas Anmuth:JPMorgan:

Thanks for taking the question. So I just wanted to ask you about unit growth overall and if you look back over the last three quarters you have accelerated now in a materially higher level than what we saw in ‘14 in the first half of ‘15 and realize in 3Q I understand you had prime day. But was just hoping you could comment on kind of the overall acceleration we’ve seen here and key drivers behind that and if there is something difference perhaps than what are you talking about on International and then just also on AWS and could you just talk about the underlying drivers here of margin thinking about that a little bit going forward kind of primary sources of leverage and as you open up six new regions in coming months, should we expect this to be kind of constant build or something that’s kind of more lumpy overtime and more in waves? Thanks.

Phil Hardin:

This is Phil Hardin and I’ll take the units question. So, really the units are driven by very similar trends to what Brian described, I think when we look at the bridges for revenue and obviously units are key driver for revenue. Things like Prime or key in that bridge I would also call out selection growth that’s been a big area of focus for us and one importantly we drive selection through FBA. So we continue to be very pleased with the progress we’re making in FBA what that means for a prime customers is there is more for them to choose from obviously that gives them more they can purchase that makes Prime more valuable. For sellers that means they sell more and so I would say that FBA is helping drive some of the selection growth we’re seeing here, so selection growth and Prime that are two very key drivers of our growth.

On the second part one other comment I didn’t say earlier I do want to point out that because of the leap year there is an extra day in Q1 every company would have seems this obviously, but we estimated it was worth about a 150 basis points to our growth rate in revenue that would consistent North American International. Here the comment was on or question was on AWS and bit about margins and margin outlook. We are very pleased with the quarter we came in at 23.5% operating margin on the new basis including stock based compensation and other. We already please it stepping back with the 64% growth in AWS which is now $10 billion business. But on the margin side I would caution you that we are pleased but it is very early to start drawing too many conclusions on that.

Long term margins in this business there will be bumpy overtime. At any point of time they are going to reflect balance of investing including global expansion talked about price reductions we may offer and also driving cost efficiency which is for us is a very important driver in now in this business, but also the North American international segments.

Operator:

Our next question is from Heath Terry with Goldman Sachs. Please state your question.

Heath Terry:Goldman Sachs:

Great thanks. Looking at the active customer account number it looks like growth slowed pretty significantly about 10 percentage point. So I am just curios if you can give us the sense of anything that might be throwing that number that number off assuming we are reading at the right way and then I as you rollout on AWS as you rollout fixed new availability turns over the course of this year is their way to quantify what kind of an impact that’s going to have on the capacity at AWS?

Brian Olsavsky:

So I’ll take the first part of your question about active customers. So as you look at our metrics and what information we provide each year we also make some changes so to this quarter we only gave the active customers with a paid purchase in the trailing 12 months and so that numbers was more than $285 million. I think that’s pretty similar to the trend that we’ve see in that metrics. Now in the past sometimes we’d also given a total active customers account and so that number for this quarter was over $310 million. So that maybe were you are making the statement about the slowdown in growth. The trajectory was similar from product quarters for both of these numbers, but we have just to give the but have the number for the total number of customers.

Tom Szkutak:

And on your AWS footprint question. So we ended the quarter with 33 availabilities on some 12 geographic regions and we have 11 more availability soon to opening in the next year. The impact on capital, yes, there will be additional capital investment as we build out those some of there is already taking place. But I’ll also say that by and large the largest increases in capital and capital leases is to support the growth of incremental usage of customers we have now and -- we do have now. So and you should expect to see us continue to do invest to support this business for very we have a leadership position, we intend to maintain it and we’re very excited about where we are.

Operator:

Our next question is from Brian Nowak with Morgan Stanley. Please state your question.

Brian Nowak:Morgan Stanley:

The first one is on prime sub that two straight years of on 50% prime subscriber growth. Just curious about how you think about keys to driving prime sub growth going forward and kind of the full process behind the reported monthly prime subscription and the second on the logistics investment with the there is been a lot about can truck investments logistics investments. Any comments are all by kind of learning’s and what you’re seeing from some of the investments in your truck fleet your own delivering that work? Thanks.

Brian Olsavsky:

Yes, let me start with the Prime. Yes we have had very strong growth the last two years and earlier obviously on prime growth the numbers. I would say it’s combination of lot of separate investments that we are making, so, if you look at the success of our devices we are seeing tablets work, sell twice the volume in Q1 year-over-year, fire TVs deck you may have read in our press release that it has a greater than a 100,000 customer reviews the most reviewed product ever, 62,000 or over 62,000 of those reviews are five star reviews.

We now only have the eco but we have the eco dot and tab so our branching of that product line and having trouble keeping those in stock and of course we launch the new Kindle oasis e-reader. So that is important part of the story as is the digital content you may have seen the recent announcements that we are working on a great amount of new content for prime numbers. We love -- customers love the content and we like the results we see particularly around prime free track conversion and renewal rates for subscribers who use and take advantage of prime.

So beyond the awards that content in winning and success we are having with Amazon particularly Amazon Originals, we feel that program is working we’re going to significantly increase our spend in that area some of that is in Q2, you’ll see that more in the next few quarters. But we think that’s working and look forward to bringing a lot of new content to our prime subscriber base both through our normal prime subscription and also the monthly plan that I do alluded to.

Phil Hardin:

This is Phil Hardin. I’ll jump in on the second part of your question. So, for the trucks it really its trailers the typical used case is running a lag between a fulfillment center and assort center. So we’ve got enough volume there that we are using in trucks already we thought it make sense to go ahead and buy some trailers -- contracting out for the truck part and it gives us flexibility we think the economics will make sense overtime.

Similarly we have an announced an agreement to lease some airplanes with air transport services group agreement to lease up to 20 Boeing767 there and similar used case its products that are already boxed and we think again this is activities we have been doing already with things grow at a very rapid rate this gives us extra capacity and we think it’s good to be able to deliver to customers and we think it make sense over the long-term.

Operator:

Our next question comes from Mark Mahaney of RBC Capital Market. Please state your question.

Mark Mahaney:RBC Capital Markets:

Great two questions related to prime oversees could you talk about the added subprime in international markets how far rolled out it is in most of your major market and then you talk about Prime flywheels and you did last year but it seems like those flywheels spun faster than you expected in the fourth quarter of last year that cause some kind of near-term expenses for you can you talk about how you’re thinking about planning against that as the Prime flywheels are getting broader for you how to you try to get ahead of that into the peak seasonal later this year? Thank you.

Brian Olsavsky:

Yes sure. This is Brian. Let me start with the second question first it was necessarily the Prime flywheel that was the issue it was more the FBA demand that we had from FBA sellers for space in our warehouses we are very form it was high class problem to have but as I mentioned last quarter it did result in higher fulfillment cost in the fourth quarter as a result I think you will see some of that anticipate now in Q1 so -- is the Q4 issue we learn from every Q4 this one was no expectation we are already making plans for a smoother Q4 next year to continue to add ultimate capacity we’ll work with FBA sellers on inventory stocking and timing and we think that there is strength we can do better as we do every year come out fourth quarter with -- learnings.

Phil Hardin:

This is Phil. On the Prime question we launched Prime in US in 2005 followed that in 2007 with UK, Germany and Japan and then other countries thereafter. We have fun in all of the countries where we have market places with the exception of Mexico, China and India and Prime is really in varying stages in those countries. We have some kind of that is shifting offering all of them.

Here in the US we have been talking quite a bit about Prime now that’s also in Italy and Japan and in UK at this point and not others. Also varying levels of digital benefit as well. So generally that the international countries are not as far along with selection or the for this digital offers. We’ve got Prime Video in UK, in Germany and Japan music is not fully rolled out yet all together this year. So that’s where we..

Operator:

Our next question comes from Carlos Kirjner with Bernstein. Please say your question.

Carlos Kirjner:Bernstein:

Thank you. I have two, I think in the first time since 1Q, ‘11 that we see conference those are percentage of revenue declining a flat. Is this just a sign feel in ability to increase the investment in line with revenue growth or is there something else going on and EPS a lot and secondly Brian you said that the growth of Prime has been driven by investments you’ve made and now making and you give the examples of devices that you guys are selling. I think it’s a mathematical sort of you that prime subscribers who decelerate in North America at some point from 50% growth.

Penetration increases and growth slows when we see the a deceleration in the investment levels and in other words how do you think about the effect of deceleration in prime on the North America margin structure into future. Thank you.

Brian Olsavsky:

Sure, let me start with that second one. So we think there is a lot of room to grow in not only our international countries, but also in the US. So we plan on continuing to build the benefits of the prime program from music to video to two days shipping to same day shipping to prime now. So, I don’t see anticipating and again it remains the best deal in retail.

So hopefully everyone signed up for that. On the second content question, I don’t have a lot to call out in the quarter I would say there is no led up in the pace of our invention here particular on the AWS side we had we just close the number of new features and services to you each quarter we had 214 in Q1, up from 170 this first quarter of last year. So over 26% growth in this quarter loan coming off a year where 722 significant new features and services delivered for AWS customers last year.

Operator:

Our next question comes from Brian Pitz of Jefferies. Please state your question.

Brian J. Pitz:Jefferies and Company Inc.:

Thanks for the question. Any comments on your business in India. How is that market ramping up and may be on the competitive front there any sense of where the local incumbent may actually have to some advantage in the region. Thanks.

Brian Olsavsky:

Yes, sure thanks. I actually I just return from India where spend a week with our teams in Bangalore and Hyderabad we are breaking ground on new 10 acre campus there. So we are solidifying and increasing our investment in India on all fronts.

to see firsthand of - invention going on with both customers and sellers making deliveries to customers seeing I have space program we have with merchants. It’s very exciting time in India and again the invention is off the charts we are inventing things in India that do not exist in other parts of the country excuse me parts of the world and the team there is one of our best.

You can see in some of the external commentary as well to second year role customers selected Amazon India, Amazon’S most trusted online shopping brand. During the quarter we rolled out a future call which is a studio wheels that we go to the sellers to help them sign up the registration, imaging, catalog, uploads and basic seller trainings so we are taking it to the sellers taking the business to the sellers we’ve already reached sellers in 25 cities and we’re really helping them expand their business and not only within their home region throughout the whole country.

Operator:

Our next question comes from Justin Post of Merrill Lynch. Please state your question.

Justin Post:Merrill Lynch:

Thanks. My questions on international margins there quite bit below where they were many years ago and traveling the U.S. Maybe talk about the dynamics there and what’s it going to take kind of catch up catch up over time? Thanks.

Brian Olsavsky:

Sure. So on the odd margin side although there was improvement year-over-year and you’re right it is still on affects neutral basis negative. We have as I said earlier selection expansion infrastructure investments fulfillment network NAWS excuse me that’s not international segment. Fulfillment network and digital content so we continue to build the underpinnings of the prime program in international countries also keep in mind that we’re making large investments in India we’re very excited about what we see and we’ll continue to invest heavily in India.

Operator:

Our next question comes from Ross Sandler with Deutsche Bank please state your question.

Ross Sandler:Deutsche Bank:

I have two question on AWS. First last fall at reinvent you guys disclosed that data management revenue was at a $1 billion run rate so can you provide an update on that figure and maybe just talk about how much of AWS revenue today is outside of the stores and compete layers.

And then the second question is on the AWS margin so I think everybody is trying to learn more about the structure long-term margin and it was down at quarter-on-quarter so was that from Apex impact or is there some seasonality of expense any color on what’s driving the gross margin and how we should think about that over the longer term? Thank you.

Brian Olsavsky:

I’ll take your second question first. So again we had margin expansion year-over-year that was quite significant from 12.4% to 23.5% but again it’s very early in this business we are very pleased with the results we’re seeing on the top and bottom-line the margins are going to be lumpy and affected by levels investing price reductions and also cost efficiency that we’re driving so quarter-to-quarter we’re very we are concern at this point about capital efficiency returning price to customers periodically with pressure reduction and adding feature sets for them to make the business more valuable.

Phil Hardin:Director, Investor Relations:

This is Phil for your other part of your question, we’re not providing an update on the $1 billion stat what we would say is that the AWS team has strong revenue growth across their suite of products the fastest growing product in their history is actually rollout that the new data base we are very excited about what we were seeing in that space but we were not breaking out the revenue for this

Operator:

Our next question comes from Eric Sheridan of UBS Investment Research. Please state your question.

Eric Sheridan:UBS Investment:

Thanks for taking the question. I am looking at the gross margin of impressive performance in Q1, there were few headwinds it look like in gross margin in Q4, I wanted to understand how we should think about the puts and takes in gross margin it evolved to be a much higher number over the last couple of years what some of the puts and takes are going forward specially with respect to content cost? Thanks.

Brian Olsavsky:

Sure, so I don’t have a forecast for you on content cost, an isolation or a really forward looks on any I think you think the -- guidance I’ve given you but, yes it hits in the gross margin content cost to show up there. I think the bigger issues that you should look out in gross margin and again starting with the comment that we expanded by 300 basis points year-over-year that is really driven by first of all the AWS growth and again $10 billion business growing 64% is very we are very pleased with that and that gross margin as well.

The other bigger element of that was the third party contribution, third party units are now up to 48% of paid units that’s up 400 basis points year-over-year so that continues to be a factor in gross margin again we booked that on a net basis the third party revenue it’s a positive factor in gross margin and can be a negative factor in for some cost and some of other metrics. This is to also just to jump in the gross margin is not the primary metrics we used to measure the business we are much more focused on the free cash flow dollars and operating profit dollars.

So there are whole lot of moving parts in gross margins and Brian mentioned a lot of, but it’s not primary metrics for us.

Operator:

Our next question comes from Aaron Kessler of Raymond James. Please state your question.

Aaron M. Kessler:Raymond James:

Great, thanks. Couple of questions. First if you give us updates on some of your new advertising initiatives in terms of how they’re sponsored that links that performing additionally I think is -- give us an update on prime now to give that number of studies the last how that evolving and attraction in prime now. Thank you.

Phil Hardin:

So we are very excited about the advertising business and we think it’s still very early for this opportunity. So it’s an offering we have been working on. We are trying to taking very customer centric approach you’ve probably noticed some changes in the treatment on the website and we did move away from text adds and product adds in favor of some of the other newer products and we are really excited about the opportunity there is for third party sellers and for other vendors on the site, but we are not breaking out numbers today.

And now on prime now, we are now in 30 metro areas really from a standing starts 16 months ago and we opened our first prime now location and as we now worldwide business in the US, UK, Italy and Japan. So the five cities we added in the first quarter were Raleigh, North Carolina, Cincinnati, Tampa, Liverpool, England and Japan. So how we feel about that business again it offers tens and thousands of daily essential products. We think it’s a service to customer leg certainly is hard for people, hard for companies to do.

We think the natural evolution of our operations network and our scale gives us a chance to do this and we are happy to invest in it as a service for our customers we’re taking the long-term approach on this..

Operator:

Our next question comes from Stephen Ju of Credit Suisse. Please state your question.

Stephen Ju:Credit Suisse:

Okay, thanks. So your capital lease driven property and equipment acquisitions is that down again year-over-year. So will you help to tie this to perhaps overall usage growth at AWS or maybe even a changing nature of how your enterprise customers maybe using the platform to be more acute versus storage or database --. I think historically on the e-commerce side you guys have been placed followers at opposed to price leaders AWS you have price leaders for the most or actively picking down by -- now given your leadership position do you think you’ll continue to be price leaders or do you think it’s now a time for your -- right.

Brian Olsavsky:

Let me your start CapEx question. So we like to look at both capital expenditures and capital leases, because they are both essentially levels are leveled investment those totaled to $9.5 billion in the trailing 12 months and it was up 7% from the 12 month period ending this quarter last year. I will point that the prior year was $6.1 billion. So we have stepped up investments although it did not go up as much year-over-year this quarter, but we are still spending almost $10 billion on what essentially is fulfillment capacity in support of really strong growth unit growth and FBA and global expansion and then also on AWS additional capacity for existing customers as they grow their business and also in new regions.

We’ve been working and continue working and continue work very hard on capital productivity it’s very important to us and I attribute a good piece of the ability to keep that at a modest growth rate year-over-year to our capital efficiency and better purchasing that cross all capital and capital just quite frankly. Again we are spending almost $10 billion so

Phil Hardin:

And Stephen this is Phil. Just to jump on the new subscriber kind of we continue to see really strong usage growth. We are not in the business of raising prices, we lower prices for AWS so that can be mixed for products, but by in large if you see our revenue growth that we’re also lowering prices which means that by math we’re typically going to be growing usage at very strong rates so just wanted to jump in that.

Operator:

Our next question comes from John Blackledge of Cowen and Company. Please state your question.

John R Blackledge:Cowen and Company:

Great, thanks. So the North American EGM segment outperformed our expectations of the growth accelerating on the year-over-year basis so given you don’t breakout GMV by vertical within the EGM segment and just given the strong growth at massive scale. Can you say any key verticals that were particularly strong and second question is just an update on fresh rollout has obviously been much slower than prime now. How should we think about the fresh rollout and the impact over the long term. Thank you.

Phil Hardin:

This is Phil. I will take the EGM question first. So just put numbers on that the year-over-year in the US or in North America was 32% growth which was up from 28% in Q4 and there is not any single categories were going out there to grow on a base that they the kind of rate. You really need pretty strong performance cross the board.

So a lot of categories are selling a lot and it’s a lot of the drivers we talked about it. As Brian mentioned on the revenue growth side, a prime selection growth and we also benefited from the extra day in the quarter due to leap year but strong performance from many of the category.

Brian Olsavsky:

Yes Amazon Fresh here we continue to have a strong fresh business in a number of cities in the US we know customers love it we are making good progress on the economics and you also knows that we have other ways for people to buy consumables products we have prime pantry, we have prime now. So we are playing with the different a lot of different models to see what resonates with consumers and it will get our investments decisions going forward.

Operator:

Our next question is from Ben Schachter with Macquarie Equities Research. Please state your question.

Ben Schachter:Macquarie:

First congratulations on a great quarter. Couple on Prime and one on China. First the point of clarification the answer to previous question I think that you will significantly increased investment in Prime was that investment specifically to video or should we expect new types of offering beyond video and music and then secondly on Prime, membership is likely hitting some saturation levels for a certain demographics in the US do you intend to focus on more lower income household to growth there and then finally quickly on China anything notable to call out their that’s been different over the recent past driving results free trade zone et cetera.

Brian Olsavsky:

I’ll take the first question on content. Yes my comment on Prime benefits was essentially one about video content in our investment there not saying other investments may not go up as well but that is one that we are focusing on and that I called out. On the comment about Prime I guess what I’ll call availability or saturation I think that’s one of the thoughts behind our monthly plan we want to create flexibility for consumers to try Prime in a low cost way is that’s how they choose. We’ve always had a free trial program but it is a hurdle for many people or there is hasn’t see that up full years payments for a year prime.

Annual is still going to be a better deal but we know that customers they try it more frequently if it’s a monthly plan and that’s what we are looking for we know that once customers try it generally really like it I think that all purchase other demographic as well.

Phil Hardin:

Just this is Phil another comment on the prime your saturation question keep in mind that even in the U.S. Which is our most mature by years of launch we still grew last year at 47% year-over-year membership growth and we continue to make program better and better I think the monthly offers are great for flexibility give people a chance to try new ways and we continue to add content we continue to add selection Prime now is a huge benefit that even exist two years ago so all this things are making the program better and we are still trying to meet as many customers as possible we are obviously very committed to drive in -- minutes of the Company.

Your question on China the part of the biggest thing to point to is more progress and selection on the Amazon global store. So this our website this is the offer that allows Chinese customers to shot from the U.S. website amazon.com would prices in RMB and with Chinese language pages. So it’s focused no really items that maybe hard to get and Amazon is really trying to become the trusted source for many things goods and so really that’s a big part of the focus and have you been tracking that number over time we are now up over $10 million which is good progress on that front.

Operator:

Our next question comes from Ron Josey with JMP Securities.. Please state your question.

Ron Josey:JMP Securities:

Great thanks for taking my the question I want to go back to North America but this time just focus on margins. 5.5, 5.4% margin I think that’s the highest level since may be 2Q 2010 and resuming the margin expansion we saw really from most of the last year so just hoping we can understand help us understand little bit more what’s driving that I am sure the moment to you prime flywheel you mentioned that’s happening in Europe. But is there anything else is going on besides prime flywheel maybe more efficient shipping or things one goes lines? Thanks.

Brian Olsavsky:

I’ll start a I think when you see the growth rate of the segment a 27% it’s showing the success we’re having with customers when we grow that club we can do a lot of good things with it we can on the cost side we run our facilities more efficiently and buy better we get look to in source something that we may have paid externally for so. There is a number of things that we can do the other thing will show up on the bottom-line but principally what we’re try and now is again make the prime experiences strong as possible after consumers.

Phil Hardin:Director, Investor Relations:

This is Phil the other thing I would add to that is at it is the margin you see in any quarters is really to output of kind of a rate of investment in some places and drive for efficiencies another and we’re not really trying to optimize for any particular number in a given quarter we are just trying to make the best decision as we can to grow long-term free cash flow per share and so again we’re juggling the investment in the places where we feel like we have long term opportunity where we need to invest with making sure we’re getting continuously better in all other process for the same time.

Operator:

Our final question will come from Bob Peck of SunTrust. Please state your question.

Robert Peck:SunTrust:

Yes, hi. Thank you. Just two quick ones, just back to India for a second I was wondering if you could talk about the regulatory environment there and particularly how to Amazon cloud tale and then number two, logistics could you talk about an access capacity it was logistics as you build out -- etcetera and we do have entertained delivering other company items IE like FedEx or UPS. Thanks.

Phil Hardin:

This is Phil I’ll take the India question. We are happy to see the recent clarifications and we are happy to operate in regiment so frankly the more clarity better.

And then on logistics question stepping back to the reason we add logistics capability and transportation capability and so we can serve our customers faster and faster delivery speeds and we have need to added more of our own capacity to supplement our carriers and our partners they are still again great partners have been and will continue to be for the future but we see opportunities where we need to add additional capacity and we are feeling those voice.

Thank you for joining us on the call today and for your questions. The 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.

Operator:

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.