Adobe Inc (ADBE) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Adobe Systems Q4 fiscal year end 2002 earnings conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question and answer session.

At that time, if you have a question, please press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Thursday, December 12, 2002.

I would now like to turn the conference over to Mike Saviage, Senior Director of Investor Relations.

Please go ahead, sir.

Thank you.

Good afternoon and thank you for joining us today.

Joining in the call are Bruce Chizen, our president and CEO;

Murray Demo, Senior Vice President and CFO; and Shantanu Narayan, Executive Vice President of Worldwide Products.

On the call today, we’ll discuss Adobe’s fourth quarter and fiscal 2002 financial results.

By now, you should have a copy of our earnings press release, which crossed the wire about 30 minutes ago.

If you still need a copy of the press release, you can go to adobe.com under the company info and press links to find an electronic copy.

Before we get started, I want to emphasize that some of the information discussed in this call contains forward-looking statements that involve risk and uncertainty.

Actual results may differ materially from those set forth in such statements.

For discussion of the risks and uncertainties, you should review Adobe’s SEC filings, including the annual report on form 10K for fiscal year 2001 and quarterly reports on form 10Q filed in fiscal 2002.

All participants are advised that the audio of this conference call is being broadcast live over the internet.

It’s also being recorded for playback purposes.

The audio of the call will be archived in Adobe’s investor relations website for approximately 30 days and is the property of Adobe Systems.

It may not be re-recorded or otherwise reproduced or distributed without prior written permission from Adobe Systems.

I’d now like to turn the call over to Murray.

Thanks, Mike.

I would first like to comment on fiscal 2002 results.

For fiscal 2002, Adobe achieved revenue of $1.165 billion compared to $1.230 billion in fiscal 2001.

GAAP operating profit in fiscal 2002 was $287 million compared to $378.5 million in fiscal 2001.

And GAAP earnings per share in fiscal 2002 were $0.79 compared to $0.83 in fiscal 2001.

Pro forma operating profit, which excludes the amortization and impairment of goodwill and purchased intangibles for structuring and other charges and acquired in process research and development was $325.9 million in fiscal 2002 compared to $404.8 million in fiscal 2001.

For fiscal 2002, this represents a pro forma operating margin of 28 percent.

Pro forma diluted earnings per share which excludes the amortization and impairment of goodwill and purchased intangibles for structuring and other charges acquired in process research and development and investment gains and losses were $0.95 in fiscal 2002 compared to $1.15 in fiscal 2001.

Now, I’d like to discuss our Q4 2002 results.

For the fourth quarter of fiscal 2002, Adobe achieved revenue of $294.7 million.

This compares to $264.5 million reported for the fourth quarter of fiscal 2001 and $284.9 million reported last quarter.

GAAP net income for the fourth quarter of fiscal 2002, which includes non-operating gains and losses, was $40.1 million compared to $34.3 million reported in the fourth quarter of fiscal 2001 and $47.2 million last quarter.

Pro forma net income, which excludes the amortization and impairment of goodwill and purchased intangibles with structuring and other charges and investment gains and losses from the company’s venture programs was $59.1 million compared to $48.7 million reported in the fourth quarter of fiscal 2001 and $52.5 million last quarter.

Pro forma diluted earnings per share for the fourth quarter of fiscal 2002, which excludes the amortization and impairment of goodwill and purchased intangibles with structuring and other charges and the investment gains and losses from the company’s venture programs, were 25 cents.

GAAP diluted earnings per share for the fourth quarter of fiscal 2002 were $0.17 based on 238.4 million rated average shares.

This compares with diluted earnings per share of $0.14 reported in the fourth quarter of fiscal 2001 based on 243.4 million weighted average shares and earnings per share of $0.19 reported last quarter based on 243.4 million weighted average shares.

Gross margin for the quarter was 91 percent compared to 92.8 percent in the fourth quarter of fiscal 2001 and 88.9 percent last quarter.

Excluding the amortization and impairment of goodwill and purchased intangibles and the structuring other charges, pro forma [indiscernible] expenses for the fourth quarter of fiscal 2002 were $184.3 million.

Regular employees at the end of the fourth quarter totaled 3,319 versus 3,557 at the end of the third quarter of fiscal 2002.

The lower head count in the quarter was related to the previously announced reduction in force.

As we stated at our October financial analyst meeting, we will be filling key positions to support our growth initiative as we move through fiscal 2003 with aggressive hiring plans beginning in Q1.

Expenses as a percent of revenue break down as follows.

Research and Development, 21.8 percent;

Sales and Marketing, 31.7 percent;

G&A, 9.1 percent.

Excluding the amortization and impairment of goodwill and purchased intangibles and restructuring charges, pro forma operating profit in the fourth quarter of fiscal 2002 was 83.8 million or 28.4 percent of revenue.

This compares to pro forma operating profit of 67.9 million or 25.7 percent of revenue in the fourth quarter of fiscal 2001 and 73 million or 25.6 percent of revenue last quarter.

During the fourth quarter of fiscal 2002, the company incurred restructuring charges of 10.5 million.

The charge is a culmination of an 11.1 million charge for the Q4 fiscal 2002 restructuring program announced in October, which was partially offset by the reversal of .6 million from the previous restructuring program.

In addition to our quarterly amortization of goodwill and purchased intangibles of 3.5 million, we also incurred a Q4 goodwill impairment charge of 6.8 million for the remaining book value of the [Glassbook] [ph] acquisition.

The impairment charge was in accordance with FAS 121.

Beginning in Q1 fiscal 2003 as required, Adobe will adopt FAS 142 and thus, will no longer amortize goodwill on a quarterly basis.

Other income for the fourth quarter of fiscal 2002 was 3 million.

Adobe’s effective GAAP tax rate for the fourth quarter of fiscal 2002 was 35.5 percent compared to 33 percent in the fourth quarter of fiscal 2001 and 32 percent last quarter.

On a pro forma basis, the tax rate was 32 percent this quarter.

The difference between the GAAP and pro forma tax rates is entirely related to the non-tax deductibility of the [Glassbook] [ph] goodwill impairment charge.

I will now discuss Adobe’s revenue by market segment.

Graphics segment revenue was $123.2 million in Q4 fiscal 2002 compared to $112.8 million in Q4 fiscal 2001 and $118.2 million last quarter.

Cross media publishing segment revenue was $65.3 million in Q4 fiscal 2002 compared to $62.6 million in Q4 fiscal 2001 and $64.4 million last quarter.

ePaper solution segment revenue was $84.4 million in Q4 fiscal 2002 compared to $65.9 million in Q4 fiscal 2001 and $78.6 million last quarter.

Revenue from the acquired Accelio business was $11.1 million this quarter compared to $8.8 million last quarter.

OEM PostScript and other segment revenue was $21.8 million in Q4 fiscal 2002 compared to $23.2 million in Q4 fiscal 2001 and $23.7 million last quarter.

As we outlined at our October 28 financial analysis meeting, Adobe will modify its business segments beginning in Q1 fiscal 2003.

For historical trend analysis, we have posted on the Investor Relations section of adobe.com both our new and previous business segment revenue by quarter dating back to fiscal 2000.

Turning to revenue by geographic segment, the results in Q4 fiscal 2002 were as follows.

The America’s, 49 percent;

Europe, 31 percent;

Asia, 20 percent.

Overall, geographic performance in Q4 was genuinely on target with our expectations.

Specifically, we experienced stronger performance in Europe offset by weaker performance in Asia.

The America’s matched our internal expectations.

Application platform mix was 73 percent Windows and 27 percent Mac in the fourth quarter of 2002, which compares to 73 percent Windows and 27 percent Mac for the fourth quarter of fiscal 2001 and 72 percent Windows and 28 percent Mac last quarter.

Our trade DSO in the fourth quarter of fiscal 2002 was 36 days.

This compares to 42 days in Q4 fiscal 2001 and 46 days last quarter.

The trade DSO was below our target range due to strong collections of the Q3 receivables and revenue linearity throughout Q4.

Our global inventory position at the end of the quarter continues to be within company policy.

At the end of the fourth quarter of fiscal 2002, cash and short-term investments were $617.7 million compared to $636.2 million at the end of the third quarter of fiscal 2002.

Turning to Adobe Ventures, we incurred an investment loss of 3.8 million in Q4 fiscal 2002.

In the fourth quarter, we made additional investments of $5.3 million.

In total, Adobe’s invested $213.9 million through its venture partnerships and direct investments.

As of the end of the fourth quarter, the net returns from this program were $348.7 million, including the stock dividended to stockholders and the market value of investments still held by Adobe.

In regard to share buyback, Adobe repurchased approximately 3.8 million shares at a cost of $118.1 million during the quarter as part of its on-going share repurchase program to offset dilutions from employee stock programs.

In addition, as part of the company’s March 2001 five million share repurchase program, Adobe repurchased approximately .8 million shares at a cost of $16.8 million during the quarter.

With this repurchase, the 5 million share March 2001 program has been completed.

The company made no repurchases against its new September 2002 five million share repurchase program.

Adobe’s board of directors declared this quarter’s cash dividend of $0.125 cents per share payable on January 23, 2003, to stockholders of record as of January 9, 2003.

This includes my discussion on fourth quarter and fiscal 2002 results.

I would now like to discuss our Q1 fiscal 2003 targets.

We are targeting revenue of $275 to $290 million.

As a percent of revenue, our approximate operating model targets for the quarter are as follows.

Gross margin, 91 percent;

R&D, 22 to 23 percent; sales and marketing, 33 to 34 percent;

G&A, 10 percent.

As we stated at our October financial analyst meeting, operating expenses are targeted to increase in fiscal 2003 through the various marketing programs to support our rich product roadmap, our plan to set up compensation, and increases in staff to support our enterprise business.

Overall, this results in a Q1 operating margin target of approximately 25 to 26 percent.

Our full year fiscal 2003 pro forma operating margin target remained approximately 28 percent as we discussed during our financial analyst meeting on October 28.

The full year target anticipates new product releases in later quarters to drive higher margins.

For our share count in Q1, we are targeting a range of 238 to 240 million shares.

Finally, we are targeting other income of approximately 2 to 3 million and a tax rate of 30 percent.

The lower tax rate in fiscal 2003 is due to the ongoing benefits from our international restructuring completed in 1999.

These targets lead to a pro forma earnings per share target range in Q1 fiscal 2003 of $0.21 to $0.23 per share.

This concludes my comments.

I will now turn the call over to Shantanu.

Thanks, Murray.

I’ll spend the next few minutes reviewing Q4 business highlights, starting with ePaper.

Our biggest opportunity is to achieve broader penetration in the enterprise.

This includes increased adoption of Acrobat on the desktop for rich, reliable communication and the delivery of comprehensive document solutions to bridge disconnected document flows in the enterprise.

In Q4, we continue to make process against both strategies.

In regard to the Acrobat desktop business, we saw a sequential increase in quarter-over-quarter revenue in Q4.

Licensing procurements of greater than 2500 seats in the quarter included Chevron, Pratt and Whitney, Royal Dutch Hill, the U.S.

Department of Justice, and the U.S.

Patent and Trademark Office.

In addition, we’ve had early success with our test of an Acrobat Light version.

We’ve closed a number of licensing agreements with more than 5,000 seats since starting this pilot program this past summer.

In total, Acrobat desktop licensing revenue as a percent of overall Acrobat desktop revenue was 30.6 in the fourth quarter versus 27.6 for the first three quarters of fiscal 2002.

The other major opportunity with our ePaper business is providing complete solutions in the areas of document generation, document collaboration, and document process automation.

Last week, we shipped two new server products.

The Adobe document server lets customer dynamically assemble customized Adobe PDF files from a variety of data sources to create documents such as technical manuals, electronic forms, contracts, business reports, and invoices.

The Adobe document server for reader extensions offers businesses and government agencies the ability to enable features in the widely deprived Acrobat Reader.

According to a recently published Forester Research Report, the ability to integrate document workflows with common applications is very compelling for enterprises.

They state, “Microsoft doubts its vision of transforming static forms-based applications.

But veteran ISV’s already offer compelling [indiscernible] client solutions.

Case in point, Adobe’s new release offers documents [indiscernible] line.”

With the release of Document Server, we are now shipping a complete line of server-based products to enable customers to automate their document workflows.

Key fourth quarter deals in the government market based on our ePaper server solutions included: the Department of Defense Information Systems Agency, which will use Adobe Server Solutions to automate their forms processing; the State of New Jersey, which selected Adobe Forms Server and Workflow Server to implement and automate their electronic forms; the State of Nevada, which is migrating their welfare programs that are on mainframe-based systems to the web utilizing Adobe Server Solutions; and the National Insurance Board of Sweden, which is using Adobe Form Server to increase operational efficiencies in health care.

In the enterprise market, [indiscernible] with our server solutions included [indiscernible] which will use the Adobe Form Server and Workflow Server Solutions to automate the process of requesting and shipping pharmaceuticals for worldwide studies.

Salomon Smith Barney, which will use Adobe Document Generation Solutions to dynamically generate custom reports in PDF for their clients; [Laureal] [ph], which will use the Adobe SAP output server to generate high fidelity printed documents; and Delta Funding Corporation, which is utilizing Adobe Document Generation Solutions to streamline their mortgage document processes.

Another metric we will report on for our ePaper business is the average software licensing deal size.

Excluding maintenance, support, and professional services, are the top ten transactions in the quarter.

In the fourth quarter, this average deal size was $315,000 compares to $308,000 in Q3.

A key component of our ePaper strategy is to partner with other enterprise software providers.

During the quarter, we signed an agreement with Open Text and together, we are working to integrate Acrobat and Adobe PDF technology into an open text review and markup solution that they will market to companies in life sciences and other regulated industries.

This relationship, along with previously announced agreements with SAP Documentum is another example of the progress we’re making to deliver integrated solutions to our joint customers.

Turning to the graphic segment, we had a solid quarter led by the performance of full unit Photoshop revenue, Photoshop Elements, and a new version of Premiere.

Elements is quickly becoming the standard editing tool for the mid-range digital imaging software market.

The 2.0 release leverages the Adobe and Photoshop brands and continues to receive great reviews and rewards, such as the coveted MacWorld software product of the year.

In the digital video market, Premiere 6.5 has been well received by our customers and industry influences.

Revenue for the product was up 39 percent year-over-year on a quarterly basis.

In Q1, we plan to ship our new image management product that we demonstrated at our recent financial analyst meeting.

It will further expand our digital imaging software offering to a broader customer base.

Turning to our cross-media segment, InDesign continues to gain momentum.

In Q4, we announced increased adoption of Adobe InDesign and Adobe InCopy by leading integrators and newspaper customers with XML at the core of many of these systems.

The new integrators and developers include IBM, Quasar Technologies, and Unisys.

They join leading system integrators such as Digital Technology International, Net Links Publishing Solutions, and [indiscernible].

Major newspapers and publishers in Spain, France, and South America also announced their support for InDesign and InCopy based systems in Q4.

In addition, during the fourth quarter, we closed new InDesign licensing business with Hearst Publishing, Reader’s Digest, Leo Burnett, Clear Channel Communications, Walt Disney, IBM, the L.A.

Times, Discover Financial Services, and the Smithsonian Institution.

In the education market, we secured InDesign business with the [indiscernible] State University, the University of Washington, Iowa State University, and the British Malaysian Institute.

One of the key ways customers can obtain InDesign is by purchasing the Design Collection, which contains InDesign, Photoshop, Illustrator, and Acrobat in one bundled suite.

With Mac OS X support and all the key Adobe products in one box, creative professionals can easily adopt the Adobe publishing platform.

On a year-over-year basis, total annual revenue for the design collection grew 26 percent.

This concludes by Q4 business segment overview.

I will now like to turn the call over to Bruce.

Thanks, Shantanu.

We are pleased with our performance in fiscal Q4 demonstrating once again that Adobe is truly a growth company.

As we discussed at our October financial analyst meeting, 2002 was a year in which Adobe made significant investments in its future.

We made strategic acquisitions and developed significant relationships to enter new and adjacent markets.

We continue to invest heavily in R&D to drive innovation and maintain our technology leadership position.

At the same time, we closely manage expenses to remain a higher profitable company.

Last week, Adobe celebrated its 20th year in business.

As we being our third decade, we have three key business opportunities: create a professional market; the digital imaging and video markets; and our largest growth opportunity, the ePaper market.

We are excited about the strong product cycle in the coming year and remain optimistic about our prospects for continued growth.

Mike.

Thanks, Bruce.

Before we start the Q&A session, I would like to announce that our regular intra-quarter update for the first quarter of fiscal 2003 will be issued on Thursday, January 30 after the market closes.

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 investors relationships website on adobe.com later today.

Alternatively, you can listen to a phone replay by calling (402) 977-9140.

Use reservation number 21052031.

Again, the phone number is (402) 977-9140 and reservation number 21052031.

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 16, 2002.

We’d now be happy to take your questions.

Operator.

Thank you.

Ladies and gentlemen, if you’d like to register a question, please press the 1 followed by the 4 on your telephone.

You’ll hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3.

If you are using a speaker phone, please lift your handset before entering your request.

One moment please for your first question.

Your first question will come from the line of Gibboney Huske with Credit Suisse First Boston.

Your line is now open.

Please go ahead.

Thank you very much.

I have two questions.

But first, your U.S. revenue is sequentially down a little bit and could you kind of characterize why you think that was.

Is that a reflection of sort of product shipments and the tail of some of your upgrades?

You know, have you seen any sort of change in the business environment?

I know you did say it met your expectations.

And my second question is, just to give us an update on where you stand with Accelio, specifically obviously, the revenue came in a little bit below what your original target had been.

Do you see yourselves making that up going into 2003 and in addition, are you starting to see good renewals of the service agreements?

So Gibboney, this is Murray.

In regards to your first question in terms of the sequential decline in the America’s from Q3 to Q4, the biggest driver there really is that we see a strong education market in the third quarter and that’s very beneficial to us, whereas in the fourth quarter, we see less of the education business.

We also had a launch of Premiere in the third quarter in the U.S., which also was beneficial the third quarter versus the fourth quarter.

In regards to Accelio, as you know, we’ve been very careful in terms of the accounting treatment.

And the first quarter that we acquired the company, we [indiscernible] got off to a slower start because we were being very careful in terms of making sure that we continued to account in a conservative manner with all of our deals.

Although we’ve seen steady progress in that business, and you can see it in the revenue numbers, and we continue to believe that and that it will continue into fiscal year 2003.

One thing that’s important to note that while we expect continued revenue growth through our server products, ’03 will continue to be a building year for our whole enterprise business.

The total revenue for our enterprise business will certainly not be much more significant than our PostScript business, which is today, not a significant piece of our overall business.

So ’03, continue to look for building.

Continue to look for increased momentum, increased sales.

But in terms of significance of the total revenue for the company, it’s really ’04, ’05 and beyond where the enterprise business -- the revenue against he enterprise business -- begins to matter in terms of the total revenue.

Could you just specifically address the service renewals?

Are you seeing good renewals as those contracts come up?

I know you can recognize the deferred revenue that was on the books, but as deals come up for renewal.

Yes.

You can see on the information we provided in our income statement that the maintenance revenue has been increasing as we continue to renew these agreements.

And so we continue to see a good steady renewals in our business as we work through this year.

Great.

A couple of things that our customers are pleased with is after the integration, we have been going on the road and talking to them about the combined service strategy as well as platform moving forward.

And they’re pleased to hear of our plans in that space.

Great.

Thanks.

Also, I would encourage you to think back to the comments that Shantanu -- his prepared comments -- showcasing the 7 or 8 either government institutions or organizations that have adopted our solutions.

They’re pretty high profile, prestigious, and that’s just a sampling of the success that we’re beginning to see.

Great.

Nice quarter everyone.

Thank you.

Your next question will come from the line of Jay Vleeschhouwer of Merrill Lynch.

Your line is now open.

Thanks.

A couple of questions for you.

First, what are your plans or expectations in 2003 for being able to maintain disproportionate growth in the bundles business, or at least for Design Collection which is apparently the only bundle right now doing well.

The second question is with regard to your reference to new releases later in the year.

What are the considerations for whether or not it would make sense to have a Photoshop release in the fourth quarter?

Would it be simply to maintain a six quarter release cycle and perhaps, take advantage of some seasonality going into the yearend or would it make some sense perhaps to hold something in reserve for 2004 given the magnitude that Photoshop upgrades typically have on your revenue?

let me first take the Photoshop question, Jay.

What we do with many of our product releases, we like to take a look at what are our customer requirements, what are the dynamics in the marketplace, what’s happening competitively, the ability of our customers to absorb and digest any new product offering that we have.

That’s what drives our behavior.

Clearly, we also factor in revenue requirements, but that becomes secondary to our thinking.

It’s way too early in the cycle to be able to communicate when Photoshop is going to ship.

Clearly, if you do the math based on historical behavior and if you believe that history repeats itself, we will ship that product somewhere between Q4 and Q1.

But it’s way too early to talk about which quarter will that product be shipped.

With respect to our strategy for the creative pro customers, Jay, certainly we are hearing that they prefer to have an integrated suite that we have been offering and so that will continue to be a key part of how we market our entire collection to our customers.

And we continue to see InDesign option as one of the reasons why people are looking towards the Design collection as a collection that they want to standardize on.

So, you know, we continue to believe that Design collection will be the most important collection moving forward.

And our strategy will be as we move to ’03 and into ’04 and beyond is to encourage our customers through both functionality, as well as through pricing schemes to buyout collections versus our standalone products.

Okay.

One follow up with respect to Acrobat Light.

You alluded to some initial orders that you are already beginning to get.

Were those from customers who were part of the testing program or are these new customers to whom you’re beginning to market even before the formal release of the product later in the spring.

These were part of the initial test, Jay.

Thank you very much, Shantanu.

Your next question will come from the line of Gene Munster with U.S.

Bancorp, Piper Jaffray.

Your line is now open.

Hi, everybody.

Just kind of following up on the Acrobat Light.

Is there any details in terms of -- is this just going to be an enterprise level product or do you potentially see this entering the retail channel and I know you’ve been pretty coy about the pricing, but I’ll take a stab at it any way.

Any sort of color or magnitude in terms of how you’re going to price that product.

At this point, our strategy with the Acrobat line is to segment it and make sure that we’re serving the needs of the customer.

So we’ve talked about having the Acrobat Light product in primarily to accomplish broad proliferation in the enterprise under site licensing scheme.

That’s really the focus for the Acrobat Light product.

The current Acrobat product will continue to be the broad product that we market.

And we’ve also talked about having a product that’s aimed at more specialized functions, such as engineering and the creative pro customers.

So specifically with the Acrobat Light product, the focus is on site licensing and broader proliferation in the enterprise.

[indiscernible] the Acrobat Light in terms of broader distribution be consistent with the upgrade of the regular Acrobat product?

We haven’t announced any timing on the release of the products.

But I can assure you that by having a segmented product line that gives us a lot more flexibility in the way we extract value for the product functionality that’s been in the one product line historically.

So we believe that that will give us an opportunity to gain incremental revenue as we increase our penetration.

Excellent.

And in terms of just the overall, kind of the bigger deals, you talked about the enterprise deals with Accelio -- one from, was it 308 to 315 -- is it safe to say that you expect those to continue to increase in the current quarter?

In terms of the two metrics that we talked about for the Acrobat business, they’re really related to our goals, Gene.

The first goal being how do we get broader penetration of Acrobat within the enterprise which is why we’re tracking our licensing business.

And second is how do we provide a bigger value proposition to both the Acrobat platform and desktop client, as well as our Acrobat server products.

So that’s really the reason why we think those two are good metrics of our business and we expect increased focus on both of those.

Are you [indiscernible] that the regular Acrobat business declines going into the upgrade or do you think it’s going to be flat going into the upgrade?

We are not [indiscernible] it to decline.

It could potentially increase, but we haven’t really given any specific targets.

What we’ve seen historically with our Acrobat release, in fact, with most of our product releases, we don’t typically see a decline of full unit sales of products prior to shipping the next release of that product.

And since the bulk of Acrobat’s revenue is related to full unit sales and not upgrade unit sales, we do not anticipate a decline going into Q1.

Excellent.

Thank you.

Thank you.

Your next question will come from the line of Ben Reitzes, UBS Warburg.

Your line is now open.

Thank you.

Good afternoon.

I wanted to ask about margins.

I believe that you’re guiding for close to 300 basis point cut to operating margin in the first quarter and I was just wondering what was going on with regard -- is there any higher costs that you are incurring next year?

And then also, with regard to your outlook for the year, it does imply that, you know, you maybe the end year at a 32 percent type operating margin.

And I was wondering if that means -- if that just comes from higher revenue throughout the year or if there is some cost cutting that takes place throughout the year.

And then I have a follow up.

In regards to the margins, as we look into Q1 from Q4, the range we provided was 25 to 26 percent, so that’s -- you’ve chosen to identify that on the low end of the range of the 300 basis points.

We’re looking to 25 to 26 and there’s a number of factors that’s leading us to target that range.

The first is that the revenue that we’re targeting for Q1 is 275 to 290, and that’s below where we came in on Q4.

So that will put some compression on the margins.

Secondly, as I stated in my prepared remarks, that we’re looking to have an aggressive hiring plan in Q1 that will be very important for us in terms as we move into the enterprise.

And, thirdly, as I had mentioned at the financial analyst meeting in October, that during the past quarters, we’ve not been paying out full incentive compensation.

As we go into 2003, we want to believe that we’re going to achieve our internal plans and we’re going to pay out the full incentive compensation target against those full targets in the first quarter.

So that would drive the margin of 25 to 26 percent range.

However, for the full year, it remains in that approximately 28 percent area.

And as we go into the year with a rich roadmap, we’re looking to see our margins expand that will finish the year around 28 percent.

So obviously, some quarters are going to have to be above 28 percent in order to offset the 25 to 26 that we’re targeting in the first quarter.

Okay.

So largely, from the higher revenues in the back half.

And then with regard to just recent business activity.

How have things kind of gone from November into December.

Maybe it’s too early to tell, but are there any signs that maybe if you could talk about it geographically -- even in Asia, which was a little light as you guys said -- is there anything going on in particular in the very near term that that’s impacting your guidance and how’s business activity?

So Ben, it’s way too early to comment on December.

And clearly, we want to focus this conversation on Q4, I’ll ask Murray to provide a little bit more color on what we experienced in Q4.

So in Q4, again, as I stated earlier, the America’s, the U.S. it’s a national internal expectations.

We had a very solid quarter on a year-over-year basis.

We had very good results.

It was a fairly linear quarter.

October was the strongest month of the quarter, followed by September and November.

The trends in November were very similar to the seasonal trends we have experienced in previous years.

In Europe, what we saw was, as we came out of the summer season, we saw a good performance in September and it improved in October and then it improved in November.

Again, very typical of what we see with our seasonal trends.

And in Asia, specifically in Japan, we saw our business a little bit better in September, but that’s part of their bi-annual period end.

But basically, the business in September, October and November was very stable, very consistent with what we experienced in July and August.

And that’s really where we finished up in each of the geographic areas.

Thanks, Murray.

Next question will come from the line of Solin Cho with Morgan Stanley.

Your line is now open.

Hi.

Thanks.

Just a quick follow up on that last comment.

When you said that the month of November in the America’s showed typical seasonality, does that mean that it actually [indiscernible] from October?

No, October, as I said, it was the strongest month of the quarter.

It was modestly down from October in November.

Typically, we see it in past cycles when you don’t factor in any kind of product upgrades.

And that’s very typical for us and that’s what we saw again this quarter.

Okay.

So I was under the impression that November was the strongest month.

But that’s not the case?

No, that hasn’t been the case.

You have to look at the product cycles.

If we shipped a major product in November, then that’s obviously going to drive the revenue for that particular month.

But, you know, you have the Thanksgiving week in there, as well, which also I’d say tends to be a lower week just because distributors and retailers are not necessarily open all five days of that week.

So in general, November is usually modestly down when you assume all of product schedules aside, just looking at just the demand, it tends to be seasonally down from October.

Okay.

Great.

And then just in terms of the guidance range for revenues in the first quarter, 275 to 300 -- sorry, 275 to 290 -- can you talk about what swing factors determine whether you achieve the low end or the high end of that range?

I think there’s really two factors.

They’re both seasonal.

The last couple weeks of December, the first week of January around the world tend to be a slower period from a seasonal standpoint.

So if that period of time is weaker, then we anticipate that could push us toward the lower end of the range.

If it’s stronger, then that could help us toward the higher end of the range.

And the other seasonal factors, February -- it’s one of the strongest months of the year for us.

And if February performs, you know, very well for us, that’s going to put us toward the high end and if it’s not as seasonally strong as it has been in past years, then that will put us at the low end.

And those are really the two drivers.

We don’t have any major product shipping in the quarter, so it’s really going to come down to some of these seasonal factors.

Okay.

Great.

And then just a final question on the op ex numbers.

Since you are targeting a pretty aggressive ramp in your hirings beginning the first quarter, should we assume that the fixed cost portion of op ex is the run rate that you achieve in the first quarter is a pretty good run rate for the rest of the year?

Well, we’ll continue to have hiring throughout the year, but I’d say that our plans right now with aggressive highs in Q1, as we exit Q1 if we achieve all of our hiring plans, that will put -- that will be the most aggressive quarter from a hiring perspective.

Okay.

Great.

Thank you.

You next question will come from the line of Craig Ellis with Salomon Smith Barney.

Your line is now open.

Craig Ellis, your line is now open.

Yes.

Can you hear me?

Yes.

Thank you.

Just want to look at the performance of the Photoshop franchise in the quarter.

Can you help us understand as you went through how Elements did.

Did we see sequentially improving growth rates?

And relative to Photoshop, can you give us some perspective on how large you think the Elements franchise can be and any perspective on where we are in terms of that progression right now.

Craig, is your question regarding Photoshop or Photoshop Elements?

It’s both and the question on sequential strength is Photoshop Elements.

The question on a relative size would obviously relate to both.

But it’s more Photoshop Elements related.

So in regards to Photoshop Elements, we did see a sequential increase from Q3 to Q4.

A number of reasons for that.

One is it’s been a very successful product.

We’re entering the time of the year where a product like that can do well.

Also, we did ship all the languages in the fourth quarter, whereas in the third quarter, we did not ship all the languages.

So the Japanese version shipped in the fourth quarter for the first time.

And I’ll comment on Photoshop and then I’ll turn it over to Shantanu to provide some color in terms of the total opportunity.

In regards to Photoshop, again, we had a very strong launch of Photoshop in the second quarter in the United States.

The overall business declined in the third quarter.

And when you look what you would typically see as you start to work for the cycle, the fourth quarter [indiscernible] Photoshop was consistent with the third quarter.

And we saw pronounced strength in the full units from Q3 to Q4.

In other words, there was an increase in the full units and the upgrades a decline from Q3 to Q4 so you would typically see during the upgrade cycle.

So with respect to the market size, Craig, I mean, clearly Photoshop will continue to be the larger market from a revenue perspective for us because, you know, it’s the imaging standard.

It’s being used not only by the creative pro customer, but also by a large number of non pros, both at home as well as at work.

In terms of the seats, Photoshop Elements will be a larger seat count that we can penetrate.

And that’s more directly correlated with camera sales.

And we continue to see Photoshop Elements do well as the number of digital cameras that are being sold expand.

In fact, our overall growth of Photoshop appears to have exceeded that for the growth of digital cameras -- Photoshop Elements.

Okay.

And then just understanding your comments a little bit further, Murray, on Photoshop Elements in the quarter.

Did you see growth rates on a month-to-month basis that increased as you approached the Christmas selling season or did you peak in October or peak in September from a year-over-year growth rate standpoint.

That’s a bit of a challenging one to answer because when you introduce like the Japanese version for the first time, and those weeks ensuing the sales [indiscernible] could be quite high on that.

So all I can say is that we have had good performance in the quarter going into the holiday period, which [indiscernible] can do quite well.

You know, we’re going to have some focused marketing programs in Q1 during this holiday period to drive sales of that particular product.

And we continue to believe that, you know, we are in a position to take advantage of that opportunity.

Okay.

Thanks, guys.

Thanks, Craig.

Next question will come from the line of Steven Jue with RBC Capital Markets.

Your line is now open.

Please go ahead.

Thanks.

Great quarter guys.

Just looking at the pure Photoshop business, have a couple of just kind of thoughts just anecdotally would love to get your opinion on.

Looking at where the units have tracked to date since the launch back in May -- the May/June timeframe -- have those units, the total upgrade units -- kind of met where you thought you’d be at this point in the cycle?

Yes.

And then, just looking at the full units.

I’m just kind of curious at how that is tracking kind to your internal expectations just, you know, at this point given the cycle.

What -- go ahead.

I think if you look at the Photoshop market, you know, clearly the CreativePro is a big percentage of the people who buy Photoshop and that’s a fairly well penetrated market with Photoshop.

And so a lot of the full units that we see are really being pulled into the at home and at work.

Again, as I said, because these people are drawn to Photoshop as the imaging standard.

What we saw in Q4 was that full unit sales were in line with our expectations and continue to do well.

And keep in mind that full unit sales of Photoshop was coming off a relatively weak Q3 of full units.

As we said back in Q3 and I think at the analyst meeting, full units of Photoshop are clearly been effected by the overall economic issues that we are experiencing around the world.

Both creative professionals are struggling with keeping themselves employed or financially stable, and then certainly consumers are being much more price sensitive to what they’re buying as luxury items.

We believe that once the economy improves, that full units of Photoshop could return back to its normal run rate.

I would also add one other thing to it is that we are finding some of our customers, which we want them to do, is to buy Photoshop through the collections.

And we’re seeing real strength in the collections.

They’re also driving the Photoshop business -- or driving our overall revenue as the company.

So again, when you look at the Photoshop standalone business, you also look at what’s going on with collections, because Photoshop is a major driver of those collections.

Whereas, in past cycles, the collections weren’t as strong or weren’t as comprehensive an offering as we have today and you would have seen more on the standalone Photoshop business.

But what’s exciting is to look at our overall digital imaging business, both today’s products and then adding the additional products in Q1.

We will have a significant product lineup in the category that’s going through a major transformation.

And we’re uniquely positioned to take advantage of it.

Great.

And then just last question.

You talked a little bit about aggressive hiring in Q1 and the enterprise business.

Could you just kind of give us more color on which areas you’re looking at.

As I understand, you guys have made the sales force transition of the few hundred already.

It’s pretty broad.

It’s going to include a number of positions in the sales organization, in the marketing organization, the engineering organization, and even in some cases, in the G&A organization to fully support our move into the enterprise.

So it’s quite broad.

We’ve made a lot of progress on the sales side, hiring a number of enterprise staff.

But, we’ll continue to look for additional resources to drive against the opportunity that we have there.

And this is something that we planned for as we were doing the restructuring earlier on late Q3, early Q4.

Great.

Thank you.

Your next question will come from the line of John McPeake with Prudential Securities.

Your line is now open.

Please go ahead.

Okay.

Can you hear me guys?

Yes.

Thank you.

Good executive.

Good quarter.

I just have a couple quick ones, I think.

Could you just elaborate a little bit about the linearity in the quarter.

There was a significant drop in the DSO’s despite, you know, I guess, it sounded like you shipped the Photoshop Elements for the first time in the Japanese market.

And just give me a little more on that.

Thanks.

Yeah.

In regard to DSO, last quarter we had 46 days and [indiscernible] balance was higher because of the -- that was not at the linear quarter.

We were able to collect all those receivables.

And when you look at the revenue this quarter, if you saw [indiscernible] all 13 weeks of the quarter, it really tracked very linear just so of quarter -- week in, week out as we moved all the way to the end of the quarter.

So the fact that we were able to collect all those receivables from last quarter and we didn’t have any kind of a hockey stick at the end of the -- for the month of November around the world, we’re in a position where the DSO was lower.

In regard to Photoshop Elements, [J] [ph] -- the Japanese version -- that’s a product that shipped toward the beginning of the quarter.

So the money that would have been collected during the quarter.

Okay.

Great.

And then just a quick follow up on the sort of Elements concept.

It does seem like the product’s doing really well.

Is there any thought of a Premiere type Elements product as more digital cameras -- you know, digital movie cameras get out there?

We continue to look at that as a potential opportunity.

I mean, certainly even Premiere, we continue to see a lot of people at the at home and at work use the Premiere product.

But, we think relative to the digital imaging opportunity, the video opportunity is smaller at this point.

Smaller in the home segment.

We see the big opportunity for video in corporate.

So for corporations that are trying to do in-house sales training, in-house communications, as well as marketing communications -- those things like products and services through DVD’s and through the web -- we think video is going to continue to grow in that space.

If you’ll look at the consumer, the reality is even back in the old analog world, the number of people who use still cameras versus the number of people who use video camcorders was significantly greater -- almost a factor of something like 10 to 1.

Consumers, when you have the first child, second child, you might use your camcorder.

And then by the third child or once that second child becomes over five, most people end up not doing video.

So we just don’t see it as a big space.

We think people will do videos snippets through the use of their digital still camera and certainly products like the imaging management product that we’ll be introducing this quarter, over time will incorporate more and more video capabilities.

But having a standalone Premiere Elements product, you probably won’t be doing -- we’ll continue to test -- we’re doing some tests in markets like Japan, but so far we haven’t been too excited.

Yeah.

It just seems like with Firewire and direct digitization without the need for a board, there might be a little more of a market.

But then --

The technology is there.

It’s just whether -- do people really want to work with video and the third dimension of time makes it complex for a lot of users.

I hear you.

Now, if I could just have one more follow up on Acrobat, the next version.

As you get closer to the release date to someone’s question earlier, is there any sense that you might give upgrade protection to maybe prevent people that buy the 5.0 from waiting potentially towards around the release date?

John, we’ve for years [indiscernible] a standard policy around that and that is once we announce a new version, the existing product in the channel, you get a free upgrade to the new version because we don’t want to stall sales and we obviously defer revenue for that.

So that’s a standard thing we’ve done across all of our products.

We’ll do that as well for 2003 for all of our products so you don’t get in a situation where you would stall sales during that time period.

And it’s never been an issue for us.

We’re able to do it and the cost of doing it is not significant.

Great job, guys.

Thanks.

Your next question will come from the line of Steve Ashley with Robert W. Baird.

Your line is now open.

Hi guys.

I just have a couple questions on the server business.

Shantanu, you ran through maybe 7 or 8 examples of ePaper, eForms transactions that were larger deals.

Were those the three Accelio servers involved in those transactions, or did those transactions also include the recently released Document Server or Document Server with read extensions?

No.

Those were primarily the Accelio products that are now called the Adobe Form Server and the Adobe Workflow Server that was generating most of those revenues.

In addition to that, we’ve always had some Adobe Acrobat server products that allow you to output PDF as part of those.

So, you know, the recently released products in the last quarter, as you might imagine, they were more pilot customers and beta customers and given we’ve just shipped that, you’ll see more sales from that this quarter.

And about how many places do you think those are being [indiscernible]?

Again, we’re not going to break that out.

We have been getting good feedback from our customers.

And, you know, there’s a lot of interest.

We’ve talked in the past about the Adobe Document Server for reader extensions and the ability to outside the firewall, take advantage of those half a billion Acrobat Readers out there.

There’s some pilots all around the world.

And both -- again, both businesses and governments are really excited about being able to leverage the reader franchise.

And just to be clear, do those two products that were recently released integrate into the three Accelio servers, or integrate with those?

Certainly.

Again, integration is a pretty broad word, but relative to PDF being the standard platform that now the Form server allows you to serve PDF, as well as the Acrobat Reader being the client for all those server products, that integration is there.

And in addition to that, we’re expanding all of them to really include more XML capabilities so that they all work with existing back-end systems.

And does the doc server run on a [J2E] [ph] app server?

The doc server currently runs both UNIX, as well as [NTN] [ph].

Yes, as part of that, it does run in conjunction with application server that you might have on UNIX.

Thanks so much.

Thanks, Steve.

Your next question will come from the line of Christopher Donnelly with JLF Assets.

Your line is now open.

Please go ahead.

Good afternoon, gentlemen.

Sorry.

I joined the call a little late, so if someone asked this, I apologize.

Given deferred revenue growth accelerated materially about 14 percent sequentially this quarter up from the low single digits last quarter, would it be safe to say that you’re just being conservative on guiding Q1 revenues down, or am I missing something?

We’re also very prudent with our guidance and I’ll leave it at that.

Okay.

Thank you.

Your next question will come from the line of Keith Gay with Thomas Weisel Partners.

Please go ahead.

Thank you.

If Acrobat is becoming more part of an enterprise solution sale versus a shrink wrap sale, do you expect the smoothing of revenues based on Acrobat upgrades or is it just too early in terms of the side of the enterprise business right now?

Well, in the past, Acrobat upgrade revenue -- especially Acrobat, even with the launch, it has been relatively small.

So in terms from a smoothing standpoint, that wouldn’t really apply.

What you’re seen with the launches of the previous versions of Acrobat is your strong full unit sales.

So, you know, we’ll see how this one goes, but we continue to believe that the large opportunity is not [indiscernible] from upgrading the existing base, but continue to reach the millionth of seats that we currently don’t have today.

What could potentially be an interesting opportunity for us with this release, unlike all the other releases, is that a customer that has the standard version of Acrobat might choose actually to upgrade to the Pro Version or Professional Version.

That would be a new opportunity that we hadn’t had in the past.

Does it also provide a new opportunity in that there are now other server products that might be bundled with an enterprise sale?

Certainly, yeah.

So, I mean, as part of being able to do a complete solution sale in the area of document collaboration, process automation and generation, we do expect that the Acrobat client would be on the desktop and you’d have our solo products at the back end.

Okay.

And can you give a little more color on the number of direct sales people now in the enterprise market what your plans are there and then a couple of more questions.

You mentioned a license for the top ten deals.

Can you give us the total number of deals and any color also on the license service mix on those deals.

What we’re trying to do, Keith, at this point is start to give you some metrics that you help you understand our ePaper business better.

So, you know, the licensing -- the top ten deals is what we are sharing at this point and the licensing.

We’re not prepared to give you comments on how many sales people we have as well as the total licensing.

What we did state in the past, Keith, was that more than 60 percent of our total sales organization is now focused on the ePaper opportunity.

You know, you guess on how many people we have in the field.

I’ve seen ranges anywhere from 300 to 500.

But, we haven’t specifically broken that out.

All of those wouldn’t necessarily be quota carrying.

Some are supporting the quota carrying sales people.

But it’s been a major effort we’ve made over the last year.

And is there a [tele] [ph] sales effort supporting this operation?

Absolutely.

Thank you.

Thanks, Keith.

The next question will come from the line of Bill Lennan with WR Hambrecht.

Your line is now open.

Please go ahead.

Thank you.

Most of my questions have been answered.

I have a -- I want to take another go at this Photoshop upgrade thing.

How would you compare the tail of -- Bruce has used the term tail in the past of this Photoshop upgrade versus the prior.

If you graph the upgrade rates on it, would this one be above or below or about the same as the prior release?

Thanks.

I would sale the tale for Photoshop 7 has been roughly consistent with the tale of Photoshop 6.0.

Okay.

That’s all I had.

Thank you.

Your next question will come from the line of Peter Ausnit with Deutsche Bank.

Your line is now open.

Thanks very much.

At the analyst day, you mentioned that you’d be providing Acrobat revenue from new customers as a percentage.

Is that statistic available?

That was one of the statistics that we are going to start providing.

We expect that we will deliver that with the Q1 numbers.

Okay.

We weren’t able to get the data collected and communicated in such a way in time for this quarter.

But we’ll certainly it have for you in Q1, beginning with that fiscal year Q1 call.

Okay, terrific.

You also announced an agreement -- an arrangement with Open Text, I believe, just recently -- perhaps today.

You previously talked about Documentum and SAP.

Can you tell us where we are in terms of seeing revenue from those relationships?

Is any ongoing yet or is that still sort of more coming for next year than a now thing?

So I think in terms of the revenue, we are starting to see revenue from our partnerships with Documentum.

With SAP also, we have started to jointly co-market the solutions that we have, namely the ability for SAP to be outputted using our server products.

As you can imagine, part of these relationships, it’s all about integrating to a much deeper level and that work is ongoing.

In fact, with SAP, we were with SAP in their headquarters very recently.

And it’s definitely progressing according to plan.

Can you give us a sense though, is it relatively insignificant now and you expect it to become significant next year, or is this more of a, you know, like the enterprise sales effort, more of an ’04 thing?

It is relatively insignificant now.

And in line with wherever you see our enterprise sales and server revenue, it is more of an ’04 and ’05 thing.

At the same time, I think you will start to see these partners talk a lot more about Adobe and their solutions.

Okay.

Can you give us a sense of the mix of Acrobat sales in terms of the platforms that they’re running on?

Is it primarily running on the Windows platform or does it follow somewhat the mix of the graphic products and have a significant Macintosh base?

And if you also have some indication of the applications that are driving Acrobat output, whether it’s mostly Office or whether it’s Lotus and other desktop productivity-type applications or other applications that are driving significant demand there?

So first, I think in terms of the Adobe Acrobat Reader, the Reader is certainly available on Mac, as well as UNIX platforms and Windows, in addition to Symbian and Pocket PC and Palm.

In terms of the PDF generation, the predominant platform for PDF generation at this point is the Windows platform.

Certainly, the creative pro, you see a lot of PDF generation as it relates to PDF workflow for the creative professional.

But, Windows is the majority of where PDF is generated.

So it’s more than the company average of about -- in the 70 percent range for Windows?

Yes.

The Macintosh business for Acrobat is a percentage is relatively small.

In terms of usage, we certainly see a fair amount of Office usage, but you’re seeing it increasingly from other engineering applications.

You’re seeing it as part of PDF workflow for the creative pro community.

And you’re seeing it a lot in terms of any e-mail message that’s going or posting on the web.

It’s being done in PDF.

Okay.

That sounds good.

It seems like you’re developing a suite strategy with regard to functionality, as well as pricing with your collections.

With regard to some -- are there important suites that you sort of live in and around regarding productivity applications?

Are you aware of other digital rights management efforts designed to enable more control over output and whether they’ll have an impact on end-market demand for third party capsules that provide read-only, print-only and other sorts of digital rights management functionality in your marketplace?

Peter, I’m not sure I understand your question -- this is Bruce -- but, I’ll take a stab at it.

In terms of when we look at any other significant collections of suites out there, there’s only one company I could think of that has done a better job than Adobe today and that’s certainly Microsoft with their Office product.

That Office product is clearly targeted at a different customer than our collections are targeted at.

Our collections or suites of products are targeted at either the video professional, the web professional, the print professional, either the serious user or the more casual user.

So we don’t really compete in that space, but we haven’t done a good a job as Microsoft in both adding value to our collections above and beyond the value of our standalone products.

More pricing the collections and the point products in such a way that encourages the user to buy the collections over the individual point products.

Bruce, I think you’re correction strategy is a brilliant one, and I think it’s going to be very successful and I think it’s a great proven model that’s going to work for you.

I’m asking much more about extensions to that other suite regarding digital rights management that in some ways may encroach on the value add of the Acrobat franchise.

Are you aware of any efforts in the marketplace from --

We think that digital rights management is very complimentary to what people are trying to do because they’re trying to protect the information that’s been created from within our applications.

And as it relates to Acrobat in particular, we already support a variety of digital rights management that allow people to deliver secure information in a rich and reliable way.

In fact, the reason why PDF has been adopted by most government agencies around the world is because it’s the only reliable secure document container that they believe that they can use DRN with.

Yeah.

That makes a lot of sense.

So really, a lot of the value add, you’re saying from Acrobat, is digital rights management in some respects.

The ability to work with other company’s DRN solutions.

Whether that be folks like VeriSign or Entrust or Will Networks or anybody else, we become the great container in which to secure that information with using their DRN solutions.

Well, thanks very much.

That’s clarified.

Thanks, Peter.

Ladies and gentlemen, as a reminder, to register for a question, please press the 1 followed by the 4 on your telephone.

We have a follow question from Bill Lennan with WR Hambrecht.

Your line is now open.

Hi guys.

Just one other one.

On the Acrobat license -- on the licensing -- Acrobat licensing as a percentage of the desktop, you’ve given the percentages.

And I think at analyst day, you said 27 percent over trailing three months.

Is that a 27 that’s very steep, like 20, 27, 30-something or is that like -- what’s the ramp on the licensing, if you could share some color on that?

Thanks.

Bill, what we said was is that the first recorders of 2002, that average we said was 27.6 percent.

This quarter, it’s 30.6 percent.

So if your question is was it 5, you know, 12, 27, 31, that’s far from what’s happened.

It’s been more of a gradual building over a period of years as we continue to build away on that and we had very good performance this quarter at 30.6 in breaking through 30 percent.

Okay.

Thanks, Murray.

Gentlemen, I’m showing no further questions at this time.

Please continue with your presentation or any closing remarks.

Okay.

Well, that concludes our call today and we thank everybody for joining us.

Ladies and gentlemen, that does conclude your conference call for today.

We thank you for your participation and please ask you to disconnect your line.