Analyst Conference Summary

conference date: March 19, 2012 @ 2:00 PM Pacific Time
for quarter ending: March 2, 2012 (Q1, first quarter fiscal 2012)

But I use Adobe products
Forward-looking statements

Overview: Not too exciting, with revenue nearly flat and GAAP EPS down y/y on higher operating expenses.

Basic data (GAAP) :

Revenue was $1.045 billion, down 10% sequentially from $1.152 billion but up 2% from $1.027 billion year-earlier.

Net income was $185.2 million, up 7% sequentially from $173.7 million but down 21% from $234.6 million year-earlier.

Earnings per share (EPS) were $0.37, up 6% sequentially from $0.35 and down 20% from $0.46 year-earlier.

Guidance:

Fiscal Q2 2012 revenue estimated at $1.090 to $1.140 billion, with GAAP EPS of $0.37 to $0.43 and non-GAAP EPS of $0.57 to $0.61.

For fiscal 2012 estimates have changed due to the acquisition of Efficient Frontier. Annual revenue growth now expected between 6% and 8%, with GAAP EPS range from $1.63 to $1.73 and non-GAAP EPS range from $2.38 to $2.48.

Conference Highlights:

Efficient Frontier acquisition closed in January and resulted in $9.6 million revenue in the quarter. It expands Adobe's digital marketing suite, for instance allowing ad spend to be optimized across multiple platforms.

Non-GAAP numbers: EPS $0.57, net income $284.5 million.

Adobe is looking to new releases of Creative Suite and Creative Cloud for an upside. Revenue for the quarter was within plan. Creative Suite revenue was lower than expected in Q1 as customers are waiting for the coming release to upgrade. Interest in HTML5 is high. The new CS6 is planned for release late in Q2.

Creative Cloud includes all the Adobe online services and will have a subscription model. It will also have a lower cost of entry for new customers.

Project Primetime delivers video with ads across platforms. Lightroom 4 was released earlier in March.

Product revenue was $808.5 million, down from $842.7 million year-earlier. Subscription revenue grew to $146.2 million from $106.2 million year-earlier. Services and support revenue was $90.5 million, up from $78.8 million year-earlier.

Digital media $730.3 million. Document services $188.3 million. Digital marketing $259.9 million, consisting of $174.3 million for Digital Marketing Suite and $85.6 million for LiveCycle and Connect. Print and publishing segment was $55.0 million.

Revenues by geography, Americas 48%, Europe 32%, Asia 20%.

Cash flow from operations was $314.4 million. $2.8 billion cash & equivalents balance, down from $2.9 billion sequentially on acquisition costs. $53 million was spent on share repurchases.

Cost of revenue was $108.3 million, leaving $937.0 million in gross profits. GAAP operating expenses were $648.0 million, consisting of: $177.7 for research and development; $358.9 million sales and marketing; $102.7 million general and administrative; $11.4 million amortization of purchased intangibles; and a reversal of $2.8 million for restructuring. Leaving operating income of $289.0 million. Other expense was $18.6 million. Income taxes were $85.2 million.

Tax rate was higher than usual due to the acquisition, somewhat offset by a state tax ruling.

9963 employees, up from 9925 sequentially.

Q&A

CS5.5 did not achieve goal, details? We had solid Acrobat earnings. Demand in general was stable. We started advertising CS6 in Q1, which is earlier than usual. Demand for CS6 is more than in higher cycles. 5.5 accomplished its key objective of giving CS an annual cycle.

Deferred revenue had a nice pop, much due to Omniture, some due to buildup for CS6.

CS6 timing? It is a bit later in the quarter than the in prior cycles, as we need to release online along with desktop. Most revenue will be in Q3, but some in Q2.

Document Services demand continues to by stable, we typically see an uptick in Q4 due to enterprise purchasing cycle. It is getting late in the Acrobat business cycle, it did do worse y/y than in Q4, but it was in line with our expectations.

The operating expense changes we had to make for the current transition are now behind us.

Creative Cloud adoption pace? We expect it to be, not slow, but going to take a little while. We are excited and expect to transition more and more people to the cloud offering, but it will take some time.

Is pricing needed to entice more customers to move to subscriptions? With imaging and Photoshop, they have not been updated for 2 years, so people are excited. We will support Flash developers and allow them to export to HTML5. For enterprises pricing is per user, and will continue to be that way for the Cloud product. New users will be the primary adopters of the new platform.

We have a very healthy roadmap of features we will release on the Cloud, so that will be a better offering for people long term. We will have individual point products by subscription, as well as the Cloud bundle.

Four key areas of digital marketing: analytics including mobile and cross-visit analytics; personalized engagement; multi-channel campaign execution. and media monetization. More details will be available at the summit this week.

In next version a single button will enable them to export both Flash and HTML5. PhoneGap is also creating enthusiasm for CS6 because it takes known technologies and allows creation of products for multiple app stores.

Digitial marketing business margins, room for improvement? We have the professional services business and the cost of the physical servers.

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