Adobe Inc (ADBE) 2005 Q1 法說會逐字稿

Good afternoon.

My name is Derrick and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Adobe Systems Q1 fiscal year 2005 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you.

I would now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations at Adobe Systems.

Please go ahead, sir.

Good afternoon, and thank you for joining us today.

Joining me on the call are Bruce Chizen, our CEO, Murray Demo, Senior Vice President and CFO, and Shantanu Narayen, President and Chief Operating Officer.

In the call today we will discuss Adobe's first quarter fiscal 2005 financial results.

By now you should have a copy of our (inaudible) press release which crossed the wire about an hour ago.

If you need a copy of the press release, you can go to Adobe.com, under the Company 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, particularly our revenue and operating model targets for the coming quarter and our forward-looking product plans, is based on information as of today, March 17th, 2005, and contains forward-looking statements that involve risk and uncertainty.

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

For a discussion of these risks and uncertainties you should review Adobe's SEC filings, including our annual report on form 10-K for fiscal 2004, and our quarterly reports on form 10-Q to be filed in fiscal 2005.

During this call, we will discuss non-GAAP financial measures.

The GAAP financial measures that correspond to non-GAAP financial measures, as well as the reconciliation between the 2, are set forth in our press release issued today and are available on our website.

All participants are advised that the audio of this conference call is being broadcast live over the Internet, and is also being recorded for playback purposes.

The audio of the call will be archived on Adobe's Investor Relations website 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.

I am pleased to report the momentum we established in fiscal 2004 has continued in the first quarter of 2005.

Q1 revenue was a record $472.9 million, exceeding our expectations.

Our record-setting Q1 performance is evidence of strong customer adoption of our platforms.

This was particularly true in our Intelligent Documents business, where increasing adoption of PDF-based document workflows in organizations and governments worldwide, resulted in 42 percent year-over-year growth.

Demand was also strong for our Creative Suite Platform, as we experienced record revenue 5 quarters after its launch.

Given our strong performance in Q1, and a planned major product launch this quarter, we're increasing our financial targets for fiscal 2005.

I will now turn the call over to Murray for a review of our financial results.

Then Shantanu will provide more detail about performance in each of our business units.

Thanks, Bruce.

For the first quarter of fiscal 2005, Adobe achieved record revenue of 472.9 million.

This compares to 423.3 million reported for the first quarter of fiscal 2004, and 429.5 million reported last quarter.

On a year-over-year basis, this represents 12 percent growth.

As a reminder, the year-ago quarter had 14 weeks, due to our 52, 53-week accounting calendar.

Therefore, our year-over-year revenue growth would have been higher than 12 percent if measured on a comparable 13-week basis.

GAAP net income for the first quarter of fiscal 2005 was 151.9 million, compared to 123 million reported in the first quarter of fiscal 2004, and 113.5 million last quarter.

Included in GAAP net income this quarter was the tax impact of the planned repatriation of certain foreign earnings, net of related tax accruals.

Repatriation is being done to take advantage of the lower tax rate under the recently passed American Jobs Creation act.

Non-GAAP net income, which excludes as applicable investment gains and losses from the Company's venture program, and the net tax impact of the planned repatriation of certain foreign earnings, was 133.8 million, compared to 123.8 million reported in the first quarter of fiscal 2004, and 110.4 million last quarter.

GAAP diluted earnings per share for the first quarter of fiscal 2005 were $0.60, based on 253.1 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.50 reported in the first quarter of fiscal 2004, based on 246.1 million weighted average shares, and GAAP diluted earnings per share of $0.45 reported last quarter, based on 250.3 million weighted average shares.

Non-GAAP diluted earnings per share for the first quarter of fiscal 2005, which excludes investment gains and losses and the net tax impact of the planned repatriation of certain foreign earnings, were $0.53.

Gross margin for the quarter was 94.3 percent, compared to 94.3 percent in the first quarter of fiscal 2004, and 93.2 percent last quarter.

Operating expenses for the first quarter of fiscal 2005 were 275.2 million.

The increase from last quarter was primarily due to higher compensation-related expenses, and higher marketing, charitable contribution, and legal expenses.

Regular employees at the end of the first quarter totaled 4,016 versus 3,848 at the end of the fourth quarter of fiscal 2004.

The majority of the head count increase was in R&D, and in sales and marketing.

Expenses as a percent of revenue break down as follows: Research and development, 18.3 percent; sales and marketing, 31.2 percent;

G&A, 8.7 percent.

GAAP operating income in the first quarter of fiscal 2005 was 170.7 million, or 36.1 percent of revenue.

This compares to GAAP operating income of 163.3 million, or 38.6 percent of revenue in the first quarter of fiscal 2004, and 146.4 million or 34.1 percent of revenue last quarter.

In each of these quarters, GAAP and non-GAAP operating income, and operating income as a percent of revenue were the same.

Other income for the first quarter of fiscal 2005 was 7.6 million.

Other income was higher this quarter, due to higher interest income, and lower foreign currency hedging expenses.

Adobe's effective tax rate for the first quarter of fiscal 2005 was 14.1 percent, compared to 26 percent in the first quarter of fiscal 2004, and 26 percent last quarter.

Excluding the net tax impact of the planned foreign earnings repatriation, our tax rate in the first quarter of fiscal 2005 was 25 percent.

I will now discuss Adobe's revenue by business segment.

Creative Professional segment revenue was 160.7 million, in Q1 fiscal 2005, compared to 158.1 million in Q1 fiscal 2004, and 151.2 million last quarter.

Momentum has continued for our Creative Suites and CS products.

Digital Imaging and Video segment revenue was 106.6 million in Q1 fiscal 2005, compared to 113.5 million in Q1 fiscal 2004, and 118 million last quarter.

The decline from last quarter was due to expected lower post-holiday demand for our consumer digital imaging and consumer video products.

Photoshop momentum continued, consistent with past quarters.

OEM Postscript and Other segment revenue was 20.7 million in Q1 fiscal 2005, compared to 21.4 million in Q1 fiscal 2004, and 20.4 million last quarter.

Intelligent Document segment revenue was a record 184.9 million in Q1 fiscal 2005, compared to 130.3 million in Q1 fiscal 2004, and 139.9 million last quarter.

In Q1, total Intelligent Documents desktop revenue grew 47 percent, to a record 160.7 million.

Intelligent Document server revenue was 24.2 million, and represents 14 percent year-over-year growth.

Turning to our geographic segments, the results in Q1 fiscal 2005 on a percentage of revenue basis were as follows: The Americas, 46 percent;

Europe, 32 percent;

Asia, 22 percent.

Adobe experienced solid demand across all major geographic segments.

Application platform mix was 76 percent Windows and 24 percent Mac in the first quarter of fiscal 2005, which compares to 71 percent Windows, and 29 percent Mac for the first quarter of fiscal 2004, and 75 percent Windows, and 25 percent Mac last quarter.

Our trade DSO in the first quarter of fiscal 2005 was 27 days.

This compares to 28 days in Q1 fiscal 2004, and 30 days last quarter.

In regard to our global channel inventory position, we ended the quarter within Company policy.

At the end of the first quarter of fiscal 2005, cash and short-term investments were $1 billion $467 million, compared to $1 billion $313 million dollars at the end of the fourth quarter of fiscal 2004.

In regard to share buyback, we repurchased approximately 3.1 million shares in Q1 at at cost of 180.5 million as part of our share repurchase program.

Adobe's board of directors declared this quarter's cash dividend of $0.0125 per share payable on April 12th, 2005, to stockholders of record as of March 29th, 2005.

This concludes my discussion on the first quarter fiscal 2005 results.

Now, we will discuss our Q2 fiscal 2005 targets.

We are targeting a Q2 revenue range of 475 to 495 million.

Included in the targeted revenue range is our plan for a major product launch later in the quarter.

As a percent of revenue, our approximate operating model targets for the quarter are as follows: Gross margin, 94 percent;

R&D, 18 to 19 percent; sales and marketing, 30 to 31 percent;

G&A, 9 percent.

Resulting in a GAAP and non-GAAP operating margin target of approximately 35 to 37 percent.

For our share count, we are targeting a range of 256 to 257 million shares.

For other income, we are targeting approximately 6 to 7 million, and for our tax rate, we are targeting 25 percent.

These targets lead to a GAAP and non-GAAP earnings per share target range in Q2 fiscal 2005 of $0.51 to $0.55 per share.

We also are raising our full year fiscal 2005 revenue target to approximately 1.925 billion from the prior range of 1.85 to 1.9 billion.

We also are increasing our operating margin target for the year to approximately 36 percent, subject to FAS 123-R implementation.

The prior operating margin target range was 34 to 35 percent.

And finally, as we announced today, Adobe plans to split its stock two-for-one in May.

As part of the stock split, we will discontinue our small cash dividend after the Q1 dividend payment in April.

To continue our goal of returning value to stockholders, we intend to utilize the cash used to pay the quarterly dividend, for our ongoing stock repurchase programs.

This concludes my comments.

I will now turn the call over to Shantanu.

Thanks, Murray.

I will take the next few minutes reviewing highlights in each of our major businesses, starting with the Intelligent Documents business unit.

In Q1, we achieved record Acrobat desktop revenue of 160.7 million, representing 47 percent year-over-year growth.

Acrobat 7 focuses on driving higher value uses of the Acrobat product family beyond PDF creation, with emphasis on specialized document work flows in verticals such as manufacturing, and AEC, architecture, engineering and construction.

We continue to receive positive reviews and comments.

PC Magazine gave Acrobat 7 the Editor's Choice Award and Small Business Computing described Acrobat as "mission critical" for small businesses, stating Adobe has "created a significant upgrade to the existing product."

And Desktop Engineering added "for those who collaborate with others, including those who create and use engineering and technical drawing, the new features make Acrobat 7.0 a must-have."

We achieved record Acrobat desktop licensing revenue in the quarter.

Licensing, as a percentage of Acrobat revenue, was 41.1 percent, lower than last quarter, due to the launch of Acrobat 7.

In our server-based Intelligent Documents business, we continue to see adoption of our solutions.

Intelligent Documents server revenue was 24.2 million in Q1, representing 14 percent year-over-year growth.

Our success in the government market continues.

Key wins in Q1 included the U.S.

Navy Exchange Command, or NEXCOM, which is using Adobe LiveCycle Form Server and Adobe Output Server to administer their report generation tasks.

NEXCOM plans to phase out, and eventually eliminate paper reporting through its use of this solution.

Deutsche Post, which announced a new Internet postage service, called Stampit Web, which is utilizing an Adobe solution that includes LiveCycle Form Server and LiveCycle's Reader Extension Server, along with the free Adobe reader, to allow customers to prepay mail postage online.

After purchase, the postage will be delivered to the customer as an Adobe PDF document that can be printed offline, and affixed to an envelope.

Companies House, the U.K. government department that maintains the country's 1.8 million plus company registrations, which is using Adobe LiveCycle Reader Extension Server, and the Adobe LiveCycle Form Server, to deliver dynamic online and offline forms for unaudited and dormant accounts.

And Italy's Interior Ministry Scientific Police Section, which is responsible for criminal forensics, which is using an Adobe LiveCycle solution and PDF to enable XML data exchange.

In the commercial market, (indiscernible) Q1 included, RouteOne, a web-based joint venture created by the financial services arms of Daimler Chrysler, Ford Motor, General Motors, and Toyota, they are utilizing the Adobe Form Server to render contracts and other forms with XML data, to replace paper-based loan and lease processes with secure electronic transactions.

BellSouth, which is using an Adobe document generation solution to create personalized collateral for new customers on demand.

And HomeBank Mortgage Corporation, which will use an Adobe document generation solution in their new loan origination system.

In regard to the key quarterly performance indicators that we report, the number of enterprise server transactions greater than $50,000 totaled 39 in the quarter.

The average size of these transactions was $150,000.

This month, we also made several announcements that will help extend the reach of Adobe PDF as a platform for the exchange and delivery of information.

First, an agreement with Japanese mobile giant, NTT DoCoMo, which will deploy the Adobe Reader on its 3G network for customers of its popular i-mode service.

These customers will soon be able to view subway maps, brochures, bank statements, and other valuable information in PDF.

Second, we announced a collaboration with HP to help technical professionals, including architects and engineers, improve collaboration inside and outside their organizations.

And third, we announced with Accenture this morning, that we are helping the U.K.'s Medicines and Healthcare Product Regulatory Agency, an equivalent to the United States Food and Drug Administration, to develop an online portal for the pharmaceutical industry.

Adobe's form solutions and PDF technology will enable the agency to electronically process, share, and archive tens of thousands of applications and requests for information each year.

Turning to our Creative Professional business segment, our momentum continues, driven by record quarterly revenue for the Adobe Creative Suites.

Helping drive this quarter's success was the inclusion of the new Acrobat 7 Professional release and the premium version of the suite.

In addition to the Creative Suite performance, the individual CS products, including Photoshop, Illustrator, and InDesign, continued to show momentum in Q1.

Stand-alone InDesign customer adoption was strong in Q1.

Leading advertising and branding agencies, Ogilvy & Mather, DDB Worldwide, and Wunderman, have announced that they are adopting InDesign.

In addition, Advanced Magazine Publishers, which publishes 27 magazines including Vanity Fair, Conde Nast Traveler, Glamour, GQ, and House and Garden, has announced that it is adopting an integrated publishing system to replace their core base system with InDesign and InCopy.

Turning to our Professional Digital Imaging business, Photoshop momentum continued in the first quarter.

On a year-over-year basis, new full Photoshop units in Q1, including those licensed as part of the Creative Suites, were up more than 20 percent when compared to Q1 of last year.

Adobe also continued its industry leadership by working to advance the adoption of DNG, the new digital negative standard.

Earlier this month, we were pleased to see 2 digital camera manufacturers, Hasselblad and Leica Camera AG, announced their support for DNG.

In the hobbyist digital imaging market, Photoshop Elements 3.0 continues to earn strong accolades.

Popular Science gave it a Best of What's New Award, and Macworld commented that it is a "a must-have upgrade for digital photographers."

In the professional video market we announced the availability of a plug-in for Premiere Pro to deliver real-time high definition editing on the desktop.

Praise for our digital video products continued.

DVD Etc.

Magazine awarded the Adobe Video Collection, a 2004 Editor's Choice Award, calling the collection "five outstanding programs in one exceptional collection."

This concludes my Q1 business segment review.

Bruce?

Thanks, Shantanu.

It is clear Adobe is executing on its strategy.

We're experiencing strong momentum across all of our major business segments.

This demand is being driven by the exploding growth of digital content and the accelerating migration to PDF-based document work flows.

Our significant market opportunities, our strong product platforms, and our consistent record of execution, positions Adobe for continued growth.

Mike?

Thanks, Bruce.

Before we start Q&A, I would like to announce the date of our Q2 intra-quarter update.

We plan to issue the press release on Tuesday, May 3rd, after the market closes.

Again, that is Tuesday, May 3rd, after the market closes.

Looking to April, our annual meeting of stockholders will be held on Thursday, April 28th at Adobe's headquarters in San Jose.

Adobe's 10-K, the letter to stockholders, and other proxy materials are being mailed this week.

These documents can also be viewed online from Adobe's Investor Relations website.

For those with questions regarding our stock split announcement today, you can access an FAQ document on the Investor Relations page of Adobe.com.

To reach the Investor Relations page, you can go to www.Adobe.com/adbe.

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 website on Adobe.com later today.

Alternatively, you can listen to a phone replay by calling 706-645-9291, with conference I.D. number 4027771.

Again, the phone number is 706-645-9291, with I.D. 4027771.

The phone playback service will be available beginning at 4 p.m.

Pacific time today, and ending at 4 p.m.

Pacific time on Monday, March 21st, 2005.

We would now be happy to take your questions.

Operator?

(OPERATOR INSTRUCTIONS) Ben Reitzes, UBS.

A couple of things.

Murray, can you comment on your backlog with the strong, I guess, shrink wrap and licensing sales of Acrobat, what it looks like into this next quarter?

And then also, with regard to the share repurchase, now that you won't be doing a dividend, is the goal now to keep shares relatively flat?

I see you're guiding to another 3 million or so share creep in the next quarter, but if you could just talk about how that strategy should play out, I would appreciate it.

Thank you.

Ben, in terms of backlog, if you look at the end of the fourth quarter, we had received quite a number of orders for the yet to be launched Acrobat 7.

So on a quarter-to-quarter basis, our backlog is lower at the end of this quarter than last quarter, again because of the launch of Acrobat 7.

However, we end the quarter within Company policy on inventory.

We're in a good, healthy position in the channel, and we factored in that position into our targets of 475 to 495 for revenue in the second quarter.

In terms of the share repurchase and the dividend, now, first of all, the dividend is about 12 to $12.5 million of cash on an annual basis.

So it is obviously quite small.

And so the idea there is that given with the stock split, the administration of all of that now with the 500 million share base, or so, is that it is probably more efficient to buyback the stock and pass the value back to the shareholder that way, than to go through the administrative efforts associated with paying out the dividend.

As far as a target for the share count, we're not providing any specific targets beyond what we have for the second quarter.

Just 1 last thing.

Bruce, with regard to your growth for the year, I think your target comes in at around 15 percent growth.

If we take the 30 million or so that might have been added to last year's first quarter, and we kind of normalize, I'm getting growth for this quarter organically, in and around 20 percent, give or take.

So just for the year, you're at around 15, and you kind of seem to be growing a little faster than that organically right now.

Can you just reconcile that for us with regard to your long-term guidance for the year?

Yes, I'm looking at Murray, because I'm not sure I quite understand your question.

So if you could try and re -- .

Yes, if I have 1.925, I think if I do the math, it is about 15 percent growth or so in revenue.

I'm actually -- got to actually check that stat, but I would think we decelerate a little bit from the 20 percent organic growth.

You grew 12 percent this quarter, but if we normalize it for the extra week, I'm getting around 20.

So I'm just trying to -- it seems pretty conservative to -- still, with what you're guiding to for the revenues.

So if you can kind of look out for the year.

Okay.

I now understand your question.

Thanks, Ben.

So what you're saying is, last year we had the 14 week quarter.

This year, the 13-week quarter.

We grew 12 percent year-over-year.

If you just do the math, it is about, you're saying it is close to 19, 20-ish, depending on how you calculate it on a year-over-year basis.

And yet our year-over-year growth for the remainder -- for the total year in fiscal 2005 is 15 percent, and you're questioning whether that is conservative or not.

We think that is -- what we believe it will be.

Keep in mind, we're 13 weeks into a 52-week year.

Certainly as we get closer to the second half of the year, we will comment on Q3 and then subsequently Q4.

So clearly, Q1 exceeded our expectations.

Not only did we exceed our original expectations, but we exceeded our intra-quarter guidance expectations.

Acrobat is stronger than we had anticipated.

And the Creative Suite is doing better than we thought it would do.

Certainly, what happens over the next quarter or 2 quarters will determine how we see the remainder of the year.

Thanks a lot, guys.

Good quarter.

Jay Vleeschhouwer, Merrill Lynch.

A couple of questions around CS.

First, Murray, do you have an updated installed base number now for CS as compared to the 700,000 number you quoted at the analyst meeting back in October?

Also, you cited a record number, or revenue for the product.

Was that in any way correlated to the sequential strength we see in your Asia number?

Asia looks like it had a good sequential increase, and the second best quarter in nearly 4 years.

So has CS correlated to that, or was that also Acrobat selling into Asia?

Jay, in terms of the installed base, we're not providing an update today in terms of where we stand with that installed base.

But can you believe that we are underpenetrated there, and we have significant opportunities on a go-forward basis.

In terms of the Asia number.

First of all, Japan makes up a large percentage of our Asian business.

And given that March is the year-end in Japan for governments, for corporations and the education sort of buying season, and we would expect that the first quarter, from a seasonal standpoint, would be a stronger quarter.

Also, with the launch of Acrobat in the quarter, it also helped to fuel the growth that we saw, or the strength we saw in Asia in the quarter.

Okay.

A follow-up on the Acrobat business.

You're nearly 2 years into the vertical strategy, which you largely commenced with Version 6, and you've been quite active in that respect the last few months, as Shantanu pointed out with some announcements.

Could you describe perhaps a little bit more precisely how much business you're now getting for Acrobat out of some of those verticals, particularly manufacturing, AEC, and financial.

And how successful do you think you are in terms of materially changing the revenue contribution from those verticals?

Well, Jay, with respect to Acrobat 7, clearly it is early.

We saw the record quarter.

One of the indicators that we do look at is the mix that we see between the standard product and the pro product, because the pro product is aimed at those verticals where there is the creative professional, the manufacturing, as well as the AEC segments, to understand the adoption and usage in those segments.

In the quarter that we just finished, the pro to standard mix was approximately 50/50, which is higher than it's been before.

Which again I think reflects greater utilization of the features that we've put in, the higher value features that we put in.

In addition to that, I mean certainly in spending a lot of time with customers, we are seeing them use Acrobat features that we put in, specifically for those markets.

So the customer feedback has been positive.

From a revenue contribution, certainly pro has been continuing to grow stronger, which again reflects success of the higher value SKU.

All right.

And then lastly on the server side of the business, are you seeing 2 or 3 out of the more than half dozen server flavors that you have, that are doing better than the rest?

I think on the server side, clearly the servers that are doing well, the Document Server Reader Extensions and the Form Servers which is all about automating the business processes, we see a number of customers use that.

Typically they will start with a couple of business processes and then extend it further.

We're also seeing success with the Document Server, which is all about creating the document generation, the marketing collateral that we talked about.

The other servers that are relatively new in the marketplace are the Bar Code and the Policy Server.

But good adoption of the Forms Technology which we believe starts to integrate the Intelligent Document Platform with their back-end infrastructures.

Tom Berquist, Smith Barney.

I think a couple of times you alluded to a major product release next quarter.

Can we assume that is probably Creative Suite Version 2?

At this point, all we are saying is that it is a major product release.

Stay tuned.

One of the challenges, not that we're trying to hold back information, but as many of you know, we typically provide free upgrades to our customers, once we announce a product.

There is also a possibility that once we announce a new version of a product or a new product, we could stall current sales of an existing product.

So as much as we would like to share with you what the new product or products would be about, or what they specifically are, we don't want to hurt our business in doing that.

So that's why we're not able to disclose that information.

Got it.

Okay.

Fair enough.

Shantanu, I believe I heard you mention that Photoshop product category as a whole was up 20 percent year-over-year?

What I said, Tom, was that the Photoshop new full units, including licensing, was up 20 percent year-over-year, and that was just to reflect that we continue to see Photoshop adoption in the marketplace many quarters after the product was released.

And this is the Photoshop CS product.

Got it.

Okay.

The reason I was asking is that I was struggling to figure out where that -- what the growth was coming at the expense of, since the categories that Photoshop is represented in, one of them I guess the Creative Suite category was up a couple percentage points year-over-year, and the Digital Imaging and Video segment was down like 5 or 6 percent year-over-year.

So I'm trying to figure out like where the other products maybe were weaker than expected, given the continued strength of Photoshop.

Well, one of the things I think we also talked about was, as expected, we saw the holiday -- after the holiday season, we tend to see the consumer digital and consumer video products go down.

And so that happened as expected.

Got it.

Also, Tom, the -- what we're referring to on the growth is the new units.

And so obviously a year ago, we had more upgrade units driving revenue as we were just launching Photoshop CS.

And so the point is, is that we're seeing new unit adoption up 20 percent on a year-over-year basis, which just shows that we're continuing to be successful at reaching new customers.

Got it.

Okay.

Now, I understand.

Thank you.

The question on the server business, are you starting to see -- because I know last year you didn't see really seasonality in that business in the first quarter.

But apparently did you in the year.

Is that driven by enterprise buying cycles?

I think in the server business, we continue to see year-over-year growth.

And in terms of the number of large deals, we still had the second best quarter we've ever had for deals greater than 50,000.

As we spend time talking to customers, clearly we're seeing validation of the opportunity and we're seeing customers adopting our solutions.

We're making progress.

But Tom, it is fairly early in Adobe's entry into the enterprise business, so I think are you going to see some movement quarter to quarter.

Sure, I wasn't trying to imply -- I knew it was up.

I was just wondering if it was the first time we saw a sequential downtick in the first quarter.

So as I'm modeling out in future years, should I assume that there will be typical seasonality for the first quarter, like there is in most enterprise software companies?

It was really more along those lines.

First of all, we're not really providing specific Q1 targets for subsequent years, and where it relates to our product cycles and things like that.

So I think it is really difficult for us to say there is a specific trend right now, in terms of quarter in, quarter out.

I think the only trend we can point to is that, the third quarter of the year is our seasonally weak quarter.

And that cuts across all of our businesses, and including our server business, and that is something that we will be factoring in in anything that we do, as well.

And the other thing, Tom, keep in mind that because our fiscal year is off by a month, it is hard to look at our enterprise server business and compare it to many others, because they're working with -- they're typically working on a fiscal year that mirrors the calendar year quarters.

Totally fair.

Good point.

Last question, on the platform mix.

I was just noticing sort of the last couple of quarters we've seen sort of a bigger uptick on the Window side versus the Macintosh.

Anything I should read into that?

I know that -- I know that a lot of the Creative Suite products that were bought last year were coming on OS-10, as the operating system.

Has that sort of stabilized, and now you're seeing a little bit more of the growth on the Windows platform?

I think that reflects really on the Creative Suite platform, we continue to see strong adoption in both Macintosh and the Windows platforms, given the strong strength of Acrobat.

Acrobat tends to be more heavily skewed on the Windows platform, so that's what you're seeing reflected in that platform mix.

Steve Ashley, Robert Baird.

I would just like to actually follow-up on Jay's earlier question.

It just has to do with again, you cited in the press release and during the call, strength you're seeing in the adoption of Acrobat on the desktop, for PDF-based document workflows, and driving that into specific verticals.

And what are you doing to create the awareness, and just drive and create that demand within those vertical?

And secondly, is the channel playing any part in demand creation within those verticals?

So Steve, you faded in and out.

I think the question was again around Acrobat desktop, and sort of as it relates to specific verticals, what we are doing to drive that awareness, as well as usage?

Yes, exactly.

Well, we're doing a number of things.

I think as it relates to the creative professional, clearly using PDF as a digital master and everything that we've done around standards like PDFX and the awareness of that, is driving more usage with PDF within the creative professional community.

In the engineering and technical community, a number of the partnerships that we've done with using these partners also to talk about the benefits of what we've done with PDF, one of the things we added with Acrobat 7 was support for this new U3D format.

There are a number of other companies, like Bentley and Hitachi, that have also announced both support for the U3D format and also plug-ins to take their format and convert it to PDF.

And so, a number of these partners are also endorsing and supporting PDF.

And finally, in terms of auto and marketing programs, we are spending more time speaking to those particular customers, through the channels that they are accustomed to hearing about product information.

For example, reviews.

I think if you look at the number of reviews that we've seen in engineering-related magazines, it has gone up significantly with Acrobat 7, and the reviews have been universally positive.

Perfect.

And then, Murray, with respect to the extra week a year ago, is there any way to quantify or guesstimate what the revenue contribution was in the year ago period from that extra week?

Well, obviously it is somewhat subjective in terms of being able to determine that amount.

I think that if you take, and you divide it by 14 from a year ago, it probably overstates a little bit what 1 week of revenue would be, because we do get paid in some cases on a monthly basis for revenue.

But once you kind of do that, then the modifications to that wouldn't be particularly material.

It would give you a pretty good idea in terms of what the benefit would have been.

Okay.

But it wouldn't be the whole one-fourteenth, but it would still be a substantial portion of that.

Tom Ernst, Deutsche Banc.

A couple quick questions.

The tax repatriation benefit you had this quarter, can we anticipate that that might happen as we look forward at any subsequent time again?

I'm sorry, so the question on the tax repatriation, what in the future?

Might you get another benefit like you saw in Q1 again, as we look forward?

Typically, no.

On this one, based on the -- our plan in terms of repatriating cash, the accounting treatment for that was done in this quarter, and I really wouldn't forecast that there would be another item like this of this magnitude related to the repatriation.

So I think you need to kind of look at it more like it is a 1-time type of event.

Now if there was a modification to the law, or something like that, then that could potentially have another impact.

But for right now, we're looking at as more of a 1-time event.

Right.

Okay.

And the R&D expense picked up quite a bit in this quarter as well as in your guidance for next quarter.

Should we assume that there is some 1-time expense associated with the major product launches, or is this is permanent rate, run rate?

We've been saying all along as we continue to think it is important to invest in our future, and we continue to hire more and more engineers.

And so what you're seeing is, is a continued investment in that category, and it is not really about 1-time specific charges.

It is really about driving our future product development, going forward.

And 1 thing I will add, keep in mind this quarter, we did overachieve.

And clearly, our bonuses would be higher than they would be in a quarter in which we did not overachieve.

And that also impacts our R&D expenses since many of those expenses are salary-related.

Great. 1 final question, if you'll permit.

Is there any direct revenue associated with the i-mode announcement?

And then as you look across other web standards and perhaps other smartphone standards, like Symbian or Windows Mobile, is there anything we should expect in the works for PDF availability?

Well, we do see the mobile market as1 of the next frontiers for how people are publishing and distributing content.

And getting Adobe Reader as part of all those devices, whether it is Symbian or Palm, Pocket PC, or in this particular case, the NTT DoCoMo phones, is an important important part of the strategy.

Certainly, we continue to make revenue from both the desktop as well as server products associated with PDF.

And they are -- we're not -- the terms associated with the NTT DoCoMo itself are confidential.

But yes, they can also be revenue-generating.

It wouldn't be a material part of our revenue.

Right.

But that was my question.

It seems, Shantanu, with that market, it is a differentiating feature, you ought to be able to capture some revenue off the platform.

Well, we continue to believe that having PDF playback and viewing as being ubiquitous is what has fueled our Acrobat revenue to date.

And we just want to continue to have that be the platform for content distribution across every device.

Steve Jue, RBC Capital Markets.

2 questions. 1, just with the new Acrobat release.

As you've gone into, I guess major enterprises and companies, are you seeing any change in how people buy that product, whether it is, departmental in the past, versus maybe, kind of licensing it like they would a Microsoft Office on more desktops?

And then, just secondly in terms of FX impact in the quarter, Murray, I am wondering if you can comment a little bit on that as well?

I will take the question on Acrobat and the enterprise.

We have seen a shift over the last number of years from departmental to lines of businesses, and in some cases, to the entire enterprise.

And it really depends on where the customer is in their life cycle of Acrobat utilization, and PDF utilization.

So it really varies.

But you have -- we continue to see a shift, if you look at industries like the pharmaceutical ones that have been using PDF as part of their mission critical workflows for a number of years, they're more likely to adopt Acrobat at the enterprise level.

If you look at some of the other corporations, they're a little bit further behind that cycle.

In terms of the FX impact in the quarter, it is about $11 million, and you look at the currency rates on a year-over-year basis.

And again, the currency was factored into our guidance at the outset of the quarter and also intra-quarter update.

So the currency benefit did not lead to the overperformance in the quarter.

That was again, driven really by the sales of Acrobat and the Creative Suites.

Okay.

Great.

And then just last question.

At a high level, as you look at the success of the first version of the Creative Suite, how do you think about pricing versus value?

And do you think, given the success, that obviously that the price value equation was very successful, is there a possibilities of possible slight price increases or any change in that strategy going forward?

Well, we continue to monitor pricing.

We do a number of customer research.

I think at the highest level, we're really gratified that people are adopting our platform at the rate at which they are.

And secondly, the fact of the active usage of the products within that platform, including InDesign, is going up.

And I think that just reflects that we're delivering significant value to our customers.

And Steve, we do a lot of modeling around pricing.

To try to determine what we think is going to drive the most adoption and drive the greatest amount of revenue over a short to a longer term period.

And so anything that we do quite a bit of research, quite a bit of modeling, and scenario planning, goes into that for all of our products.

Barbara Coffey, Brean and Murray.

My question is more around the server revenues again.

I saw that the -- sequentially down on the average server size, and the number of server transactions under 50,000 declined slightly, although it is -- I was wondering that, as well as the license revenue of the desktop.

Could you sort of speak to what you're seeing now?

And any reasons why those look like they tick down slightly?

Well, I think if you look at the last couple of quarters, the Q3 revenue was really driven as we had said, by a 1-time OEM payment.

I think Q4 was a very strong quarter.

We saw a number of deals close in that quarter.

This quarter was the second best quarter, and down sequentially.

But, we continue to see customer validation really of the opportunities.

I think on a quarter-over-quarter basis, we are going to see some deals slip or some deals not close.

With respect to the size of the deals, the intent was really to demonstrate that both from license revenue as well as then when you add professional services, people are investing significant dollars to deploy our customer solutions.

We recognize that that revenue -- the license revenue for the greatest deals, is going to oscillate from quarter to quarter.

So, we continue to look at it.

It is a good -- great multi-year opportunity, and our customers are adopting this.

And then the percent of licensing.

So in terms of the percentage of licensing, we had 41 percent on Acrobat desktop in the quarter.

And the thing to remember is, is that when we launch new products, we tend to see a lot of the customers who buy through shrinkwrap at retail, that tends to happen very early on.

And then you see licensing kick in more over subsequent quarters.

And so it was clearly our expectation that we would see that the licensing, as a percentage of total desktop revenue, would come down in the quarter of the launch, like in the past.

And then it would move up from there.

All told, on an absolute dollar basis, though, it was a record quarter for licensing revenue for Acrobat desktop.

Oh, by all means.

It was just -- I wondered if you were seeing the same kind of people were buying single copies of the new server, just to try them.

And therefore the average transaction size had dipped a bit.

That was kind of what I was thinking might have occurred.

Well on the desktop versus the servers, those are really unrelated, in terms of trying to correlate these 2 moves.

I think what you saw this quarter was -- on the server side, the average deal size was lower.

We didn't have as many of the really large deals, and that sort of drove the average down, and had an impact in the overall server revenue in the quarter.

What we think is significant, that any deal that was greater than $50,000 means that the customer is probably investing in excess of a $1 million on the business process that they're trying to enhance.

So while they might buy 50,000 or 75,000 or $100,000 worth of product license from Adobe, the internal development costs and/or the SI costs, system integrator costs in which to implement that, could in many cases exceed $1 million.

After making that kind of investment, it is validation for us that our value proposition is for real.

Brent Thill, Prudential.

Bruce, last year, it was a tough first half of the year for the software industry.

You obviously didn't have any of those issues.

Just curious if you could contrast the characteristics of the selling environment that you see this year versus last year?

And has anything changed?

Has Sarbanes-Oxley now freed up some more resources, or any other changes that you're seeing in the pipe?

Yes, Brent, keep in mind, when we talk about what we see, the bulk of our revenue comes from Western Europe, Japan, and North America.

So, we can only talk about those countries and regions in which we have a strong business.

The -- in terms of what we're seeing at the macro level, it is relatively stable.

Which is I think good news for us, and probably good news for the industry.

Murray touched on it a little bit earlier.

In Japan, we typically see an uptick in the economy in the first quarter, especially as we get closer to the end of our quarter, because of the buying cycles.

And we did experience that time.

North America and Europe both were strong, and strong across all of our very diverse business segments.

Everything from the casual hobbyist who is aspiring to be a -- use a creative professional tool, to the creative professionals who are buying our suite products, and the enterprises who are looking to become more productive and efficient with our PDF-based document workflows.

The fact that we saw consistent performance across all of those segments suggests to us that we are living in a world, at least in a software world, where the economy is pretty good.

And Murray, if you could just address the decline in deferred revenue, albeit it was very small, is that -- should we read into that?

Well, Brent, the main issue there is really is, is that as we launched, or announced the launch of Acrobat 7, those customers who were buying 6, we will give them a free upgrade after we announce the launch of the new product, to continue to sell the existing product in the channel.

And then as we deliver Acrobat 7 and the subsequent -- after we launch it, then we are finally able to realize that revenue.

So it becomes what we call sort of free upgrade revenue.

It goes into deferred, we deliver the product, and therefore we can then recognize the revenue.

So it is really around the launch of Acrobat 7 that caused the slight decline you saw in deferred revenue.

Okay.

And last question, if you could just address Google's move with Picasa.

What impact does it have to the digital imaging business?

Well, I think if you look at the digital imaging business, and you look at the various customer segments that have -- at the professional and the hobbyist level are clearly Photoshop.

CS, as well as Photoshop elements, continue to have the majority market share, and are clearly driving the market.

I think on the low end, you find a number of products that exist in the marketplace, Google and Picasa is certainly 1 of that.

But I think as people outgrow the low end imaging products, we have continued to believe that that is an opportunity for them to move to the hobbyist products.

And our focus is really on the faithful customers who value the Photoshop brand.

James Friedman , Fulcrum.

It is Jamie Friedman at Fulcrum.

I believe that mid-quarter, guys, you had updated this CS 1 to include the new Acrobat 7 at launch.

And I was wondering if you could give us any color as to what extent Acrobat 7 may have helped to boost the CS success in the bundle in the quarter?

We do think that the inclusion of Acrobat 7 Professional, which only exists in the premium suite of the -- premium version of the Creative Suite, also would help further acceleration of the Creative Suite bundle.

The ratio between the Creative Suite Premium and the Creative Suite Standard was approximately 3.5 to to 4 to 1.

Clearly, people who are buying the premium edition see the value in Acrobat 6, and now clearly Acrobat 7, as well as the benefits of having GoLive.

Great.

And then just as a follow-up to Brent's question, the previous caller's question, with regard to the impact on deferred.

Assuming hypothetically that say there was a new product launch next quarter.

Should we also go under the assumption that late purchasers of say CS would get grandfathered into the next release, and that would get drawn out of deferred for the next quarter?

Well, yes, you could have a situation where the deferred revenue could go up.

There is a scenario in the second quarter, as we go into the launch, both because we're going to have to defer revenue for free upgrades, as well as those who may choose to buy maintenance in advance of a launch.

And keep in mind, we only provide free upgrades at the time between when we officially announce a product, and when we deliver it.

So, we're not currently accruing any kind of -- or deferring any revenue at this point in time, because -- at least related to any of the new products we're talking about in the future, because we won't be providing those free upgrades until we announce.

Got it.

Okay.

I will pass the baton.

Thank you.

Drew Brosseau, SG Cowen.

Just 2 quick ones.

First, can you talk a little bit about what you anticipate the product cycle to look like for the Acrobat 7?

Big boost this quarter.

Just wondering how durable you think that is going to be?

Yes, Drew, so a couple of things there.

In terms of Acrobat, this quarter we launched all 4 major languages, which is different than in some of the past times, where we've launched Acrobat where it might have split a quarter.

So what we saw this quarter was obviously really tremendous results with 160.7 million in revenue.

What we would expect to see, is that the second quarter we would see a decline in Acrobat desktop revenue, like we would have seen in past versions where we shipped all the major languages in that very first quarter.

Now, remember that in the last 2 cycles of Acrobat, the second best quarter was the last quarter of the cycle.

And so the key thing here will be as to what level the Acrobat desktop revenue sort of settles out in, as we move through the cycle.

Right.

Okay.

And as it relates to the release this quarter, we're -- by the way happy St. Patrick's Day.

We're 17 days into this quarter.

So when, this quarter, might we anticipate, to Bruce's point, both the announcement and the actual delivery?

So, at this point, we are not providing any specifics regarding each of those 2 that you just mentioned.

We provided that information to help folks understand some of the assumptions behind the target range we set for revenue for the quarter.

But we're not, at this point, getting into trying to announce specific products and timing of products.

But can I -- can you comment on whether we will get delivery this quarter?

What we're saying is, when we say launch the product, what we're trying to do in terms of trying to provide an assumption of the revenue target range for the revenue, would assume we would generate some revenue from it.

Otherwise we wouldn't have gone into explain that we are launching it in the quarter.

So there is a revenue aspect related to the launch that supports the revenue and the target range.

So you have kind of got the launch helping drive the revenue up, and we're also sort of signaling that on the Acrobat desktop side, the revenue would be lower.

So sort of the net of the 2, if you think about it, is what is going into driving this higher revenue target range.

Okay.

But we will stay closely tuned.

Thanks.

Sterling Auty, JP Morgan.

Thanks, a couple of questions.

You guys have had a large number of partner announcements over the last 6 to 12 months.

Can you just give us an update as to which of your partners are you seeing kind of the greatest impact on the business at this point?

And then I have a follow-up.

So, Sterling, I'm assuming you're referring to the server business partner announcements?

Or are you speaking more generally in the business?

More generally in the business.

But then if you want to drill in on the server side, that would be great, too.

Well, on the server side of the business, I think the key partnerships are with SAP, IBM, and Documentum.

I think with SAP we are in production.

We have a couple of customers testing it out.

With IBM, we continue to make progress on the enterprise business.

We're part of a number of the industry solutions in the government space.

For example, with eForms and record management; in pharmaceutical with the initiative; in banking with their account opening.

And with Documentum EMC, as we both try and ensure that PDF is adopted as an archival standard.

We are certainly seeing success in the marketplace.

More generally, I mean we have a number of other partnerships.

I think on the AEC side, we've talked about our partnerships that we have with Bentley.

We've announced a partnership with HP.

And then you look at some of our broader partnerships that we've had for a number of years.

They continue to be very important to us.

Everything from Intel, in which we optimize our products for, Apple on the Creative Suite side, HP on the printing side, Kodak with some of the printing services that we offer in Photoshop Element, and the list goes on and on and on.

Okay.

And then as a follow-up, it seems like if we look back over the years, there was a period of time where it really felt like were you competing head on with Macromedia.

Then the 2 companies seemed to kind of go in separate directions.

They focused on the online.

You guys have done such a great job in the different kind of publishing medias.

But now with the DoCoMo announcement, it seems like maybe the 2 companies are heading back towards a collision course.

Can you kind of talk a little bit more broadly about the strategy for online for Adobe?

And do you see that kind of competition coming with Macromedia?

So through the years with Macromedia, I agree with your perspective, we did compete much more aggressively with them in the past.

There are still places where we do compete with them today to some degree.

We both play, we obviously both play in the web layout space, GoLive, Dreamweaver.

Obviously there is other competitors, people like Front Page, and hand coding tools like DbEdit.

We continue to compete with them, as well as people like Corel in the graphics space, with their product being Freehand, ours being Illustrator, Corel with CorelDRAW, and so on.

And we will continue to compete with them for dollars from some of the customers in which we both focus in on.

But we don't see them as a serious issue for us, quite frankly.

Their strategy has taken a different direction than ours, and we think there is room certainly for us -- we're confident in our ability to be successful.

Okay and then just 1 more.

Murray, you can give us an idea of what we should be thinking about in terms of interest and other income, as we look to the May quarter?

It seems like you had a pretty big jump here in February.

Yes, we're targeting 6 to 7 million of other income in the second quarter.

We haven't provided anything beyond that.

But given that our cash levels have increased and the interest rates have gone up, our interest income has increased.

And that's what's driving the target of 6 to 7 million in the second quarter.

Chris Rowen, Robinson Humphrey.

Can you tell us how Premiere Elements has done so far?

And also, can you give a little more color on the comments you made about consumer being down, post holiday, considering that the quarter had the holiday in it, and then a lot of the other digital media folks look at the March quarter as a strong quarter, after people buy new PC's.

So I think with respect to Premiere Elements, Chris, the reality is Premiere Elements is actually receiving tremendous acclaim.

We won Video Makers product of the year, as well as PC Photo Editor's Choice, so we are definitely gaining market share in that particular category.

We have 2 different SKUs that we deliver for Premiere Elements.

One of which is Premiere Elements.

One of which is actually bundled along with Photoshop Elements.

And we are seeing more adoption of the bundle with Photoshop Elements and Premiere Elements, which I think reflects the fact that (indiscernible) and consumers are looking at more as a media solution than an imaging or a video solution specifically.

From a revenue perspective, Q1 was lower than Q4 of last year, and that again was for the holiday season.

We had the new product in the market.

And again, as we said, as expected, it went down in Q1 after Q4.

Yes, keep in mind, many of the retailers end up buying a lot of the product in November for the holiday season.

Okay.

They have it available for December and January.

And then as you would expect, and as we expect it, it quickly falls off at that point.

That helps a lot.

And then on the Creative Suite, not assuming that it is necessarily the product that you're going to announce.

But when you do have your next Creative Suite announcement, I wouldn't expect you to tell us whether you think it will be higher or lower than the last one, in terms of impact.

But could you give us some of the drivers that you think might make it a bigger impact, or a lower impact than the last Creative Suites cycle?

I guess the thing I -- the first thing that comes to my mind is, it seemed like this last Creative Suite product cycle was, to some degree, the first time that InDesign really started getting major traction.

And so that, to me, maybe sets up tough comparisons.

But are there other counter-veiling factors?

Well I think the drive to the Creative Suite products is really, from our customer's perspective, a drive toward an integrated platform by which they can create content for print, web, video and wireless.

And so, the reason why we're as excited about the Creative Suite is really customers are saying we want an integrated approach.

As customers adopt more of our products, frankly, the desire to upgrade will continue to be strong, because when we do release the next version, we will have increased functionality in each of our products, which continues to be the strategy.

But also as we've done with version Q, continue to deliver value-added functionality in the Creative Suite that ties it all together.

Let's also remember as we've said, that the suite penetration in the Creative Professional, we still think that there is significant head room.

And in addition to that, people who are aspiring to really emulate Creative Professionals with compelling content in at work and at home, that also is a market that we will continue to target.

The other thing that I would add, is there is a massive shift going on from QuarkXpress to InDesign.

And many of the people that are looking to move to InDesign, instead of buying the stand-alone product, are buying the complete suite.

We think that shift will continue for a good amount of time going forward.

And you think there is room for it to even accelerate?

We're not commenting specifically on that.

Okay.

Fair enough.

Thanks a lot.

Operator, we will take 1 more question.

Gene Munster, Piper Jaffray.

Hey, congratulations.

Good afternoon.

Bruce, you talked a little bit about the Macromedia Sun, and I think your specific comment was that you're competing for the same dollars.

Is it safe to say you guys are giving Macromedia kind of the room to still be the web design company, and you guys are just really focusing more on the CS product as a family, versus going after that whole web design vertical?

I wouldn't characterize it that way.

I think if you look at what we've been trying to do, and where we're beginning to get some success, is address the network publishing needs, the cross media needs, of the organizations or individuals that are trying to create content.

It is no longer cost-effective to have a separate print work flow from a web work flow.

And we're trying to make it very easy for the customer who is using products like InDesign for print layout, to easily and seamless get to a web work flow.

Additionally, what we're doing is making sure that we also address the non-PC environment, whether it is a mobile device, or a set-top device that is connected to an HDTV.

We want to make it easy for our customers to get their content easily on any of those devices, with a lot of efficiency and productivity.

We think that puts us in a unique position vis-a-vis Macromedia.

With that said, it will take us a while to encourage, or help people move from a product like Dreamweaver or Front Page, to GoLive as their web tool.

Okay.

And then just 1 more, Murray.

In terms of the deferred question.

Did you guys make any comments in terms of what expectations are for deferred for the current quarter?

No, we're not providing any specific targets for the second quarter.

Okay.

Great.

Thank you, and congratulations.

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

That concludes today's Q1 fiscal year-end 2005 earnings call.

You may now disconnect.