Analyst Conference Summary

conference date: June 22, 2010 @ 2:00 PM Pacific Time
for quarter ending: June 4, 2010 (second quarter fiscal 2010)

But I use Adobe products
Forward-looking statements

Overview: Record revenues show software sector and Adobe in particular are still good growth bets.

Basic data (GAAP) :

Revenue was $943.0 million, up 10% sequentially from $858.7 million and up 34% from $704.7 million in the year-earlier quarter.

Net income was $$148.6 million, up 17% sequentially from $127.2 million and up 18% from $126.1 million year-earlier.

Earnings per share (EPS) were $0.28, up 17% sequentially from $0.24 and also up 17% from $0.24 year-earlier.

Guidance:

Q3 fiscal 2010 revenue target is $950 million to $1 billion. GAAP operating margin 25.5 to 27.5%; non-GAAP 36 to 37%. EPS target is $0.32 to $0.37 GAAP, $0.46 to $0.50 non-GAAP.

Conference Highlights:

Revenues set a record and were well above prior guidance, "driven by the successful launch of Creative Suite 5 (CS5)."

Non-GAAP earnings were reported at $0.44 per share. Net income was $234.2 million. Non-GAAP operating income was $334.5 million.

Another stock repurchase program was announced, just $1.6 billion through 2012.

Product revenue was $795.3 million, subscriptions $92.3 million, services and support $55.5 million.

There was strong CS5 adoption in all geographies. Video solutions are showing strong growth. CS5 sales were particularly strong for Mac brand computers. Believes CS5 sales will remain strong through 2011. Acrobat business was strong, and a new version will be released in Q4. Connect and LiveCycle had strong bookings.

Omniture (SiteCatalyst and other products) customer base grew strongly, revenue down slightly sequentially $83.5 million.

Flash remains strategic. Revenue up 22% y/y. There are over 3.5 million Flash developers, up 59% since 2009. people love the new flashplayer on Android phones. "Those who don't have Flash on their phones will wish they did."

Cost of revenue was $107.8 million. Operating expenses of $607.9 million included $167.3 million for R&D, $321.0 million for sales and marketing, $90.0 million for general and administrative, $11.5 million for restructuring, and $18.1 million for amortization of purchased intangibles. Leaving GAAP operating income of $227.3 million. Non-operating expense was $33.1 million. Income tax provision was $45.6 million.

Creative Solutions segment revenue was $532.7 million versus $411.7 year earlier. Includes 5 weeks of CS5 results, exceeding CS4 rates by 15%. Suites are selling well, including Flash authoring.

$156 million Knowledge Worker revenue. $76.7 million Enterprise revenue, down despite LiveCycle growth.

By geography: Americas 48%, Europe 29%, Asia 23%.

8541 employees at end of quarter, up sequentially.

$251 million cash flow from operations. Ending cash $2.6 billion, down sequentially from $2.7 billion due to Omniture acquisition expense. $84.7 million used for stock repurchases.

Believes Adobe stock is undervalued, so will aggressively purchase stock. Expects to have $5 billion in annual revenues by 2012, based on value to customer and increase importance of paperless documents and Internet content.

Q&A

Europe? We had a strong quarter across geographies, we saw no negative impact from Europe except the usual seasonality. We did have a $22 million q/q loss from Europe due to currency changes. But we expect $30 million in hedging benefit later in the year.

Capital expenditure to continue to ramp? We had some land purchases in the quarter, total $20 million. Investment in datacenters, one-time, of $25 million also contributed. So run rate should go back down.

Selling price impact on CS5 revenues? Units drove most of the revenue increase, but price of some suites was increased as components were expanded. Compared to CS3, we expect it to be closer (than CS4 was).

For the rest of the year we will focus on driving earnings growth and cash flow.

Additional 190 people in quarter, forward indicator? The way to look at it is that we will add, largely in areas that are smart from a geographic or business standpoint.

$5 billion 2012 target dependent on an acquisition? Margins will stay at roughly 2010 levels despite acquisitions of lower-margin businesses. Acquisitions mostly small to medium sized, most growth will be organic. We want to remind our investors that Adobe has a massive opportunity and is uniquely positioned; there is more to the story than the Apple v. Flash controversy.

Why not increase margins? We want to reinvest in the business.

Anything in particular driving CS5 demand? Reviews have been really positive. Mainly in is productivity improvements. Revamped playback engine in video. HTML 5 patch for Dreamweaver. We have seen no negative impact from the HTML versus Flash debate. We believe Flash and HTML will be the solution for the Web.

Omniture competition? Omniture is already the clear leader, and everyone we talk to wants to embed analytics while creating content with Adobe products.

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