Analyst Conference Summary

conference date: September 20, 2011 @ 2:00 PM Pacific Time
for quarter ending: September 3, 2011 (Q3, third quarter fiscal 2011)

But I use Adobe products
Forward-looking statements

Overview: Growth has paused for now, but results were within prior guidance.

Basic data (GAAP) :

Revenue was $1.013 billion, down 1% sequentially from $1.02 billion, but up 2% from $990.3 million in the year-earlier quarter.

Net income was $195.1 million, down 15% sequentially from $229.4 million, and also down 15% from $230.1 million year-earlier.

Earnings per share (EPS) were $0.39, down 13% sequentially from $0.45, and down 11% from $0.44 year-earlier.

Guidance:

Q4 revenue is expected between $1.075 and $1.125 billion. EPS $0.41 to $0.50 GAAP, $0.57 to $0.64 non-GAAP. Non-GAAP operating margin between 35 and 39%.

Conference Highlights:

The industry is in a major transition as tablets and smartphones "have become the new devices of choice, software is moving to the cloud, business models are evolving ... and technologies like HTML5 are gaining favor," said CEO Shantanu Narayen. Adobe is targeting two large initiatives with significant growth potential, content authoring and digital marketing.

Revenue and earnings were within prior guidance.

Non-GAAP numbers: operating income 366 million, margin 36.1%. Net income $273 million. EPS $0.55, up from $0.54 year-earlier.

Cash balance ended at $2.7 billion. Cash flow from operations was $325 million. 3.6 million shares of stock were repurchased for about $100 million. Deferred revenue ended at $484 million.

Revenue breakdown: products $814.5 million, subscriptions $111.9 million, services $86.7 million.

Shift to HTML5 was addressed in CS5.5. Adobe Edge HTML5 web motion tool has been previewed. "We will soon be introducing a broad set of tablet-based and cloud-connected apps and services across iOS, Android and other mobile platforms that represents a new revenue stream." Adobe Carousel imaging app already announced.

Creative and Interactive Solutions segment had revenue of $417.9 million, down sequentially from $433.1 million, up slightly from $416.9 million year-earlier.

Digital Media Solutions revenue was $151.1 million, up sequentially from $136.7 million, but down from $157.7 million year-earlier.

Subscription offerings of CS5.5 is attractive new customers; a third of subscribers had never bought an Adobe product before.

Digital Enterprise Solutions revenue was $270.4 million, down sequentially from $283.5 million but up from $256.1 million year-earlier. Subsegments: Knowledge Worker (Acrobat) revenue was $174.6 million, down sequentially from $182 million but up from $163 million year-earlier. Enterprise segment (LiveCycle & etc.) revenue was $95.8 million, down sequentially from $101.5 million but up from $93.5 million year-earlier.

Omniture segment revenue was $118.2 million, up sequentially from $115.9 million and from $99.8 million year-earlier. Mobile and device traffic grew to 11% of transactions from 7% in Q2.

Print and Publishing segment revenue was $55.6 million.

By geography, revenue came from: Americas 50%, Europe 29%, Asia 21%.

Employees jumped to 10,041 sequentially from 9,770.

Cost of revenue was $104.7 million, leaving gross profit of $908.6 million. Operating expenses of $634.4 million consisted of: research and development $181.0 million, sales and marketing $340.7 million, general and administrative $98.5 million, restructuring $3.8 million, amortization $10.4 million. Leaving operating income of $274.1 million. Other expense was $17.4 million. Income taxes $61.6 million.

Q&A

Monetization of new tools? Creative Suite support for HTML5 is one thing our customers want, and that we can take the lead in and monetize. HTML video is an important aspect. Preparations of magazines for HTML5 is getting more prevalent, and we are contributing to the development of HTML as a standard.

Macroenvironment? Asia and America have been stable, but Q2 weakness in Europe carried into Q3, which is usually our slowest quarter. 5.5 is helping keep the run rate high in the CS5 cycle. Biggest miss in Europe was in the enterprise segment.

Q4 guidance, level of confidence? We expect it to still be our traditionally strong quater. Enterprise customers tend to buy more in Q4, as does the government year-end. Our hobbyist launch also falls in Q4.

Video tools and Apple? We see video as a large growth opportunity, and it did well in Q3. We are doing well targetting Apple, both against Apple and Avid. We are strong on the authoring tools and the work flow.

Creative Professional user growth? Changes will drive digital publishing for new devices. We see an opportunity to attract new customers with tablet applications and subscriptions.

Seasonality in 2012 and shipping products? Should be typical seasonality, but will talk more about 2012 at analyst day.

Enterprise business weakness? It was lighter than we would have liked, driven by Europe. But we still expect enterprise can grow 20% in the year, exactly on plan.

CS 5.5 penetration, release of 6? 40% of customers are on CS5. We want to change to an annual cycle to capture more innovation. Version 6 will have many drivers, including HTML5 and video, tablet applications and cloud services.

Subscriptions as a strategy is clearly attracting new customers to the platform, both for specific products and for suites.

$3 billion of good will on the balance sheet, writing down old technology, licensing of IT? We do a goodwill impairment test every year, but the businesses have been strong so we have not had to do write downs.

Day Software acquisition part of the 20% growth this year? We integrated the solution, we don't look at revenue segregated that way.

Most of us are taking more conservative close rates for enterprise in Q4? We go through the pipeline and risks every week. There are a lot of things to help in Q4 to hit that 20%. We have seen some extended sales cycles, which we have factored in.

Government Q4 won't see a lock down? We will take the pipeline we have, including new products, and focus on selling it.

Subscriptions also help converting customers, that we would call version skippers, stay current.

We strongly believe will see tablets used not just for consumption, but for production, so we will be offering products and have that as a new revenue stream. Again, we will have both point (individual) products and suites.

Windows 8 to HTML5, Visual Studio support for HTML5? We see content created both for web browsers and for stand alone applications. This will evolve over the next 4 or 5 years. The browser support for HTML5 is going to evolve too. Our customers want help targetting multiple applications.

Recompiling for iPad? AIR works on iPad, we have thousands of applications working at the iStore. Adobe will provide tools, workflows, and solutions not just for the web, but for all these different app stores.

In education, our design suite is being adopted across most school design programs. We are seeing more adoption of our products by students.

Use of cash, hiring? Consistent cash strategy: organic investment, mid-to-small acquisitions, excess U.S. cash to share repurchase. We have bought back an incredible amount of stock over the last 5 years, which drives value to the shareholders. We continue to hire, we had about 80 interns this quarter which bumped it, but we are doing mostly sales hiring and some R&D hiring. Cash balance is roughly 2/3 offshore, 1/3 onshore.

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