Analyst Conference Summary

conference date: March 18, 2008 @ 2:00 PM Pacific Time
for quarter ending: February 29, 2008 (1st quarter fiscal 2008)

Forward-looking statements

Overview: Strong quarter, but sequentially down, and did not increase forward guidance.

Basic data:

Revenue was $890.4 million, down 2% sequentially from $911.2 million and up 37% from $649.4 million year-earlier.

Net income was $219.4 million, down 1% sequentially from $222.2 million but up 52% from $143.9 million year-earlier.

EPS (earnings per share) were $0.38, flat sequentially and up 58% from $0.24 year-earlier.

Guidance:

For fiscal Q2 2008 revenue is expected between $855 and $885 million, with GAAP operating margin of 29 to 30% and non-GAAP margin around 39%. Target for EPS $0.35 to $0.37 GAAP, $0.45 to $0.47 non-GAAP.

For full fiscal 2008 annual revenue growth target is 13%, with 30% GAAP operating margin, resulting in EPS of $1.45 to $1.51, or non-GAAP EPS of $1.86 to $1.92.

Conference Highlights:

Adobe is performing well against its strategy and the market for its products is growing rapidly.

Revenue was above the target range of $855 to $885 million. Creative Suite 3 and Acrobat demand was strong.

33.3 million shares were repurchased for $1.25 billion.

Non-GAAP: EPS was $0.48. Operating income $359.0 million or 40.3% of revenue. Net income was $273.0 million.

Product revenue was $852.0 million, services and support $38.5 million.

Cost of revenue was $82.5 million, leaving gross profit of $808.0 million. Operating expenses of $532.5 million included R&D $168.5 million, sales and marketing $262.6 million, general and administrative $82.9 milion, restructuring $1.4 million, amortization of intangibles $17.1 million. Leaving GAAP operating income at $275.4 million and operating margin of 30.9%. Other income was $20.2 million. Income taxes $76.3 million.

Cash, equivalents including short term investments ended at $1.71 billion. Cash flow from operating activities was $399.3 million.Net increase in cash was $86 million.

Launch of Adobe AIR was successful.

Revenue by business segments:

Creative solutions $543.5 million. 57% y/y growth.
Business productivity $249.7 million. 15% y/y growth.
Mobile and Device $15.2 million. 11% y/y growth.
Other (Platform and Print, including Coldfusion) $82.0. 14% y/y growth.

Revenue by geography: 45% Americas, 36% EMEA (Europe & Middle East), 19% Asia. North America had a sequential decline in line with seasonality.

Closely monitoring economic environment. Our broad array of products, customers and geographic distribution makes us relatively immune to a downturn. Q3 likely to be similar to Q2, and expect a strong fiscal Q4.

Video streamed in Flash increased over 300% this year. 20% y/y video product growth. Over 100 million mobile devices with Flash Lite shipped in quarter and Microsft is licensing it for Windows Mobile devices.

Q&A:

Creative Solution demand, enterprise v. hobbyist? At this time in cycle licensing drives business, so it tends to be enterprise. But no real change across those two segments.

Air penetration? It is very early in process, but we already have 45 shipping applications after only a month. Will piggyback off Reader and Flash.

Expense changes lately? Our annual process sets key priorities. A particular focus is to leverage video opportunities this year. Software as a Service is also being invested in.

CS4 configuration and pricing? Overall segmentation of CS3 is likely to stay the same. We at pricing with every cycle. We want people to not do version skipping.

Initiatives that might convert to revenue this year? Air launched. Media Player beta available, but revenue not material this year.

Apple mobile Flash support? Want to bring Flash to iPhone, have evaluated the SDK and are working on it.

Stock repurchases? Believe the best methodology to return cash to shareholders is through repurchases.

Silverlight competition? We have 98% PCs with Flash. We have better authoring tools, DRM, and a media server. Our partners have been using Adobe for decades. We will continue to innovate.

Strong growth in Europe? Emerging markets and Europe, especially Eastern Eupore countries enterering the EU, have a lot of potential for us, and we did release CS3 later there than in U.S.$25 million favorable y/y currency benefit. Value of intellectual property is increaseing and piracy rate is decreasing somewhat.

We get real-time sell-through data, so we can act quickly on the expense side if their is any downside to revenue due to economics. These are the times when strong companies like Adobe get stronger.

Flash Cast? Expect Verizon to launch with us later this year.

Are you working on ad serving technology? Opportunity for us is to make sure Flash is the media of choice for ads.

Backlog? 5% of revenue.

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