Analyst Conference Summary

conference date: June 21, 2011 @ 2:00 PM Pacific Time
for quarter ending: June 3, 2011 (second quarter fiscal 2011)

But I use Adobe products
Forward-looking statements

Overview: Solid quarter, but guidance below some expectations.

Basic data (GAAP) :

Revenue was $1.02 billion, down 1% sequentially from $1.03 billion, but up 8% from $943 million in the year-earlier quarter.

Net income was $229.4 million, down 2% sequentially from $234.6 million, but up 54% from $148.6 million year-earlier.

Earnings per share (EPS) were $0.45, down 2% sequentially from $0.46, but up 61% from $0.28 year-earlier.

Guidance:

For fiscal Q3, the revenue target is $1 billion to $1.05 billion. GAAP operating margin 24.5% to 27.5%, with non-GAAP 34 to 36%. Diluted EPS $0.35 to $0.42 GAAP, $0.50 to $0.56 non-GAAP.

Conference Highlights:

Strong Q2 performance allows reaffirmation of 10% revenue growth in fiscal 2011. Significant growth areas are now Content Authoring, Digital Marketing Optimization, and Customer Experience Management.

Non-GAAP numbers: EPS $0.55, up 25% y/y. Net income $279.9 million, up 20% y/y. Operating income $376.4 million up 13% y/y. Operating margin was 36.8%. Operating expenses $556.7 million.

Product revenue was $830.3 million. Subscription revenue $109.2 million. Services and support $83.7 million.

Creative Suite (CS) 5.5 shipped in the quarter with new mobile, Flash and HTML5 capabilities. Creative and Interactive segment revenues were $433.1 million. Now offering a subscription edition to create a lower initial price point. Adobe Edge will be released in July. Digital media segment revenue was $136.7.

Omniture Digital Marketing Optimization had record revenue of $115.9 million; bookings grew 20% y/y. Introduced Tag Manager and SocialAnalytics.

Enterprise segment of Customer Experience Management grew revenue 34% y/y. Day Software integration went well. Announced Digital Enterprise Platform yesterday. Total Digital Enterprise segment revenue was $283.5 million, with Knowledge Worker contributing $182.0 million and Enterprise $101.5 million. Acrobat revenue grew 17% y/y.

Digital Media Solutions revenues fell to $136.7 million. Print & Publishing segment down y/y to $54.0 million.

Revenue by geography: EMEA 30%, Asia 22%, Americas 48%.

Cash and equivalent investment balance ended at $2.62 billion. Cash flow from operations was $389.3 million. Deferred revenue hit $482 million. 13.7 million shares repurchased in quarter.

Cost of revenue was $109.2 million, leaving GAAP gross profit of $914.0 million. Operating expenses of $637.3 million included: $183.2 million R&D, $348.7 million sales and marketing, $95.6 million general and administrative, $10.4 million amortization of purchased intangibles, and negative $0.6 million restructuring. Leaving operating income of $276.7 million. Non-operating expense was $17.5 million. Taxes $29.8 million.

Employees at end of quarter: 9770.

Annual Adobe analyst day will be November 9, 2011.

Q&A

CS 5.5 premium demand drivers? Products that were upgraded (not all were) are driving sales. HTML5, mobile app creation, tie-ins to digital publishing suite.

5.5 upgrade type (from what prior versions)? Extends the life of 5.0. Selling well. Main targets are CS4 and CS3.

Europe? Somewhat off expectations, mostly nordic and U.K. Tough throughout quarter.

Getting synergy from selling analytics to marketers, then 5.5 tie-ins. We are making significant traction with video.

Adobe Edge? They want to use HTML5 to do what they did with Flash Professional. Edge is best way to do HTML5, but capabilities are still well behind Flash.

Language rollout on CS5.5? We are moving to release all major languages at the same time.

Enterprise deal slips in Q1, still low in Q2? 34% y/y growth. In quarter some impact was Europe, but government is coming back strong.

Native extensions are now allowed on Flash Builder. So you can take advantage of specific Android or IOS features if you want. Bridging gap between apps and Web browsers is important to developers.

Lower margins in guidance? Just seasonality. Margins should go back up in Q4. We are still ramping on the expense side for sales and marketing.

Day acquisition revenue cannot be separated out from its segment because it is now part of a package.

What are you seeing in the macro economy? Our own growth is based on desire for our products. As we add sales people, we see demand is out there, for us. Digital marketing category demand is exploding.

SAS (software as a service) is going to be an exciting area for Adobe moving forward.

We still aspire to be a $5 billion (revenue) company, growing organically.

Education vertical? It did really well for us in Q2. In North America Q3 is seasonally strong for education. Our new products are compelling for education publishing. Captivate allows teachers to create content, including for tablets.

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