Analyst Conference Summary

conference date: December 17, 2007 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2007 (4th quarter fiscal 2007)

Forward-looking statements

Overview: Record revenue exceeded guidance; growth continues to be rapid. Q1 revenues expected down sequentially due to seasonality.

Basic data:

Revenues were $911.2 million, up 7% sequentially from $851.7, and up 34% from $682.2 million year-earlier.

Net income was $222.2 million, up 8% sequentially from $205.2 million and up 21% from $183.2 million year-earlier.

Earnings per share (EPS) were $0.38, up 12% sequentially from $0.34 and up 27% from $0.30 from year-earlier.

Guidance:

For fiscal Q1 2008 target is revenues of $855 to $885 million, with a GAAP operating margin of 30 to 31% (non-GAAP 40%). Other income between $15 and $17 million and tax rate of 27%. Result would be GAAP EPS of $0.34 to $0.36 per share and non-GAAP EPS of $.44 to $0.46 per share.

Full fiscal 2008 annual revenue growth target is 13% ($3.57 billion for year) with a non-GAAP operating margin of about 39% (GAAP 30%).

All this assumes macroeconomic stability.

Conference Highlights:

Record results were driven by sales of Creative Suite 3, Acrobat, and enterprise business products. We are "positioned bo achieve a sixth consecutive year of double-digit growth."

Non-GAAP results were: EPS $0.49. $362.2 million operating income. $289.6 million net income. Non-GAAP net income excludes $26.8 million in stock-based compensation expense, $39.1 million of amortization, and $1.5 million investment loss.

Product revenues were $872.4 million; services revenues $38.8 million; total $911.2 million. Cost of revenue was $98.6 million, leaving gross profit of $812.6 million. Operating expenses included $162.8 million R&D, $282.1 sales and marketing, $74.0 general and administrative, and $17.9 million amortization, for total operating expense of $536.8 million, leaving operating income of $275.8 million. Other income was $14.8 million. Income tax provision was $68.5 million.

Operating margin was 30.3% GAAP, 39.7% non-GAAP.

Cash and short term investments totaled $1.99 billion. Cash flow from operations was $398 million.

Full year 2007 revenue was $3.16 billion, also a record. Net income was $723.8 million and EPS $1.21.

Revenue by business segment: Creative $570.5 million; Knowledge Worker $192.1 million; Enterprise & Developer $68.4 million (up 32% y/y); Mobile & Device $13.5 million; and other $66.7 million. CS3 revenue was up 37% over comparable CS2 revenues in comparable time period. Video products grew revenues 37% year-over-year.

By geography Americas was 47% of revenue, EMEA 35%, Asia 18%.

Q&A:

Tail for Create Suite 3? We were pleased with Q4 results. Research indicates trends are still in place, including Mac adoption. Basically following the pattern of 1 and 2 but at a higher level.

Acrobat units added in 2007? High-value users are driving usage. There are significant opportunities remaining.

Europe demand in 2008? We have not seen any regional problems in Europe, and we would expect that to continue.

August quarter new products? Not making a specific announcement yet, just saying there will be some help in seasonally slow quarters.

Gross margin erosion was hit by about $25 million of one-time expenses in Q4, some related to litigation.

Backlog and visibility? End of Q4 had about 7% of shippable backlog, which was factored into our guidance.

Revenues in 2008? In Q1 expect CS3 at same level but overall Creative business unit decline as hobbyists down in typical seasonality; Acrobat flat; Enterprise to decline sequentially on seasonality; mobile and other also flat. Q2 and Q3 are similar to Q1, with launches offsetting seasonality in Q3. Jump back up in Q4. We are excited about our long term growth rates.

We continue to invest in R&D, balancing current profits against future growth.

Air? Fixes some significant deficiencies in current Web. Looking at new adoption by developers because very early in process. Many companies are looking at improving Web experience. Microsoft Silverlight is more like FlashPlayer than Air. Air is built on existing standards. Long run is about selling authoring tools, but also should provide ad revenue.

Do CS 3 price increases imply unit sales are flat? The problem is that suites contain different numbers of products and Macromedia products have now been integrated. Adoption has been great. No complaints about higher price points. Master Collection adoption is good. Pricing is lower than value to customers.

Adoption of Flash Lite on handsets is accelerating, over 300 million.

Flash Video? Trying to get all media players to incorporate it. We want people to use secure Flash Video streaming, as opposed to unsecured.

Buyback progress? 2.3 million shares left on 20 million, but added 30 million more. 11.4 million shares bought back in Q4.

Guidance up for Q1, but unchanged for 2008? 2007 was a banner year. It is clear our strategy is working.

Asian drop? No, demand was strong worldwide.

Currency benefit? $26 million change year-over-year benefit from strong Euro. Currency impact was factored into guidance.

Elements business? New releases did well in consumer marketplace, we update it each year before XMas high demand season. Will continue to augment functionality with Web-based services.

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