Analyst Conference Summary

conference date: December 13, 2012 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2012 (Q4, fourth quarter fiscal 2012)

But I use Adobe products.
Forward-looking statements

Overview: Record revenue exceeded guidance, but flat from Q4 2011, with strong GAAP net income growth.

Basic data (GAAP) :

Revenue was $1.153 billion, up 6% sequentially from $1.086 billion and up slightly from $1.152 billion in the year-earlier quarter.

Net income was $222.3 million, up 10% sequentially from $201.4 million and up 28% from $173.7 million year-earlier.

Earnings per share (EPS) were $0.44, up 10% sequentially from $0.40 and up 26% from $0.35 year-earlier.

Guidance:

Q1 fiscal 2013 revenue between $950 million and $1 billion, with GAAP EPS $0.08 to $0.14 and non-GAAP EPS $0.26 to $0.32. $0.16 of the difference is stock-based compensation expense.

Full fiscal year 2013 revenue around $4.1 billion. GAAP EPS around $0.62. Non-GAAP EPS around $1.40. $0.69 of the difference is stock based compensation expense.

Conference Highlights:

Adobe Marketing Cloud as well as Document Services revenue set a record ($220.4 million and $210.2 million respectively). Adobe Creative Cloud adoption accelerated, with 10,000 new subscriptions per week average, an increase of 13% in overall Creative units y/y.

"We are confident fiscal 2013 will be a pivotal year for the transition. This will yield a stronger, more predictable recurring revenue model with higher long-term revenue growth."

Non-GAAP numbers: $0.61 EPS, net income $307.9 million.

Product revenue was $852.8 million. Subscription revenue $194.5 million. Services and support revenue $106.0 million.

Digital Marketing Segment revenue was $290.4 million. $220.4 million of that was Adobe Marketing cloud. Adobe Marketing Cloud had 35% y/y growth. Web experience management doubled market share in 2 years. LiveCycle + Web Conferencing revenue was $70 million, down from $102.7 million year-earlier. Includes analytics, online targeting, media optimization, social media, and web experience management. Analytics traffic is increasing rapidly and the mobile proportion is also increasing, to 22% of transactions in the quarter.

Digital Media segment revenue was $810.7 million, including $210.2 million of Document Services. Acrobat 11 launched. Includes creative cloud as well as the regular Creative Suite. Now has over 1 million free Creative Cloud subscriptions, and 326,000 paid subscriptions. Creative Cloud for Enterprises will be available in 2013. 81% of paid subscription were for the full Creative Cloud.

Demand was stable across major geographies.

For the full fiscal year revenue was a record $4.4 billion. Recurring revenue rose to 25% from 19% in FY 2011.

The move to a subscription model tends to delay revenue recognition compared to the old model and figures were given on what might have been achieved under the old model.

Cash flow from operations was $473.7 million. Cash, equivalents and short term investment balance ended at $3.54 billion. Deferred revenue ended at $619.6. Repurchased $67 million in shares.

Cost of revenue was $125.0 million, leaving gross profit of $1.028 billion. Operating expense of $720.7 million consisted of: R&D $195.0 million; sales and marketing $402.2 million; general and administrative $111.4 million; amortization of purchased intangibles $12.3 million. Leaving operating income of $307.8 million. Other expense $17.1 million. Income tax provision $62.3 million.

11,144 employees reflected hiring of field employees.

For Fiscal 2013 Video server solutions revenue will be moved from Digital Media to Digital Marketing segment. In Q4 that was less than $10 million.

Q&A

Creative Cloud price increases for new offerings, enterprise licensing? People are really seeing the benefits of having access to the latest applications and services, and the location independence.

Cash flow and monthly billing? We have a terrific cash balance. Cash flow would be less in 2013 than in 2012 and model with non-GAAP income.

New users due to lower entry costs? We are seeing new customer adoption because it is more affordable. We have a lot of headroom as we combat piracy. This is the first time in many years we have grown units in Creative. The new HTML applications are seeing a lot of downloads. We are also seeing significant adoption of Edge and Muse.

Traditionally it was just magazines that were buying Digital Publishing Suite, now it includes insurance companies, retailers, etc.

What leads you to expect the level of subscription adds implied in 2013 guidance? We see a larger target market, partly due to new products, and geographic expansion. We have a funnel in the million-plus free members we hope to convert to paid.

Enterprise market? We want Creative offering to become license agreements, so in Q4 we started to move to that. Then they have access to latest upgrades as they become available.

Education market? We saw a fair number of education subscribers in the quarter.

ASPs (pricing)? Average revenue per user has been very stable. On promotional pricing, we expect those people to stick with us and continue to subscribe at the higher price.

We believe revenue, margin and EPS are going to grow starting fiscal 2013, with the transitional phase over. EPS should grow at least as fast as revenue. The Digital Marketing business margins will be lower than Digital Media, so it could weigh as it grows as a percent of revenue.

We are assuming 80% retention, but we won't have the big data point for churn until the first set of annual renewals.

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