Adobe Inc (ADBE) 2001 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the Adobe Systems fourth quarter and fiscal year-end conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, please press "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded, Thursday, December 13th, 2001. I would now like to turn the conference over to Mike Savage, senior director of investor relations. Go ahead, sir.

Good afternoon, thanks for joining us today. Joining in on the call is Bruce Chizen, our vice president and CEO; Murray Demo, our vice president and CFO; and John Warnock, chairman of Adobe systems. We will discuss Adobe's fourth quarter and fiscal 2001 financial results. You have a copy of our earnings press release that crossed the wire 30 minutes ago. If you need a copy, go to adobe.com, under the corporate and press links to find an electronic copy. Before we start, I want to emphasize that some of the information discussed in the call includes forward-looking statements, involving risk and uncertainty. Actual results may differ materially. For discussion of the risks and uncertainties, review Adobe's SEC filings, including the report on Form 10K for fiscal year 2000 and the quarterly reports on Form 10Q filed by the company in 2001. Call participants are advised that the audio of this call is broadcast live over the internet and recorded for playback purposes. The audio of the call will be archived on Adobe's Investor Relations web site for approximately 30 days and is the property of Adobe Systems. It may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe Systems. I would now like to turn the call over to Bruce.

Thank you, Mike. Good afternoon. I'm disappointed that Adobe achieved Q4 revenue of $264.5 million, which was below our target range for the quarter. Despite lower-than-expected revenue, I am pleased that Adobe's pro forma diluted earnings per share of 20 cents for the quarter came within the target range we gave on October 30th. As we have done all year, Adobe carefully manages business to deliver solid bottom line results. Although I am not happy with our overall revenue performance during the year, when I look back at fiscal 2001, there are some highlights worth noting. On an annual basis, our Acrobat business grew 41% year-over-year. We have maintained or gained market share in our major markets with our key products. We continued to deliver award-winning products on schedule. And we laid the foundation for the future of Adobe, aligning the company around our network publishing vision, which is gaining industry momentum. Later, I will discuss product highlights for the fourth quarter and comment on our overall market outlook. I will now turn it over to Murray for a review of the financial results. Murray?

Thank you, Bruce I would first like to comment on fiscal 2001 year-end results.

For fiscal 2001, Adobe achieved revenue of $1,230,000 , compared to $1,266,000 in fiscal 2000. GAP operating profit in fiscal 2001 was $378.5 million, compared to $408.1 million in fiscal 2000. And GAP diluted earnings per share in fiscal 2001 were $.83, compared to $1.13 in fiscal 2000. Pro forma operating profit, which excludes restructuring and other charges, amortization of goodwill and purchased intangibles and the write-off of in process research and development was $404.8 million in fiscal 2001, compared to $421.2 million in fiscal 2000. Pro forma diluted earnings per share, which excludes restructuring and other charges, amortization of goodwill and purchased intangibles, the write-off of in process research and development, investment gains and losses and one-time gains from the sale of assets were $1.15 in fiscal 2001, compared to $1.12 in fiscal 2000. Now we'd like to discuss our fourth quarter results. For the fourth quarter of fiscal 2001, Adobe achieved revenue of $264.5 million. This compares to $355.2 million recorded for the fourth quarter of fiscal 2000 and $292.1 million reported last quarter. GAP net income for the fourth quarter of fiscal 2001, which includes non operating gains and losses was $34.3 million, compared to $79.2 million reported in the fourth quarter of fiscal 2000 and $40.3 million last quarter. Pro forma diluted earnings per share for the fourth quarter of fiscal 2001, which excludes restructuring and other charges, investment gains and losses from the company's venture programs and the amortization of goodwill and purchased intangibles were 20 cents.

GAP diluted earnings per share for the fourth quarter of fiscal 2001 were 14 cents based 243.4 million weighted average shares. This compares with 31 cents reported in the fourth quarter of fiscal 2000 based 257.3 million shares and 16 cents reported last quarter based on 248.6 million shares. Gross margin for the quarter was 92.8%, compared to 93.7% in the fourth quarter of fiscal 2000 and 93.1% last quarter. Excluding restructuring and other charges, and the amortization of goodwill and purchased intangibles, pro forma operating expenses for the fourth quarter of fiscal 2001 were $177.6 million. During the fourth quarter of fiscal 2001, the company incurred a restructuring charge of $12.1 million for employee severance and related benefits. This is greater than our estimated charge of 8 to $10 million that we communicated at our financial analyst meeting on October 30th. The higher charge is due to a greater head count reduction than originally planned. On October 30th, we estimated the reduction in force at approximately 150 employees. However, we decided to make additional job eliminations in less-strategic areas. This will enable us to increase our investment in digital imaging, digital video and e-paper based businesses in fiscal 2002. The head count reductions and restructuring impacted organizations throughout the company. With the implementation of our restructuring plan, we reduced

our head count by 247 employees, or 8% of the global work force. With the reduction in force, the regular employees at the end of the fourth quarter, totaled 3,043, versus 3,233 at the end of the third quarter, fiscal 2001. The Q4 fiscal 2001 regular employee head count includes 48 employees, who were notified in Q4 that their positions have been eliminated, but will leave the company during Q1, fiscal 2002. Severance and related benefits for the employees is included in our Q4 restructuring charge. Expenses as a percent of revenue break down as follows. Research and development, 20.7%.

35.8%.

G & A: 10.6%. Excluding restructuring and other charges, the amortization of goodwill on purchased intangibles and acquired in process research and development, pro forma operating profit in the fourth quarter of fiscal 2001 was $67.9 million, or 25.7% of revenue. This compares to $127.5 million or 35.9% of revenue in the fourth quarter of fiscal 2000 and $96.4 million or 33% of revenue last quarter. Other income for the fourth quarter of fiscal 2001 was $4.8 million. Adobe's effective tax rate for the fourth quarter of fiscal 2001 was 33%, compared to 35.5% in the fourth quarter of fiscal 2000 and 33% last quarter. I will now discuss Adobe's revenue by market segment. Cross-Media publishing segment revenue was $85.1 million in Q4, fiscal 2001, as opposed to $96.8 million in Q4, fiscal 2000, and $79.1 million last quarter. Web publishing segment revenue was $90.3 million in Q4, fiscal 2001, compared to $167.7 million in Q4, fiscal 2000 and $112.8 million last quarter. The year-over-year decline was primarily due to severe economic pressure on the creative professional and a tough compare with the year ago quarter, when we shipped Photoshop 6 E-paper solution revenue was $65.9 million in Q4, fiscal 2001, compared to $59.4 million in Q4, fiscal 2000, and $74.3 million last quarter. OEM, PostScript, and other segment revenue was $23.2 million in Q4, fiscal 2001, compared to $31.3 million in Q4 fiscal, 2000, and $25.9 million last quarter.

As we outline at our October 30th financial analyst meeting, Adobe will change its business segments beginning in Q1, fiscal 2002. For historical trend analysis, we have posted on the investor relations section of adobe.com, both our new and current business segment revenue by quarter, dating back to Q1, fiscal 1999. Turning to revenue by geographic segment, the results in Q4, fiscal 2001 were as follows. The Americas, 48%. Europe, 30%. Asia, 22%. As we discussed at our financial analyst meeting in October, we clearly experienced weak economic performance in the U.S. Following September 11th. At the time of the meeting on October 30th, we indicate that he did October was our weakest month of the year in the U.S. Excluding the new release of Illustrator 10, our North American business in November was even weaker than October and much weaker than we had anticipated. In our Asia business, Japan improved in November versus October, bringing Q4, Japan revenue in line with Q3. In Europe, we continue to experience relatively stable performance since Q2, fiscal 2001. Application platform mix with 73% Windows and 20% MAC in the fourth quarter of fiscal 2001, comparing to 65% Windows and 35% MAC for the fourth quarter of fiscal 2000. And 71% Windows and 29% MAC last quarter. Our trade DSO in the fourth quarter of fiscal 2001 was 42 days, compared to 36 days in Q4, fiscal 2000, and 46 days last quarter.

Our global inventory position at the end of the quarter continues to be within company policy. At the end of the fourth quarter, cash and short-term investments were $581.6 million, compared to $575.9 million at the end of the third quarter of fiscal 2001. Turning to Adobe ventures, we incurred an investment loss of $5.9 million in Q4, fiscal 2001. In Q4 fiscal 2001, we made additional investments of $2.8 million. In total, Adobe has invested $194.9 million through its venture partnerships and direct investments. As of the end of the fourth quarter, the net returns in this program were $354.3 million, including the stock dividend into stockholders and the market value of investments still held by Adobe. During the fourth quarter, Adobe repurchased 540,000 shares as part of our continuing program to minimize dilution from employee stock plans at a cost of $22.1 million. Under the previous 5 million stock repurchase program, we would another 2.2 million shares at $78.8 million. Adobe has made no repurchases under the new 5 million share repurchase program, authorized by the board in March of this year. Adobe's board of directors declared this quarter's cash dividend of $.0125 per share, payable on January 17th, 2002, to stockholders of record, as of January 3rd, 2002. Recently, we announced the acquisition of Fotiva Incorporated and a licensing agreement with Sonic Solutions. The Fotiva acquisition will be accounted for as a purchase with the majority of the price expensed in Q1 fiscal, 2002 as in-process research and development.

The cost of the Sonic's license will be amortized to direct cost. The FY '02 operating targets we gave on October 30th already factored in these transactions. This concludes my discussion on fourth quarter fiscal 2001 results. Based on our assumption of continued economic weakness in all of our major markets, we are targeting our Q1 fiscal 2002 revenue at $265 to $280 million. In regard to our operating model targets for Q1, fiscal 2002, we're targeting the following as a percent of revenue. Gross margin, 92 to 93%. R & D, 20 to 21%. Sales and marketing, 34 to 35%. G & A, 10 to 11%, resulting in an operating margin target of approximately 25 to 28% for Q1, fiscal 2002. Finally, in Q1, we are targeting our share count at 245 to 246 million shares. For other income, we are targeting approximately 4 million and we are targeting a tax rate of 32%. These targets lead to a pro forma earnings per share target range in Q1, fiscal 2002 of 20 to 22 cents per share. As we stated October 30th, our economic assumption for 2002 was that the global economy would remain the same as we experienced in October. At this time, we do not have sufficient information to change our economic assumption for all of 2002. If the trends of November continue throughout Q1, we will revisit our economic assumptions and annual revenue target of $1.3 billion accordingly. At this time, our annual revenue and operating targets remain unchanged. This concludes my comments. I would now like to turn the call over to Bruce.

Thank you, Murray.

The weak-global economy is having a major impact on our business. Organizations are spending less money on marketing as evidenced by industry reports showing a significant reduction in ad spending. Those products that are targeted at the creative professional customer are being hit particularly hard. Until corporations begin to spend more marketing dollars, this negative impact on the creative professional market and Adobe's business will likely continue. The web segment has been hit especially hard, although Photoshop continues to receive accolades and is maintaining strong market share position, the revenue for the product decreased significantly, bringing down the entire segment. We are working hard on the next release and it will be the most impressive upgrade in many years. We continue to see success of Photoshop elements, our market research indicates the product is solidly outpacing category growth and we are seeing adoption beyond our traditional customer segments. For example, a publication for real estate professionals, Realty Times, recently touted the effectiveness of elements as a tool to improve selling real estate on the Web. This demonstrates that our strategy is working. We are extending the Adobe brand and leveraging our digital imaging franchise to reach new customers. We are excited by our recent transactions in the web segment. First we acquired Fotiva, providing Adobe with cutting-edge technology and a great team of engineers who will drive our entry into the digital image management market; something we highlighted as an emerging opportunity at our recent analyst meeting. Second, we licensed technology and obtained engineering talent from Sonic Solutions to accelerate Adobe's entry into the professional DVD authoring software business.

Most of these transactions signal Adobe's intent to leverage our leadership in digital imaging and digital video and expand into fast-growing markets as we further deliver on the promise of network publishing. Turning to our cross media segment, we launched Illustrator 10 during the fourth quarter that had more than 30% sequential revenue growth over Q3. We will ship the major localized versions of the product this quarter. We are already starting to see great reviews, Creativepro.Com stated "Illustrator 10 includes a collection of powerful features and tools we've been hoping for and some we didn't even know we wanted." MAC.net added, "if you owned Illustrator 9, you need to upgrade now." In the professional page-layout market, InDesign continues to gain momentum, we're encouraged by recent wins. Australian Consolidated Press, which publishes 65 magazines, has begun a corporate wide switch from QuarkXPress to InDesign, and Magazine House Publishing, one of the largest publishers in Japan, has decided to move from a proprietary-based system to InDesign. We continue to execute well against our education strategy for InDesign. Key adoptions this quarter included the School of Visual Arts, the University of Massachusetts, the University of Maine, and Tokyo Adachi Educational Foundation. In other InDesign news, we announced the relationship with Unisys. We plan to leverage our cross media products and technologies and their industry expertise in integration capabilities to deliver publishing solutions to global media markets.

As we prepare to ship the new relation of InDesign this quarter, we're excited about the awards and reviews it has already received. For example, Seybold named it best of show at their recent san francisco event. And Macworld stated, "InDesign is quickly maturing into a program that outperforms QuarkXPress and other page-layout programs." Further, MAC user, Kay stated, "the sleek InDesign Lamborghini is starting to make XPress 5.0 look more like Chitty Chitty Bang Bang." The excitement is building around InDesign, and we expect to gain significant market share in fiscal year 2002. Finally, despite a tough economy, our e-paper business continues to perform well. We continue to see large adoption of Acrobat in major accounts. For example, a major telecom provider in Europe signed a license agreement for 160,000 seats, and a major U.S. Government agency licensed more than 30,000 sites of Acrobat. Other new Acrobat licensing orders for more than 1,000 seats in the fourth quarter include the State of California, the Department of Defense, the French government Office of Labor, RR Donnelley, Boeing, Waxo Smith Klein, The government of Quebec, McCann-Erickson, Capital Group Companies, and Safeco Insurance, among others. Global enterprises are also using Acrobat to increase their productivity. For example, Hitachi is integrating Adobe Acrobat technologies with the back-end systems to automatically deliver salary statements in Adobe PDF to their 70,000 employees.

Adobe is working with governments around the world, helping drive their e-government initiatives. In the UK, the government is using Acrobat collaborative work flow and digital signature capabilities. Officials recently cited how Adobe PDF allows the routing of electronic documents in a secure, tamper-proof, reliable format. As we discussed at our recent analyst meeting, we have began working with partners help with the implementation of Acrobat solutions around the world. For example, Adobe, Mitsubishi Electric, VeriSign, and Sachihata announced a partnership to develop Adobe PDF base review review and approval for e-form work flows targeted at enterprise and government customers. This concludes my business segment review. Adobe continues to focus on the long-term opportunities available in the new network publishing economy. As we enter 2002, we are excited about our strong product lineup. In this quarter, we will ship localized versions of Illustrator and new releases of InDesign, GoLive, After Effects, LiveMotion and AlterCast. As we've stated, our priorities this year are the following: One, managing Adobe's business for short term profitability while we continue to invest in future growth opportunities, something that we've done over the past year. 2, taking significant market

share from Quark with InDesign. 3, leveraging and expanding our digital imaging and digital video franchises. And 4, our biggest opportunity, driving the transformation from paper-based processes to electronic work flows in enterprise and government with our Acrobat products. Adobe is well-positioned for future growth. Mike?

Thank you, Bruce. For those who wish to listen to a playback of today's conference call, an audio recording of the call will be available from Adobe's investor relations web site on adobe.com later today. Alternatively, you can listen to a phone replay by calling 858-812-6440. Use reservation number 200 151 14. Again, the phone number is 858-812-6440. Reservation number 200-151-14. The phone playback service will be available beginning at 4:00 P.M. Pacific time today, and ending at 4:00 P.M. Pacific time on Monday, December 17th, 2001. In regard to upcoming events for Adobe in Q1, management will be at the Morgan Stanley conference in January and the Goldman, Sachs and Robby Stevens conferences in February. In Q1 -- our Q1 interquarter update will be issued Thursday, January 31st after the market closes. We would now be happy to take your questions. Please limit your questioning to one question per person. Operator?

Thank you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the "1" followed by the "4" on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the "1" followed by the "3". If you are on a speaker phone, please pick up your handset before entering a request. One moment, please, for the first question. Benjamin Reitzes with UBS Warburg, please proceed with your question.

Yeah, hi. Ben Reitzes. Good afternoon. I wanted to ask a question about Photoshop, what is going on, what are you hearing? Are customers waiting for the upgrade? And if so, what is going on there? How does Photoshop move sequentially ahead of the upgrade into the next quarter, can it get worse than what it is, and also with regard to Photoshop, what do you think the impact is with regard to making that compatible with MAC OS/0. Thank you.

Good afternoon, Ben.

Hey, Bruce.

The biggest issue around Photoshop is the issue around the creative professionals. If you look at full MAC units, that is the area that was hardest hit and certainly the economic issues that we experienced in the U.S. compounded the issue. We believe that the Photoshop revenue won't pick up significantly until we release the new major new version of Photoshop, which we previously stated we were targeting Q2.

Well, how much is it declining, year-over-year? Like roughly?

Oh, I'm sorry, in -- we all break it out on a percentage basis, but keep in mind that a year ago, we had a brand new version, the Photoshop 6 version. So, the decline is pretty significant and it makes up a big chunk or a majority of the decline in the web publishing segment. We do believe that the next release, which will be in OS/10 compliant release, will do extremely well for two reasons. One is because it is OS/10 and many of our customers are -- are in -- desiring or requesting we have an OS/10, a fully OS/10 compliant release. And also, as I said, or I tried to imply my in my prepared remarks, this release will have more features that we believe customers will desire than our prior two releases.

So, do you have any indication from people what the take-up rate could be on this? Are you getting any indications from customers on those that are waiting? What this could be like, or is it too hard to say right now?

We've shared the product under non-disclosure with a number of the industry pundits, the industry reviewers and they validated what I said, which was that this is the best release that we've experienced -- that they've seen in -- in prior -- in three releases.

All right.

I think you will probably look to Macworld for some additional announcements regarding what we're doing around Photoshop.

And then just to clarify, you are keeping your outlook for 2002, but said you will address them at a future date. What's that really mean? I mean, does it mean that, you know, right now things are lousy and, you know, we have a lowering bias or we just don't see a reason right now to cut it? I mean what are we supposed to take away from Murray's comment that he will revisit it as needed. I need more clarity there, it would be helpful.

First of all, what we're doing today, I want to be absolutely clear, we are re-affirming the targets that we provided you back on October 30th. What we did say was that those assumptions are based on the economic conditions that we experienced in Q4. Clearly, if the economy gets worse, then we will have to go back and revisit those targets. Let me turn it over to Murray for a little bit more details on what -- what's behind that.

So, to give a little bit of color in terms of, you know, what we saw in November, when you look at where we stood on October 30th, clearly, our expectations were in the $275 to $285 range. What we saw was that in November, Europe came on track with what we expected. In Asia, Asia was on track with what we expected. Going into November, with the U.S. knowing that November is one of the strongest seasonal months of the year and having the Illustrator 10 release, we expected to see a decent November. What we did see, was in the last weeks of November we saw real weaknesses, especially at retail. And that is what drove the -- the shortfall in the quarter. Now, in terms of trying to look forward this, it is hard for us with just a couple of weeks of data to try to make an assumption for all of 2002. When, in fact, in December, the first week of December, we've seen a bounce back to the October levels in terms of sell-through. Given the choppy week to week business, we want a lot more information to see what the trend really looks like. At this point, we're going to stick with the $1.3 billion until we get further information telling us to raise or to lower the revenue guidance for '02.

I want to reinforce, that's as long as the economic conditions that we experienced in Q4, in total, remain the same throughout '02, we are comfortable with the $1.3 billion revenue target, and all of the other targets associated with that. One additional note, then, where I did leave out, Macworld magazine shared with us that 82% -- in a survey they did with their customers and they are the leading MAC publication, 82% of their customers were waiting for Photoshop to make their move over to OS/10.

Hmmm... Okay, that's what we're hearing, too. So, get it out. Thanks, guys, appreciate it.

Our next question comes from Jay Vleeschhouwer with Merrill Lynch Technology Research. Please proceed with your question.

Thank you. Bruce, in light of the significance you're placing on Acrobat volume business, can you bring us up to date on the status or plan for your direct sales effort in support of Acrobat? You made some changes there recently. It sounds like, especially in this environment, there's even more value that ought to be placed on the sales capacity that you can use to drive Acrobat. Secondly, a more general question, in the past, you've talked about how your professional customers spend on average, several thousands of dollars each on a variety of products and services. How much of that total technology spent do you think is now going to Adobe and what's the prospect for meaningfully increasing a -- your portion of that professional customer budget?

Yeah, first, let me provide some color around the Acrobat business. It grew 11% on an annualized basis. If you look at it as a total year, 41% growth, in a tough year is dynamite performance. The other thing I will note is that the -- the lack of growth, you know, the double-digit, the 30, 40% growth that is potential for Acrobat was held back by the Acrobat retail business in the U.S. In fact, our licensing business was up sequentially. So, it says when you look at the telecom in Europe that bought 160,000 seats, all the agencies around the world that are buying thousands and thousands of sites. The customer that we're targeting the massive adoption is happening where we want it to happen. And where we got hurt this quarter, and again, it's relative because we still grew the business 11% this quarter, but where we got hurt, relative to what we think is the big opportunity is Acrobat retail. Which, by the way, is no surprise, given that the economic data that I've seen this morning says that retail sales overall in the U.S. was down and we just follow along with that. In terms of the sales organization, we have, and we are, executing against our plans. We eliminated those people that we though were not able to provide us with what we needed to do, in terms of the sales and the account focus, and we are aggressively hiring against that plan. We will have most of the people in place, we believe, by the end of Q1, with the remainder in Q2. But we're feeling very good about our execution on the sales side. And I think relationships with folks like Mitsubishi and others that we can't talk about today is evidence against that. In terms of the professional customer, it's hard to tell what their overall [spin] in this economic environment, and it keeps changing on a weekly basis. What I can tell you is that when we look at the market share data that's available to us in every category that is material to us, we are either maintaining, and in most cases, gaining market share. So it says that we're growing our business relative to others in this tough economic environment. So once the economy picks up, we're going to be looking very good to that community.

Just one follow-up, you've made a statement at the beginning of your prepared remarks about the momentum behind network publishing. Other than the momentum that you're still showing in Acrobat, what's really the best evidence that you are or will show customer adoption of network publishing? Why is that concept really gaining hold amongst customers? Again other than for Acrobat.

Jay, this is Shantanu. In terms of network publishing, there is a bunch of stuff that is really happening. The first is partnerships, as it relates to InDesign and our cross media. We've been able to sign partnerships with companies like Unisys that reflect that they see, just as we do, that the whole move towards [repurposing] content is really happening. The second thing we are starting to see is the usage of Adobe PDF on alternate devices, which is very much part of our -- making sure that content is available any devices is happening. We recently released the Adobe Acrobat Reader for the pocket PC. We've seen over 1.5 million downloads on the Palm OS, and as we've said earlier, we're also working on Acrobat for other devices. In the e-paper space, Bruce talked about partnerships with [wires] and S.I.s to continue to move both in the government as well as in larger enterprises. The move from paper-based workflows to enterprises. So -- I mean to electronic workflows -- so we continue to believe and are driving our organization by network publishing. I think we also talked about image management as a need. We've certainly demonstrated that, with the Fotiva acquisition, we're going to get a better time to market in that space, as well as in DVD.

Thanks, Shantanu.

Our next question comes from Gibboney Huske, with Credit Suisse First Boston. Please proceed with your question.

Great, thank you. I just wanted to get a little bit more color in terms of overall -- you talked about how the months played out, October, November. Also maybe could you work in September as well? And did you see any sales loses in September flow into October? Did that kind of skew how the quarter played out in terms of linearity? And could you just specifically talk about Acrobat during the quarter? Did you see it kind of continue to decline throughout the quarter, you know, it seems to be directionally in a pretty negative trend on a sequential basis.

Yes, Gibboney, let me just talk about September and October first. The only place that we could really say that there might have been some revenue sort of moving between September and October is actually a reverse situation. In Japan, their semi-annual period end is in September. So potentially, some of the revenue that we typically would have thought we would have got in October, actually happened in September. So kind of a reverse effect. But we didn't see anything where there was deals pushed from September into October like you might see in some of the other organizations. We had previously stated in the U.S. that October was worse than September. So really haven't seen the push out that you might be referring to. In regards to Acrobat, we clearly saw some weakness with Acrobat in November in the U.S. in terms of sell-through. And that was the biggest contributor, if there an issue in terms of linearity around Acrobat.

The other thing, Gibboney, if you look at full unit mix versus upgrade mix, most of the upgrades have trailed off. Most of the upgrades are current in the Q2 - Q3 time frame. And most of the business, in fact, greater than 90% of the business is full units. It's new adoption. And that's what we wanted to see. You really need to look at the long term opportunity about Acrobat -- it's not long term retail business for Acrobat will be a very small piece of the overall mix. Today it's still a relatively big piece, which is why the overall weak retail environment in the U.S. has hurt us bit. But as more and more organizations adopt the product, you'll see more and more growth. And it's about new seat adoptions versus upgrade business.

And just one follow-up question with regards to you taking out some additional people than you had originally anticipated. Based on how [OP-X] is coming in do you think there is an opportunity to get better than expected [OP-X] performance next year? I know you are still planning on investing and increasing it overall, but based on what you've seen, and particularly given the last [divisibility] in the economy, could you see that coming in a little bit below where you expected if things remained soft?

Well I think, Gibboney, we've proven all year that we can manage expenses very swiftly and if we believed that there was an issue with the top line revenue, we would be able to react quickly on the expense line. Now we're going to manage our business at a $1.3 billion level, but if something were to happen economically, we will find ways to reduce expenses.

So there is still a little bit of room for expense reduction?

We're not going to mortgage our future, we're really very focused on continuing to invest in our future growth opportunities in '03 and '04, but we can find ways to reduce expenses to try to offset some impact on revenue.

We have, as you know, Gibboney, we have a very leveraged model. As the revenue picks up, you will see margin expansion. If the economy does pick up more quickly in '02 than we're anticipating, that's going to probably mean margin expansion for us.

Okay, thanks, guys.

Our next question comes from Steven [Jew] with RBC Capital Markets. Please proceed with your question. One moment. All right, your line is open Mr. [Jew] STEVEN [JEW]: Thank you, good job, guys, on these expense controls. Can you talk a little bit about, I guess, Fotiva and, you know, licensing up the Sonic technology? Timing of some of these products and the functionality enhancements. Is this something that is going to happen in the second half of the year? I know they are in the emerging category, but are you seeing signs that this are is really picking up?

Let me speak to both of those. With respect to the Fotiva acquisition, what we've talked about is the growing demand that people have in terms of image management. We've said that 60 billion images will be captured by 2004. And it really is a critical unmet need. The reason we acquired the Fotiva technology was we believe that both in terms of having a really good experience to manage those pictures as well as capability to manage it with the best technology. It will help us to accelerate our offering in that market place. We do not anticipate it being a revenue driver for 2002, however it will allow us to be in the market sooner that we would have been. On the Sonics Solutions we license the technology so that we could have a professional DVD authoring solution, and again that helps us accelerate our offering into that market. But it will not be a revenue driver in 2002.

Our strategy for digital imaging and digital video is twofold. First of with the existing products, Photoshop, Photoshop elements, Premier, and After Effects, we're going to continue to go after new markets for those products. With Photoshop we're going to go after the photography market. With Photoshop Elements, we're would go more after the small business market. In the case of video we are going to go after the corporate customer who's looking to do more video streaming for internal communications. And then we'll take the new products the Fotiva products and the DVD authoring products and have new products to go after both the existing customers and new customers. So we're excited that we're able to leverage our franchise in V.D. and V.I. STEVEN [JEW]: Great, and then just one follow-up question. As you saw some good success here with the Acrobat and the enterprise, I'm just curious how much of business was influenced by, you know, [VARS] and system integrators and really helping close those bigger enterprise type deals?

Steve, most of that business is being influenced directly by ability, either through marketing communications messages or through our sales organization. There's two things that we do want to do -- actually three things. One is we will continue to get more and more aggressive with our marketing communications. More dollars on advertising, as well as more targeting communications directed at the I.T. professional. The Second thing that we will do is, as I stated earlier, is we are ramping up our sales organization more -- certainly more than 50%, and right around 60% of our sales organization will be focused on creating demand, calling our customers around the Acrobat opportunity. And thirdly, we are focusing a lot of our channel sales attention on developing relationships with [VARS] and system integrators. The third takes a little bit longer than the rest and that's going to be an effort that will go on throughout the year and we'll start seeing the benefits of that toward the end of '02. STEVEN [JEW]: Great, thanks a lot.

Our next question comes from Mike Olson with U.S. Bancorp. Please proceed with your question.

This is Gene Munster and just, I don't want to get too detailed here, but when you outlined what the priorities were for 2002, you kind of switched the priorities in terms of digital video, you put that ahead of e-paper. Am I reading too much into it, or is there some kind of underlying message there?

Your reading way too much into it, Gene. The reality of long-term the other two major revenue opportunities that we have in '02. The first being around D.I. and D.V. the second being around market share gains. This is the year, because we finally a dynamite product, InDesign 20 is going to take market share away from QuarkXPress. So that was not intentional. The number one priority for this company is around Acrobat, because that represents the biggest growth opportunity. But I didn't want anybody to ignore the fact that we have other two big revenue opportunities in '02.

Okay, just a quick follow-up on Acrobat. The majority of revenue, I know you went over this, but is it from new seats or upgrades.

The majority of the revenue is from new seats. In fact, if you look at the mix between full and upgrade compared to the rest of the products in our product line, it's more full than upgrades.

Okay. And AlterCast, you haven't mentioned -- you mentioned it earlier about one of the products coming -- can you outline any sort of expectations from AlterCast or how quickly you see that taking off?

AlterCast is a new product geared at the rendering or the translation of graphics -- of the [now] generation of graphics and images. Lots of interest in the product. We're going to ship it in the January time frame. The customers that are testing it are excited by it. But the revenue -- at least for planning purposes, we're assuming relatively immaterial revenue. It's a new product and we'd rather not assume anything greater than that.

Okay, and one last question. This is in terms of Photoshop and Illustrator is that I've historically looked at it as they really get going during product cycles and then it kind of tapers off after it. Can you talk a little bit about just fundamental growth. Are those products that we should expect fundamental growth in those markets at some point, maybe in '03 or '04? Or are these basically the cash engine of your company and then you're going to draw through InDesign and Acrobat and through some of the new digital photography initiatives to drive your growth from there?

There are a number of different dynamics going on at the same time. So let me first talk about the '02 dynamic. Illustrator clearly did better this quarter than last quarter, because of the compelling release that it was. Customers who can afford to buy it are buying it, and also, those customers that are -- are waiting for OS/10 are not buying it. So, you know, look at Illustrator as -- it's a great relief -- the creative professional is under a lot of duress -- and keep in mind it's only been three weeks since we shipped the product so it's a little too early to really reach any more conclusions. You could expect, given the functionality that's in the product, especially some of the new features around web, and some of the new features around they deal with symbols, that we will gain market share against the competition with Illustrator during '02. And once Illustrator 10 kicks in, we believe its another opportunity to gain more of both market share and upgrade revenue. Photoshop -- not only do we have a tremendous opportunity to upgrade the creative professional, because at that period of time; A. we'll want to move over to OS/20, and B. its the best release we've had in many, many years. It will clearly legally move over to Photoshop, but we also believe because of the transformation from traditional photography to digital photography that -- that the non-creative professionals will be looking to buy Photoshop. Markets like -- that includes photographers.

Excellent. Thanks, guys.

Our next question comes from Keith Gay from Thomas Weisel. Please proceed with your question.

Hi, guys. When you talked about the large e-paper sales of 160,000 seeds, the deals bigger than a thousand seeds, at what level or where is the purchase point within the organizations? Who are you selling to? And, also, based on that purchase point, what other products might you be able to leverage in once you have that relationship established?

It varies by the size of the account and the quantity of the units. So in the case where you're talking about 160,000 units, or 160,000 seats, that is openly at the CIO level and that, in these environments, usually includes signatures from the CFO. As you move down in terms of quantity it becomes more at the departmental level. Where somebody will make a decision. If it's as low as a thousand, it becomes departmental. As you move up it has to move up within the organization. It's really around any organization or division or department that's looking for increased productivity and efficiency.

And once you are in there, for example on say something that's 5,000 seats or larger, where it is a bigger than departmental level, are there then other products -- something such as a digital image management, or maybe in the future digital asset management that you might want to leverage on to that relationship?

What you'll see us do is introduce server-based products around Acrobat technology. So you will see us introduce new products to leverage the fact that Acrobat is sitting on this desktop. But it won't be around our imaging and video products, it will be more around making businesses more efficient and productive.

Okay, thanks.

Our next question comes from Aleksandar Zorovic with Robertson Stephens. Please proceed with your question.

Could you please comment on competitive -- your competitive relationship with Macromedia. You were commenting on Quark, how about Macromedia going forward?

Yeah, the areas in which we compete with them are in GoLive and LiveMotion. What we have seen is that the professional web authoring segment really is a ch allenge, and I think that's also evidenced by what you heard from Macromedia. We've really been working on making sure that the next versions of both LiveMotion and GoLive are best-of-breed. Both of them will be supporting OS/10 and as we've said earlier, both of them are going to be released in the Q1 time frame and they're both on track for that.

I think that it's important to note is that the market for web-only products, we don't believe is going to be a significant market. We believe that most customers want a cross-media solution. So what we're going to do is leverage the fact that we can provide a customer with a total solution and put less emphasis around web-only. It's one of the reasons why we've lost a little bit of market share, we believe, with GoLive and LiveMotion. We've been putting less energy and attention on it and we're glad we have because the overall market opportunity seems to be going down significantly. It's just not as important as it once was to us.

Thank you.

Our next question comes from [So Lin Cho] from Morgan Stanley. Please proceed with your question. [SO LIN CHO]: Hi. Thanks. Trying to get a little better comfort with the $1.3 billion revenue target in light of the magnitude of the shortfall in the fourth quarter and the guidance for the first quarter. And, I understand that visibility is quite poor this early into the year. But just mathematically, you know, mapping out the quarters, it just seems like, you know, the ramp is going to have to be quite steep. And I was wondering if you could provide a little bit more color in terms of either what you saw in the fourth quarter, or since the end of the fourth quarter, that might give you some comfort or sense that yeah, we will see this bounce back, you know, if it's -- maybe it's in the -- the -- the mix of businesses that actually bounce back. You know, post- the end of the quarter or, you know, some indication that the customers in fact are deferring ahead of these new product releases. But if you could just provide a little bit more color that would be helpful.

Yeah, before I turn it over to Murray, So Lin, let me just comment. First of all, the growth in the Acrobat business, if you look at the licensing announcement that we made today, if you look at the progress that we've been talking about all year, that business will continue to grow in '02 and we are absolutely confident about that. Now, the overall economy will not allow us to grow at the mid-twenties, thirties, or forty percent. We're growing that business 15% on a year-over-year basis is something that we believe is absolutely achievable. When you look at the creative professional products, it's all around new product opportunity and new products for those customers that are shifting to OS/10. So, if you look at the product rollout, keep in mind in 2000, we've not had a Photoshop release. I'm sitting here, today, telling you that the next release of Photoshop will be better than the two previous releases. Those that we released back in 1999, I believe, and 1998. -- '99 and 2000. I was corrected. So in 2001, we didn't have a release. This is the best release we've had in many years. And then when you start looking at InDesign getting market share from Quark, you look at the continued movement with digital -- around digital photography, and you look at some of the other new products that we're introducing throughout the year After Effects 5.5, a new release of Premier, and others, it's clear that the $1.3 billion is certainly achievable.

All I want to add to that is that when you look at from an economic standpoint, in Europe we've seen stabilization now since the spring. It's continuing to be very stable. And in Japan if you look at -- we mentioned that October was the weakest month of the year at the analysts' meeting, and seeing that November improved, and then kind of seeing well maybe some of the revenue in October ended up in September for their semi-annual period-end. It's now kind of looking pretty stable since July, when we had the big drop. So in those two markets, we certainly -- appear to be having some stability. Obviously its hard to know on a going-forward basis, but having a number of months kind of repeating itself, you know, we feel better about that. The U.S. will be the issue in that -- in a few weeks we find out that for the few weeks in November everybody was watching CNN with what's going on in Afghanistan, or it's just that -- it's something more, you know, pronounced than that. And at this point, you know, it's just too early for that. So, we'd like to get a little bit more data on the U.S. and see where that goes, and let the momentum really build in and around these new releases that we're putting out in Q1-Q2 time frame. And also the transformation of our sales organization, we're putting a lot of our resources against Acrobat and driving sales in that particular area and believe that we'll continue to see benefit that will show up later in the year.

It's clear that we're gaining market share. If you look at, you know, some statistics around ad spending, the industry force is suggesting that this is the worst ad spending environment since 1942. Corporations are cut back on marketing, and that is affecting us. That will change as the economy gets better. [SO LIN CHO]: Great. Just one follow-up. Where were the areas where you saw bounce back to October levels, since it's the end of the quarter. Was it across the board, or we're there --

Okay, we're just talking about, you know, one week in December. It's pretty broad across the product line. There's just no way we can draw conclusions from one week. But the point of it is is that, you know, week to week it's fairly choppy in terms of demand, and that's different that it was let's say a year ago. Or from week to week it was so consistent, and that's the part that's made it hard and why, just for a few weeks in November, we're not going to make it -- you know, change our economic assumptions for the next 52. [SO LIN CHO]: Okay, thank you.

Our next question comes from Jonathan Rosenzweig with Saloman Smith Barney. Please proceed with your question.

Hi, guys. A couple of things. First of all, the Q1, when you guys had established the full year target for 2002, I would assume that you had some idea in mind of what you anticipated for Q1. Is the range that you're coming out with here meaningfully different from that? Or is this pretty much the range that you would have anticipated all along? And it seems -- and sort of to leverage someone else's question, it does seem that we're sort of back end loading the year. I mean if we took the low end of your range at $265 million a quarter it seems like, you know, you'd be at about a, you know, a billion and 60 million. You would need something like 20 to 25 percent additional revenues to come from new products and upgrades, unless you are assuming a recovery meaningfully in the back half of the year. So I'm just trying to understand, you know, how much are we really back end loading this? What is driving that back end loading and have we back end loaded it more than you originally anticipated doing it?

So, Jonathan, taking a look at what happened in November, you know, the guidance for Q1 is slightly below what we would have expected say on October 30th. But I wouldn't say something so material that was going to lead us to change our overall picture for the year. The key thing is is that we've got a number of product releases coming out in the first half of the year that we really believe is going to drive revenue. And especially in the case of those things like -- products like InDesign and Acrobat we clearly expect to see revenue build throughout the course of the year, with what we're doing in terms of driving market share with InDesign, and driving penetration in large organizations and governments around Acrobat. And those are the key things that we're looking for. So, you know, slightly below in Q1, but nothing that's so major that's going to change our overall opinion at this time.

I suspect what you'll see, John, is the shift from Q1 to Q2. By the time we release Photoshop in Q2, InDesign, Illustrator, After Effects, GoLive, LiveMotion will all be OS/10 compliant. And when you read the industry data that says that 82% of people haven't switched to OS/10 because they're waiting for Photoshop, well that bodes well for the rest of our product line.

On that note, if I can just try to understand that a little bit better. If you look at the percentage of MAC users on Photoshop can you give me some idea how much in the last few quarters, in that product, that percentage? Even if it's not the exact number, just kind of an idea how much of the percentage MAC user has changed. And if it's changed significantly then you would expect there's been a lot of people waiting for the Photoshop for the OS/10 version. But if that percentage within Photoshop is not changing a lot, it would be hard to draw the conclusion that people are waiting.

So, I see Murray's trying to see if he can find the detail data. I'll tell you what, I know is that if you look at the overall Adobe business, we've gone from last quarter of 7129; this quarter, 7327; a year ago Macintosh represented greater than 30% of it -- 35% --

But Bruce that's largely because of Acrobat. I mean if you look at the impact Acrobat's had on your percentage of business, its huge. So, I mean, you have to look at it within the individual product.

There's been a significant change in terms of the Photoshop platform mix.

Yeah, so Jonathan, definitely we've seen a trend over the last few quarters where the percentage of the Macintosh business for Photoshop -- it's been [degradating] over the past quarters.

I mean are we talking, you know, like five or six points in the course of a few quarters? How significant are we talking about? You're always getting a trend line down, so the question is how far off the trend line are you?

Well it's percentage of Windows versus MAC, so it's not a full upgrade kind of thing. So what we've seen is definitely a degradation. I wouldn't say that it's been a, you know, like a cliff kind of degradation from quarter to quarter, but it has been some degradation over the past -- the past quarters. And the thing is that then again if that the creative professional is on the MAC platform. So, that's -- there's been severe economic pressure on that particular customer. So the combination of that, plus, you know, the potential for OS/10 -- it's difficult to weed the two out, but we believe the majority of that is on the -- is the economic pressure on the creative professional.

When you're looking at -- When you're looking at those ratios, the MAC percentage, it looks like it -- that it has accelerated downward in the last several quarters?

Yes.

When we look at it from where we were a year ago it is significant.

All right, and just in terms of Acrobat, and then I'll let you go, I know we talked a lot about this, but, you know, the comparisons do get sort of daunting once you get to the May time frame when you introduced 5.0. Are we expecting the introduction that you're talking about to come relatively early in the year so that it'll -- it'll reinforce the growth there? So that when we get to those tough comparisons we have something to give us a [jilt]? Because at these levels you'll be in trouble when you get to those comparisons.

Well first of all, you know, 2001 was kind of like two years. There was the first half, and then there was the second half. So certainly in the second half of '02 the compares are very different than they are in the first half of the year. And we also have Photoshop coming out in Q2, which is the same quarter as Acrobat came out. Not to mention we'll continue to see real strength in the products that we released in Q1. So, the strength of, you know, in terms of a lot of [parts] happening in the first half, and then you've got the easy compares in the second half.

I guess what I'm wondering is, you know, just sort of looking at the 15% expectation for growth, I mean if I just look at where Acrobat is right now, if it's anywhere near the kind of performance we're seeing in Q4, if it's anywhere near that in Q2, we're going to have a major decline, I think, year on year. Looking at the numbers. So, I'm just wondering are we going to see something in terms of new products coming in Q1 or early in Q2 so that we're not going to -- we're not going to have that weight thrown against us? See, because if we have -- if we're at, you know, what is it, I guess, $60 million or, I guess $66 million going -- if we're at something like $66 to $70 by the time we get to Q2 '01, we're going to be facing a $90 million comparison. Getting your 15% revenue growth for the year is going to get awfully difficult.

There's a couple of things. First, of all if you look at Q4, the reason why Acrobat didn't grow more than 11% on a year-over-year basis is because of retain, and predominantly retail in the U.S.

Um-hmm.

And that is something that we suspect probably won't continue throughout next year. The other is if you just look at the momentum we have with corporate customers and government agencies around the world, that will carry us through regardless of the retail environment. And then you have to factor in the productivity of the sales organization. Remember we only had a relatively small piece of the sales organization focused against the Acrobat opportunity this past year. That's all changing, and that will change by Q2, the latest. In terms of new products, you'll start seeing some of the new server-based products as we go through the year. But those are more supporting in nature than they are in terms of the actual revenue against the Acrobat desktop product. It will become more material in '03-'04. But these will be products that we make for forms -- deployment much easier. Products that will allow for the movement of .X ML to .PDF more seamless in nature. You will see a number of new products throughout the year, but the bulk of the revenue is going to be in Acrobat seats. But we are very well positioned to grow a minimum of 15% in the Acrobat business.

Okay, guys, thanks.

Our next question comes from Lauren [Sclovoni] from Prudential Securities. Please proceed with your question.

Yeah, hi, it's actually John McPeake, Lauren had logged in for the call. Can you guys hear me?

Yes.

Okay, great, I've just got to check with these [INAUDIBLE] systems. I don't want to harp on points here, but I'm actually going to ask one question. That is, again, looking at your guidance for '02 and sticking with the $1.3 million, which -- including $65 million the first quarter, if you go back to 2000, which was the year where you did have a Photoshop upgrade and I think there was still additional seats being added -- native seats being added for Photoshop, not upgrades, you did $282 million in the first quarter of that year, and you didn't reach $1.3 million. You reached $1.27 billion -- I'm sorry you didn't reach $1.3 million you reached $1.27 million, I'm trying to get a sense as to how the dynamics could be more favorable this year than they were in 2000 when you had 22% year-over-year growth in many of those quarters, where you could reach this type of a -- this type of a target, and why we're not being more conservative with the guidance here? Thank you.

First of all, John, I appreciate you asking one question. If you look back at the year 2000, I believe Acrobat was about a $120 million a year business. I don't know if my number is right, but you look at Acrobat back in 2000, Acrobat was a much smaller piece of our business. You have to look at the Acrobat business and then you also have to look at InDesign revenue which was relatively tiny in 2000. So Acrobat in 2000, Murray's giving me the actual detail numbers, were 280 compared to this year approximately 300.

Okay, but Photoshop represents, you know, 40% -- anywhere from 35 to 40% of revenues, or it did back then and it was growing. I'm just wondering how a 25% of revenues product, even if it hit the 30% target could drive the type of growth that we are talking about in '02. But, so, essentially the answer here is you think the bulk of it's going to come from Acrobat in '02 by new seats.

John, it's going to come from three things. It's going to come from Acrobat. It's going to come from InDesign, against Quark. And it's going to come from a release of Photoshop that I'm sitting here telling you that is significantly better that the release that we offered in 2000. And the release that we offered in '99. And then there's the added factor of OS/10 which will make the release even that much more compelling.

I don't doubt that. I'm just wondering if an upgrade -- I mean the '90, or was it the 2000 release a lot of full seats sold, and upgrades I imagine in a difficult economic environment is a tougher sell. That's -- that's my only concern with Photoshop, which is your largest product.

And again without -- we certainly haven't announced the product and I don't want to offer any [meaning] of the product, but I'll remind everybody that the last two releases were Top Five releases, and I'll leave it at that.

Okay. Thank you.

Ladies and gentlemen, as a reminder, to register for a question press the "1," "4." Mr Saviage there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or any closing remarks.

Thanks, Annie. Well, this concludes our conference call today and we thank you for joining us.