Analyst Conference Summary

conference date: June 19, 2012 @ 2:00 PM Pacific Time
for quarter ending: June 1, 2012 (Q2, second quarter fiscal 2012)

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Forward-looking statements

Overview: Revenues were above prior guidance range, while non-GAAP earnings were near the high end of that range. Increased full-year earnings guidance.

Basic data (GAAP) :

Revenue was $1.124 billion, up 7.5% sequentially from $1.045 billion, and up 10% from $1.023 billion in the year-earlier quarter.

Net income was $223.9 million, up 21% sequentially from $185.2 million, but down 2% from $229.4 million year-earlier.

Earnings per share (EPS) were $0.45, up 22% sequentially from $0.37 and flat from year-earlier.

Guidance:

Q3 fiscal 2012 revenue target is $1.075 to $1.125 billion, with GAAP earnings of $0.38 to $0.43 and non-GAAP earnings of $0.56 to $0.61.

For full fiscal 2012, GAAP earnings ranging from $1.69 to $1.76; non-GAAP earnings from $2.40 to $2.46. Revenue growth 6 to 7% y/y.

Conference Highlights:

Results were driven by the launch of Creative Cloud in May and Creative Suite 6 (CS6). Acrobat revenue was also strong. Digital Marketing Suite revenue grew 35% y/y.

"Creative professionals see significant value in the new subscription-based offering," allowing Creative Cloud to exceed targets. Response to improvements in CS6 have been outstanding.

Digital Publishing Suite now has 850 customers world wide.

Acrobat revenue included a $10 million deal with the U.S. Air Force.

Non-GAAP numbers: $404.4 million operating income, net income $299.6 million, EPS $0.60.

Digital Media Segment revenue was $818.4 million, up 9% y/y. $206.7 million was for document services, including Acrobat.

Digital Marketing revenue was $250 million.

Creative segment revenue was [not stated or glitch]. There was some softness in Europe. Over 90,000 paid subscriptions at end of quarter, with 75% paying annually, and most take the entire CC offering.

Print and Publishing segment revenue was $55 million.

Product revenue was $871.0 million, subscription revenue was $159.5 million, and services revenue was $93.9 million.

Cash and short-term investments balance ended at $3.0 billion, up $200 million in the quarter. Cash flow from operations was $448.2 million. Debt and lease obligations were $1.5 billion. Capital expenses were $60.8 million. Depreciation and Amortization was $77.2 million. Non-cash stock-based compensation expense was $63.0 million. Deferred revenue ended at $535.1 million. $176 million was used for share repurchases.

Cost of revenue was $130.9 million, leaving gross profit of $993.5 million. Operating expenses were $688.4 million, leaving GAAP operating income of $305.1 million. Other expense was $10.6 million. Income tax provision was $70.7 million.

Q&A

Subscriber color? Some of 90,000 subs, about 30,000 were conversions from 5.5 subscriptions. We are now getting about 5000 new subscribers per week. Many subscribers are getting the lower promotional pricing.

Earlier guidance was changed because of demand in Europe, foreign exchange effects, and the good subscription response.

CS4 and CS3 owners? Right now we are only offering subscriptions to individual users, not to teams or enterprise.

Digital marketing suite vs. Livecycle? Connect and Livecycle are now just focused on government, and we predicted a $150 million decline this year. This is part of realignment.

Digital media guidance? In this cycle, for guidance we are being prudent because of Europe.

Enterprise customers on Cloud? They want access to the rapid updates and file storage capabilities, digital asset management. "Selling the entire solution is really resonating with them." We intend to do that before the next cycle. They are mostly on a seat-license basis already, so converting to the cloud would not be a revenue change.

We are seeing people with pirated copies of our products convert to CC.

Where in particular are you seeing demand for Creative Cloud? The free trial memberships have been broad and global. It is still early, no one has seen how much innovation we will be able to introduce on a monthly basis.

Expects long term deferred revenue is expected to go up, but some one-time gains in Q2 means Q3 may be flat. Creative Cloud revenue will not be reflected in deferred.

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