Analyst Conference Summary

conference date: September 16 , 2008 @ 2:00 PM Pacific Time
for quarter ending: August 31, 2008 (3rd quarter fiscal 2008)

Forward-looking statements

Overview: Flat revenues sequentially; generally, growing slowly compared to the past, possibly due to delayed purchases anticipating release of Creative Suite 4. Profits decreased.

Basic data (GAAP) :

Revenue was $887.3 million, flat sequentially from $886.9 million and up 4% from $851.7 million year-earlier.

Net income was $191.6 million, down 11% sequentially from $214.9 million and down 7% from $205.2 million year-earlier.

Earnings per share (EPS) were $0.35, down 12.5% sequentially from $0.40 but up 3% from $0.34 year-earlier.

Guidance:

Fiscal Q4 revenue target is $925 to $955 million, with an operating margin of about 30.5% GAAP, 39.5% non-GAAP. GAAP EPS range $0.39 to $0.41, non-GAAP $0.51 to $0.53. 544-548 million shares. 25% tax rate.

Will not comment on fiscal 2009 due to economic uncertainty.

Conference Highlights:

Management characterized performance as strong, "driven by record revenue for our Acrobat and LiveCycle products, as well as the overall diversity of our business." Exceeded targets. Year-over-year comparisons were difficult because of Creative Suite launch in 2007.

Creative Suite 4 product family to launch next week (September 23). Will be great, a must-have release. 82% of online videos in U.S. are viewed using Flash. Adobe Air adoption growing rapidly.

Non-GAAP EPS was $0.50, flat sequentially and up from $0.45 year-earlier. Non-GAAP operating income was $352 million. Non-GAAP net income was $269 million.

Non-GAAP income tax was lower than expected due to an audit resolved in Adobe's favor.

$493.6 Creative solutions segment revenue. Sell through rates slowed in anticipation of CS4 launch.

$283.5 Business productivity segment revenue. 25% growth y/y. $218 million was knowledge worker revenue, up 23% y/y. Enterprise revenue was $65.5 million, up 29% y/y.

$27.5 mobile and device revenue. Other segment was $82.7 million revenue.

By geography: Americas 48%. Europe 33%, Asia 19%.

Product revenue was $838.8 million, services revenue $48.4 million. Cost of revenue was $110.8 million. Gross profit $776.4 million. Operating expenses of $556.9 million included R&D of $170.1 million, sales and marketing $271.4 million, general and administration $97.1 million, restructuring $1.2 million. Amortization of intangibles $17.0 million. Leaving operating income of $219.5 million. Non-operating income was $9.0 million. Income tax provision $36.9 million.

Cash and short term investment ended at 2.0 billion. $211 million cash flow from operations. Repurchased 3.7 million shares for $147 million.

Inventory was within normal limits.

Q&A:

CS4 prices? Excited about launch. First good integration of Macromedia and Adobe products. Will talk about pricing at launch. Do want everyone to standardize on latest version; don't like people skipping versions.

Server business growth? Enterprise segment is a major opportunity. Lifecycle adoption has been good.

Expenses and investments in 2009? Make tradeoffs between long-term investment and current operating margins. Video on Web and Air will be major investment priorities in 2009.

U.S. spending patterns? Good education and Acrobat results in Americas. In 2009 we see exciting opportunities, cannot predict overall economy in 2009. Explosion of digital content is expected to continue.

Softness in any vertical markets? Creative business decline was seasonal and due to new launch anticipation. Financial services segment showed good Acrobat revenue, government too. In Q4 CS4 launch will drive revenue gains, mobile will show a sequential decline.

Acrobat Pro continues to be over 50% of business. Licensing is becoming increasingly important.

Backlog ended at a minimum in anticipation of CS4 launch. Deferred revenue was up.

From an expense perspective the CS4 launch will be expensive. R&D continues to be an area of investment; all this is in the Q4 guidance.

Worries about economy in Europe? We saw nothing besides the normal seasonality.

Taking old comment that revenue in 2009 would grow faster than 2008 off the table.

CS4 will be provided in more languages than CS3. Emerging markets are important.

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