Adobe Inc (ADBE) 2005 Q4 法說會逐字稿

Good afternoon.

My name is Katrina and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Adobe Systems Q4 and fiscal year 2005 earnings conference call. [OPERATOR INSTRUCTIONS].

I would now like to pass the call over to Mr. Mike Saviage, VP 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, Shantanu Narayen, our President and COO, and Murray Demo, Executive Vice President and CFO.

In the call today we will discuss Adobe's fourth quarter and fiscal 2005 year-end financial results as well as our financial targets for fiscal year 2006.

By now you should have a copy of our earnings 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 fiscal 2006 and our forward-looking product plans is based on information as of today, December 15, 2005, and contains forward-looking statements that involve risks and uncertainties.

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) for 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 two are set forth in our press release issued today and are also available on our Web site.

Call 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 Web site for approximately 45 days and is the property of Adobe Systems.

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

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

Thanks, Mike, and good afternoon.

In addition to the financial results we released this afternoon, we also announced some management changes that I know are of interest to participants on today's call.

In our prepared remarks, we will first review our Q4 and fiscal 2005 financial performance, then in my closing remarks, I'll comment on the management changes.

With that, I am pleased to announce that Adobe is reporting record revenue for both our fourth quarter and our full fiscal year.

In Q4, revenue was $510.4 million, representing 19% year-over-year growth.

It was also our first $0.5 billion quarter, a significant milestone for Adobe.

For the year, revenue was $1.966 billion, an increase of 18% over fiscal 2004, and our third consecutive year of double-digit revenue growth.

Operating income in the year was also a record with growth of 23%.

We were particularly pleased with the performance of our key strategic products.

This includes adoption of the Creative Suite by creative professionals to offer content across multiple media types, increased usage and standardization of Acrobat by enterprises and technical professionals, and implementation of Life Cycle by enterprises and government to automate manual business processes.

However, our most significant achievement during this past year was accomplishing all of this while completing the acquisition of Macromedia, a major step toward positioning Adobe for future growth.

I will now turn the call over to Shantanu to provide more detail about performance in each of our businesses.

Later, Murray will review the financials and discuss our fiscal 2006 targets.

Thanks, Bruce.

We had an exceptional year in fiscal 2005 with record revenue for key strategic products such as the Creative Suite, Acrobat, InDesign and our Life Cycle set of our products.

In the creative market, we established Creative Suite as the design and publishing environment of choice for creative businesses and professionals worldwide.

As a result we have grown our average revenue per customer based on this increased value we delivered to them.

In the enterprise, we continued to grow the penetration of Acrobat in document intensive industries and newly targeted verticals such as A. E. C. with the launch of Acrobat seven.

As a result, Acrobat revenue in fiscal 2005 grew 36% year over year.

In addition PDF continues to become more of an entrenched standards, for example, PDFA, which stands for PDF for archival, became an internationally approved ISO standard.

We continued to gain traction in regulated industries with our Life Cycle Service Solutions that are being used to automate manual business processes.

We are also gaining traction in our partnership with companies such as EMC and SAP.

For example, SAP is now delivering interactive form solutions based on Adobe software as part of their Netweaver platform.

I will now turn to reviewing highlights from our record performance in Q4 starting with the Creative Professional Business Unit.

Our Creative Suites products corporate to be the major driver of the creative business.

The premium version of the suite continues to outsell the standard version on a revenue basis by a more than three to one ratio and both revenue and units for Creative Suite 2 are outpacing the results we had for Creative Suite 1.

Creative Suite revenue continues to be a healthy mix of new full unit licenses, as well as upgrades from Creative Suite one and upgrades from standalone Photoshop.

Adobe InDesign also had another solid quarter in Q4 as we continue to gain market share.

Turning to our professional digital imaging business Photoshop posted a solid quarter with sequential revenue growth over Q3.

In addition, standalone new full Photoshop units combined with units included in the suites achieved double-digit growth on a year over year basis.

In the hobbyist digital imaging and digital video markets, the launch of PhotoShop Elements four and Premiere Elements two is off to a great start and both have received strong reception in the press.

PC magazine gave Photoshop Elements and Premiere Elements their Editors Choice Award.

Turning to our Intelligent Document Business Unit in Q4 we achieved Acrobat Desktop revenue of $147.8 million, which represents 34% year over year growth.

Licensing as a percentage of Acrobat revenue was an all time high of 57%, demonstrating the reach and penetration we are getting with Acrobat in large Enterprises.

The professional to standard mix was again approximately one to one, demonstrating the success of our strategy to target verticals such as manufacturing and AEC where we believe higher value capabilities beyond PDF creation are being adopted.

Key Acrobat customer wins in the fourth quarter included a large procurement from the U.S. Navy.

And the city government of Yokohama, the second largest city in Japan, which licensed 13,000 copies of Acrobat to implement settlement work flows in their document management system.

With our Life Cycle Silver business, we achieved record revenue of $33.3 million.

More importantly the number of transactions with software licensing revenue greater than $50,000 in the quarter grew to a record 63 in Q4 with the average of these transactions being $162,000.

During the quarter we made a number of Life Cycle partner announcement with a focus on key vertical markets.

In the government vertical we announced plans with CGIAMS to provide state and local governments with innovative process automation solutions through tighter integration between the Enterprise Resource Planning Suite and Adobe Life Cycle.

In Manufacturing we announced a technology partnership with UGS Corporation to enable organizations worldwide to tap into the industry's vast reservoir of 3D digital product models and published them as Adobe PDF files.

And in Financial Services we partnered with Satyam Computer Services and announced an intelligent statement solution, enabling banks and other financial institutions to use e-statements for more secure and cost-effective delivery of customer communications.

In regard to LifeCycle customer wins, Q4 highlights in the commercial market included Albert Labs diagnostic division which is using an Adobe form solution to efficiently capture information from a variety of sources and then dynamically generate appropriate regulatory documents.

The Korea Magazine Association, a trade organization that promotes more than 1,000 leading Korean magazines which is utilizing an Adobe forms and security solution to build an on line magazine repository.

Articles will be available to mobile and Internet customers, via PDF, while maintaining full publisher copyrights and protection for the content.

In Flagstar Bank, one of the nations's leading providers of residential mortgage loans which plans to deploy Reader Extension Silver and Form Silver.

In the government market Q4 included NASA which is using an Adobe silver solution to support the collection of research proposals and related information for NASA research opportunities.

The central government of Luxembourg which is using an Adobe form solution to develop a series of dynamic e-government applications for citizens and companies such as electronic tax declaration, company registry and a citizen portal.

And the state of Texas which is using Reader Extension Silver to offer accessible forms to all employees.

They have installed a screen reader that is voice activated and can read forms aloud, perform enlargement capability for the visually impaired, and tab navigational forms for those with limited movement capabilities

In summary 2005 clearly demonstrated strong momentum for Adobe across all of our segments with our flagship products as well as newer strategic initiatives.

Looking to 2006, now that the Macromedia acquisition is closed, we expect to make significant progress in integrating and selling the combined Adobe and Macromedia product lines.

On December 5th, our first day operating as a combined company, we announced three new product bundles to help customers create rich interactive experiences and compelling content in print, on the Web, in video, and across mobile devices.

These bundles include a design bundle, combining Creative Suite2 and Flash Professional 8, a web bundle combining Creative Suite two and Studio eight.

Both were made available immediately, demonstrating the progress we made as part of our integration planning process.

A third bundle called a video bundle, will be available in early 2006.

This concludes my comments.

Murray?

Thanks, Shantanu.

Before I discuss Q4 I would like to comment on our full-year 2005 results.

Adobe achieved revenue of $1.966 billion, compared to $1.667 billion in fiscal 2004.

This represents 18% year over year revenue growth.

GAAP and non-GAAP operating profit in fiscal 2005 were $728.4 million, compared to $591.8 million in fiscal 2004.

This represents 23% year over year growth in operating profit.

Our GAAP and non-GAAP operating profit margin for the year was 37%, compared to 35.5% in fiscal 2004.

GAAP diluted earnings per share in fiscal 2005 were $1.19, compared to $0.91 in fiscal 2004.

Non-GAAP diluted earnings per share, which excludes as applicable, the net tax impact of the repatriation of certain foreign earnings and investment gains and losses were $1.13 in fiscal 2005, compared to $0.91 in fiscal 2004.

Now I would like to discuss our Q4 fiscal 2005 results.

For the fourth quarter of fiscal 2005, Adobe achieved revenue of $510.4 million.

This compares to $429.5 million reported for the fourth quarter of fiscal 2004 and $487 million reported last quarter.

On a year over year basis, this represents 19% revenue growth.

GAAP net income for the fourth quarter of fiscal 2005 was $156.3 million, compared to $113.5 million reported in the fourth quarter of fiscal 2004 and $144.9 million last quarter.

Non-GAAP net income which excludes as applicable the net tax impact of the repatriation of certain foreign earnings, and investment gains and losses was $151.5 million compared to $110.4 million reported in the fourth quarter of fiscal 2004 and $146.4 million last quarter.

GAAP diluted earnings per share for the fourth quarter of fiscal 2005 were $0.31based on 508.6 million weighted-average shares.

This compares with GAAP -diluted earnings per share of $0.23 cents reported in the fourth quarter of fiscal 2004, based on 500.6 million weighted-average shares and GAAP diluted earnings per share of $0.29 reported last quarter, based on 507.8 million weighted-average shares.

Non-GAAP diluted earnings per share for the fourth quarter of fiscal 2005, which excludes the net tax impact of the repatriation of certain foreign earnings and investment gained were $0.30.

Gross margin for the quarter was 94%, compared to 93.2% in the fourth quarter of fiscal 2004 and 94.4% last quarter.

Operating expenses for the fourth quarter of fiscal 2005 were $287.7 million.

Regular employees at the end of the fourth quarter totaled 4,285 versus 4,286 at the end of the third quarter of fiscal 2005.

Expenses as a percent of revenue break down as follows: Research and Development, 18.5%.

Sales and Marketing, 28.8%.

G&A, 9%.

GAAP operating income in the fourth quarter of fiscal 2005 was $191.9 million, or 37.6% of revenue.

This compares to GAAP operating income of $146.4 million, or 34.1% of revenue in the fourth quarter of fiscal 2004 and $183.6 million or 37.7% 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 fourth quarter of fiscal 2005 was $10.3 million.

Adobe's non-GAAP effective tax rate for the fourth quarter of fiscal 2005 was 25.1%, compared to 26% in the fourth quarter of fiscal 2004 and 25.3% last quarter.

Adobe's GAAP tax rate for the fourth quarter of fiscal 2005 was 24.6%.

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

Creative Professional Segment revenue was $192.4 million in Q4 fiscal 2005, compared to $151.2 million in Q4 fiscal 2004, and $206.3 million last quarter.

Digital Imaging and Video Segment revenue was $114.7 million in Q4 fiscal 2005, compared to $118 million in Q4 fiscal 2004, and $95.6 million last quarter.

OEM Postscript and Other Segment revenue was $22.2 million in Q4 fiscal 2005, compared to $20.4 million in Q4 fiscal 2004, and $19.3 million last quarter.

Intelligent Document Segment revenue was $181.1 million in Q4 fiscal 2005, compared to $139.9 million in Q4 fiscal 2004, and $165.8 million last quarter.

In Q4 total intelligent document to desktop revenue was $147.8 million, representing 34% year over year growth.

Intelligent document server revenue was a record $33.3 million.

Turning to our geographic segment, the results in Q4 fiscal 2005 on a percentage of revenue basis were as follows: The Americas, 49%, Europe, 32%;

Asia, 19%.

The strength in the quarter was driven primarily by North America.

Our trade DSO in the fourth quarter of fiscal 2005 was 31 days.

This compares to 30 days in Q4 fiscal 2004, and 29 days last quarter.

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

At the end of the fourth quarter of fiscal 2005, cash and short term investments were $1.7 billion, compared to $1.893 billion at the end of the third quarter of fiscal 2005.

In regard to share buy-back, we repurchased 11.2 million shares at a cost of $345 million as part of our share repurchase programs.

This concludes my discussion on fourth quarter fiscal 2005 results.

Before I discuss our fiscal 2006 targets, it is important to note that the purchase accounting revenue adjustment in cost related to the Macromedia acquisition we are using today are preliminary estimates.

At this time we have not yet completed the Macromedia accounting close process nor have we finalized the purchase price allocation with an independent third party, nor have we reviewed the purchase accounting financials with our external auditor.

All of this will be completed by the close of our first quarter.

For fiscal year 2006 we are targeting revenue at approximately $2.7 billion, with a non-GAAP operating margin range of approximately 36% to 37%.

We are targeting non-GAAP earnings per share for the year to be in the range of $1.26 to $1.30.

Our 2006 revenue target of approximately $2.7 billion, is after, and I repeat after, a purchase accounting revenue reduction of approximately $50 million associated with the acquisition of Macromedia.

The purchase accounting revenue reduction is in two areas.

First, we anticipate we will lose approximately $25 million in Macromedia deferred revenue due to the typical accounting adjustment following a software company acquisition.

And second, we will lose approximately $25 million in revenue related to some specific Macromedia Mobile and Flash agreement where technology has been previously delivered and all that remains is the receipt of cash.

In this case, we will book an accounts receivable for these future cash receipts on our beginning balance sheet and will not recognize revenue when we receive the cash in the future.

In regard to our operating margin target in fiscal 2006, we are targeting a GAAP operating margin range of 20 to 23%.

This GAAP operating margin target range includes purchase accounting expenses, restructuring charges and the cost of stock based compensation under FAS-123 R. Our non-GAAP operating margin target range in fiscal 2006 is approximately 36 to 37%.

This 2006 non-GAAP operating margin target reflects our goal to bring the combined company operating margin approximately in line with Adobe's operating margin reported for fiscal 2005.

Excluded from our non-GAAP targets are the following full year fiscal 2006 purchase accounting cost ranges related to the Macromedia acquisition: Amortization of purchase technology, which will be charged to direct cost, is estimated at approximately $140 to $150 million; amortization of other intangibles, which will be charged to operating expense, is estimated at approximately $50 to $55 million; amortization of deferred compensation, which will be charged to operating expense, is estimated at approximately $55 to $60 million; again each of these target ranges are full year estimates.

In addition, as we recently disclosed in an 8(K) filing, we anticipate a restructuring charge related to the Macromedia acquisition which includes severance, vacated facilities and other items related to the former Adobe business of approximately $20 to $25 million in fiscal year 2006.

These costs will be charged to the income statement and will not be included in our non-GAAP results.

The majority of these costs will be incurred in Q1.

As a reminder, the restructuring costs related to the former Macromedia business are charged to the purchase price and will be recorded on the balance sheet as goodwill.

The total Macromedia restructuring charges related to severance, vacated facilities and other items, are targeted at approximately $60 to $70 million.

At this time, we anticipate approximately 650 to 700 employees in total from both Adobe and Macromedia will be impacted by the merger.

This is due to overlap in positions, the rebalancing of our resources towards future growth opportunities, and to achieve our operating margin target range in fiscal 2006.

In the first quarter of fiscal 2006 Adobe is required to adopt FAS-123 R. In fiscal 2006 we are estimating our total stock based compensation expense at approximately $0.15 to $0.17 per share.

Because we are adopting FAS-123R, we will no longer provide expense targets for direct costs, research and development, sales and marketing, and G&A due to the added complexity of providing both GAAP and non-GAAP targets for each of these line items.

However, we will continue to provide operating margin targets on a GAAP and non-GAAP basis each quarter.

In regard to our tax rate, we are targeting a GAAP and non-GAAP effective tax rate of approximately 25% for fiscal 2006.

This rate assumes that the R&D tax credit will be extended for fiscal 2006.

The full year revenue, expense and margin target I have just reviewed lead to a bottom line fiscal year 2006 GAAP earnings per share target range of approximately $0.74 to $0.80.

Our non-GAAP EPS target range for the year is approximately $1.26 to $1.30.

Both of these target ranges include our normal stock repurchase program and the $1 billion stock repurchase authorization that we previously announced in conjunction with the Macromedia acquisition.

Turning to our first quarter of fiscal 2006, we are targeting a Q1 revenue range of approximately 630 to $660 million.

In addition, we are targeting a Q1 GAAP operating margin range of 15% to 19%.

On a non-GAAP basis, which excludes purchase accounting and restructuring charges related to the merger, and the stock based compensation impact of FAS-123 R., we are targeting an operating margin range of approximately 35% to 36%.

We are targeting our first quarter share count to be approximately 617 to 619 million shares.

For other income, we are targeting approximately 11 to 12 million, and for our effective tax rate we are targeting 25%.

These targets lead to a GAAP earnings per share target range in Q1 fiscal 2006 of $0.13 to $0.16 cents per share.

And a non-GAAP earnings per share target range of $0.28 to $0.30.

For the remainder of the year, we expect typical seasonal weakness in both Europe and Japan in our third quarter.

We also expect the fourth quarter of fiscal 2006 to be the highest revenue quarter of the year.

Lastly, as we move forward as a combined company in fiscal 2006, we will report our revenue in five new business segments.

Creative Solutions, which will primarily contain revenue from creative-focused products such as Creative Suite, PhotoShop, Studio, Flash, Illustrator, InDesign and our video products, as well as our hobbyist and customer-focused products such as PhotoShop Elements.

Knowledge Worker Solutions which will primarily contain revenue from our Acrobat and Breeze product families.

Enterprise and Developer Solutions, which will primarily include revenue from our flex, LifeCycle and Cold Fusion product family.

Mobile and Device Solutions, which will include revenue from Flashlight and FlashCast as well as other mobile products and technologies.

And Other, which includes our OEM PostScript business, our Type business, publishing products such as FrameMaker and PageMaker as well as Reader and Player distribution and Macromedia e-Learning tools.

A document outlining the content of each of these new business reported segments by product name is available on our Investor Relations Web site on Adobe.com.

This concludes my comments.

I will now turn the call back over to Bruce.

Thanks, Murray.

We closed our acquisition of Macromedia less than two weeks ago, and I'm pleased to report that the integration of the two companies is progressing rapidly.

I'm especially pleased with the integration of the new management team which is represented by a solid balance of leadership from Adobe and Macromedia as well as the addition of new executives from outside the Company as we announced today, Peg Wynn, formerly of Xilinx, will lead our global human resources organizations, and Garrett Ilg, formerly of BEA, has joined us as president of Adobe Japan.

Both will play an important role in helping move our business into the next phase of growth.

I couldn't be happier to welcome them to the team.

On a different note, we also announced today that Murray Demo, our CFO for the past five years, has decided to leave the Company to spend more time with his family.

Murray will be greatly missed at Adobe but the contributions he made during his nine years here will remain long after he's gone.

While I'm personally sad to see Murray go, I'm also happy to see him embark on this well deserved break after all he has contributed to the success of this company.

Murray will remain in his role through the end of March, or longer, if we have not hired his replacement by then.

Now I will close with some thoughts on our view of fiscal 2006 and beyond.

Adobe continues to benefit from global market trends that are fueling opportunities for our future growth.

These trends include the explosion of digital content, the accelerating proliferation of digital devices and the growth of broadband.

The combination of Adobe and Macromedia puts us in an even better position to take advantage of these trends.

Going forward, Adobe will advance a powerful engagement platform with PDF and Flash at its core which scales from mobile devices to high-end server based solutions.

This engagement platform will redefine the way people and businesses engage with information across a variety of operating systems, devices and communication channels.

We plan on leveraging this industry-defining platform to deliver a series of compelling solutions for customers around the world who are using digital content to engage people in businesses with ideas and information.

We are excited about 2006.

And we look forward to sharing more details about our strategy and opportunities at our upcoming analyst meeting.

Mike?

Thanks, Bruce.

Before we start Q&A I would like to go over a few logistical items.

First as previously announced, our financial analyst meeting will be held in New York City on January 31.

Meeting details will be sent out next week.

On January 31, we will also provide our regular intraquarter business update for our first quarter.

As discussed on the call, we have posted quite a bit of information on our IR Web site.

This includes our updated IR data sheet, a spreadsheet outlining our new business segments by product line, a spreadsheet for reconciliation for GAAP and non-GAAP financial data and legacy Macromedia investor-related information.

To access this information, 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 Web site on Adobe.com later today.

Alternatively, you can listen to a phone replay by calling (800)642-1687; use conference I.D. number 3016309.

International callers should dial 706-645-9291.

The phone play back service will be available beginning at four o'clock Pacific time today and ending at four o'clock Pacific time on Monday, December 19, 2005.

We now would be happy to take your questions.

Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from Ben Reitzes of UBS.

Good afternoon.

Murray, we'll miss you.

Bruce, with the new company, what are you, do you expect a similar product development cycle with regard to the typical once at Adobe where it was 12 to 18 months or 18 months?

And given your commentary about fourth quarter being the high watermark for the year, should that be coincident with new products or should it be more a seasonal comment and I just have one follow up.

Ben, why don't I take that?

I think the comment associated with the quarters was just to give you some color on the quarterization in terms of what we expected for revenue, namely that Q3 would be seasonally weak, given Europe and Japan and that Q4 would be the strongest quarter.

As you know we are now not announcing product cycles due to competitive reasons.

What I can say is we are excited about new products that will be coming from the combined company right through the year.

And so we are looking forward to a pretty strong product cycle.

So we shouldn't assume anything -- should we assume that the product cycle, though, are pretty comparable and get back to the way the Companies were developing and or all bets are off now that user combine?

I think we will continue to focus on our customers and make sure we are very close to them vis-a-vis how we deliver products.

I think we've demonstrated a history of innovation in being close to them and we are going to continue to do that.

Clearly I think with the combination there are a lot of ideas about how we can continue to extend what we offer our customers.

And then was there any pent up demand, do you think, pushed into the first quarter of '06 based on the merger?

Or is it hard to tell?

Perhaps maybe in the Creative Suite or something with regard to this new pricing, maybe some customers sensed this was coming, do you think there's any pent up demand crossing a strong 1Q?

The revenue guidance is a little better than we expected.

You know, Ben, at this time we really haven't seen, that there's a pent up demands in Q1.

Obviously we have seen continued momentum with Acrobat and Creative Suite and we expect to see that continue in the first quarter but no pent up demands in Q1, I think we are in day nine right now of Q1.

We do anticipate our Acrobat business will continue to accelerate on a sequential basis, and we also believe that when you look at the combined Creative Suite, Studio and the new bundles that we just introduced, that that combined business will also increase on a sequential basis.

So those are the two primary drivers for the Q1 '06 period.

Murray, did currency adversely impact the quarter, or will it adversely impact the year in a material amount?

That was the one thing I think you missed in your thorough overview there, if you missed it even.

But I would assume that's an adverse impact, so, the organic growth rate may be even higher?

That's correct, Ben.

Actual million Q4 we had an adverse impact of about $6 million.

And as you look at 2006, I think there's sort of three components to the revenue.

Obviously we've given a target of 2.7 billion, and that's after the impact of purchase accounting.

If you added the purchase accounting revenue back, that's about 15 million.

That gets to you 27.50.

If you look at the currency, if the currency rate for the Euro relative to the dollar stay at similar levels they are today on a relative basis '05 to '06 we are losing well over $150 million.

So you could then say if it was exchange rate neutral, '05 to '06, we would have plus the purchase accounting, we would have at least a target of two .8 billion for 2006.

Thanks a lot, Murray.

I'm really going to miss you.

Take care.

Thank you, Ben.

Your next question comes from Thomas Ernst with Deutsche Bank.

Good afternoon.

Guys, you highlighted the headcount reduction and the size of it.

Can you help us understand, is this the bulk of what's planned, or is it the restructuring for the combination or do you anticipate there might be something to follow later?

And then following up on that, I would assume that there's very good cost synergies in the overhead expense between the two companies, how much did this cut go beyond the overhead?

Well, a couple of things, Tom.

First of all our goal on this was that we would go through an exercise of rationalizing resources, whether it's overlap in trying to reposition, rebalance the resources, very quickly and do it once.

If you want to build this company going forward, we cannot have this extensive round of trying to save money, we want to do it swiftly and do it once and then focus on building this company given the opportunities that it has in front of it for the next few years.

So this is it for the year from our perspective.

In terms of where the reductions are coming from, they are really come in across the organization but they are coming from the areas of G&A would be certainly one area you would see quite a bit of it, some in sales and marketing and R&D but G&A would be the area where you would see the primary impact.

And people have all been notified at this point already, this is part of the plan?

No, we have not completed the notification process in some countries outside of the United States.

Look forward to seeing the plans on the analyst day.

Your next question comes from Scott Kessler with Standard & Poor's Equity Research

Thanks a lot.

Can you detail what the impact of Macromedia was on your projection for non-GAAP EPS for 2006?

And I have a couple of follow-ups.

Thanks.

Scott, no, we are not providing that information in terms what have that impact would be.

I guess if you look at it from the standpoint of when we announced this deal we had mentioned that it would be break even to slightly accretive.

That was back in the spring when we announced it.

At that time break even was probably around $1.18 per share.

We are targeting $1.26 to $1.30.

The buy back is probably something in the $0.04 to $0.05 range according to the acquisition that the acquisition is accretive by a few cents.

If you want to look at it that way there is an answer there.

But we feel that we've delivered on what we said in terms of break even to slightly accretive without doing the buy back.

It is accretive and then with the buy back it adds on to the how accretive it is.

Because of all of the synergies that we have between the two companies, Scott, we are running it as one combined company on a going forward basis.

That's how we did the business planning, the integration planning, that's how we set our financial targets for this coming year.

So it's difficult to separate Macromedia or the old Macromedia from the existing Adobe business.

It is now one company.

Okay.

Fair enough.

Thank you for that.

My second question involves stock options.

You referenced stock options and based on my calculations I think their impact for FY '06 is expected to be roughly 12, 13%, something like that, which is considerably lower than the impact in previous years for both Adobe and Macromedia, and I was wondering if you could explain why this is the case and if you think this trend is going to continue in the out years.

I think it's a combination of two factors.

One is that the dilution from stock options in terms of the annual burn rate has come down from where it was a few years ago, clearly all over the industry shareholders have told us what they find to be acceptable and the supply and demand markets for labor has led to lower amounts of options being granted.

You have going on as well as the volatility in the stock price has come down over the last few years after the bubble period.

So the culmination of that is leading to lower expensing.

Okay.

And it's fair to say that the amount of options issuances should continue to trend lower, is that a fair assumption at this point?

It's hard to say, Scott.

We obviously are an IP based company.

People are our business.

We have to remain competitive in the marketplace.

We compete for great talent.

We want to retain great talent.

We are competing with wonderful companies like Intel and Google and Cisco and others for that talent.

So we have to be careful that we are not under-compensating our brilliant employees and our passionate in employees.

So assuming the rest of the industry followed suit and decreases their compensation to their employees, that's something we will be able to do.

If they don't, we won't be able to do because we certainly don't want our employees leaving and we want to continue to attract great employees like Peg Wynn and Gary Ilg and others.

This is as I'm sure you know has been a trends over the last couple of years for companies in the valley.

The last question I have is, do you expect to have a replacement for Murray in place by, say, March, 2006?

Is that how we should be thinking about this?

Fortunately Adobe is in great shape.

Murray is leaving a legacy of a very disciplined, outstanding organization.

He has great people working for him.

The Company is very healthy with all the growth that we've had and systems in place.

So my belief is that given the outlook for the Company, both in '06 and beyond, our ability to attract a CFO should be very high.

It is a tough, tough market for CFOs.

The last time I looked, it looked like five or six of my peer software companies are all without CFOs.

So I am hopeful that we will have a replacement by the end of March.

I'm also thankful that Murray has agreed to stay on a bit longer if the search takes us longer.

Great.

Thanks a lot for the candor in your answers and best of luck, Murray.

Thank you.

Your next question comes from Jay Vleeschhouwer With Merrill Lynch.

Thanks, good afternoon.

Question first for Shantanu with respect to how you conceive of what you can and should do in terms of long-term product development and integration.

In other words, what do you think it means to, let's say, Adobe-ify the combined products and services now?

If you go back to all the Aldus and Frame acquisition it took you about two to three years to fully unify the products and the interfaces.

Is this a two to three-year effort as well, you think, Shantanu, to bring the products together?

At the Max conference a couple of months ago there was reference to the Apollo project about unifying interface, maybe you could elaborate on that.

How much time do you have?

As much as you can give.

I think at the center of the combined company will really be to deliver this engagement platform that Bruce talked about, combining the ubiquity of the Flash Player as well as the Adobe Reader in providing not just both a client environment that is going to work across PCs and non-PCs and mobile devices, but also developer tools and the servers that are required for people to be able to deliver engaging experiences and immersive experiences across all of these particular devices.

Having said that, let me talk about the strategy that we are looking at, and I think the business unit structure reflects that strategy somewhat.

I mean certainly in the creative space what we are going to be doing is looking at how can we combine the best of what Macromedia did with Studio and we did with Creative Suite.

One of the advantages we've had in having a fair amount of time to plan for this is we've been able to engage with customers and they certainly want us to get a amount of file format capability between the two sets of products and that's what we will focus on.

The reality is we have many, many cycles worth of integration ideas that we already developed.

So that's on the creative side.

On the knowledge worker side I think looking at what Breeze has with respect to real time collaboration and Acrobat with Synchronous and trying to merge that is going to be a key priority.

On the server side looking at the technologies associated with LifeCycle, Flex, as well as Cold Fusion and delivering more of an end to end solution to CIOs will be the focus.

So clearly we demonstrated from day one that we've had that work well underway and with bundles.

You will expect to see innovation right through and we are not going to be waiting for, you know, one uber-thing many years out.

So you expect to see innovation and regular product cycles from us.

Okay.

A question for Bruce, and maybe for Steve if he's there, can you talk about sales integration, Macromedia had always been much more explicit about their direct sales effort and contribution.

How do you see the other two enterprise or the side of the business coming together?

I'm pleased to say Steven is not here because Steven is busy motivating, inspiring and leading our sales organization.

In fact, this week we had our sales managers in from around the world and he spent two days with them talking about our strategies going forward, and the focuses that we need in order to execute against our plans.

We clearly have been able to increase the size of our direct sales organization by a significant amount, Macromedia had invested heavily in that area and it was an area where we started to invest heavily.

So our sales force with emphasis on the word force, has become much more significant for Adobe.

It is not our intent for competitive reasons to break that out, but what I can tell you is its very exciting to see we have a kickoff meeting with our entire sales organization in the not too distant future and I am anxious to get in front of them.

Just a question on the bundles that he announced a couple of weeks ago.

So what extent can those prove to be incremental?

At this point there's really no new technology, it's repackaged or reconstituted products.

To what extent could these bundles really be incremental over and above standalone or CS sales?

Well, you are viewing it as we've just seen that as an intangible way to highlight the benefits of the combined Adobe Macromedia and we think it's going to drive incremental revenue based on research we conducted vis-a-vis as we have looked at the creative community and Macromedia has looked at the designer developer community looking at the penetration of sets of products and customers.

Clearly, it's too early to the tell in terms of direct results but we do believe it will drive incremental revenue.

Lastly the most important question, I hope Murray that we will have continued access to your wine expertise.

Yeah, I am going to be here in full force as CFO until we have a replacement so I will be here to keep, answer any questions you might have.

Thanks, Murray.

Your next question comes from Brent Thill with Prudential.

Good afternoon.

If you can give us a sense of how quickly you think you can achieve the first phase of the channel integration.

I know first you spoke about the sales side but just in terms of the integration what the overlap with Macromedia is right now on the indirect channel.

Fortunately during the integration period, Brent, we were able to look at the channel strategy, look at the channel synergies, and/or overlap, and we are well on our way of achieving those synergies as we speak.

It would surprise me if no later than the end of Q1 to be where we need to be.

Just to give a little color on that, where we stand on the integration at this point, we've made tremendous progress on day one, our infrastructure integration of our network, video conferencing, firewalls, five digit phones, all on day one, we were processing orders on both Web sites in through SAP on day one.

We had orders processed for our direct business, both companies as one company, on day one.

The channel for licensing and shrink wrap we were processing orders on day one with full supplies of products that we needed to have within two days.

So we are in a tremendous position right now operating as one company with our typical kind of reporting basically every six hours we are watching revenue flow around the world, basically any level of detail we want for the combined products of the company.

So the integration is off to just a tremendous start.

We obviously have more work to do.

We feel quite good about where we stand on day nine.

Murray just the timing of the billion dollar buy back, is there a set course we should expect evenly skewed or will it be more back end loaded towards the ends of the year, how should we expect to see that trend progress?

No specific target to provide there but we are committed to buying back that 1 billion shares

You said 1 billion shares.

We don't have that much money.

We are definitely commit to do $1 billion of stock in the 12 months, it will be over the course of the year, but we don't have any specific time to go provide on that but over the course of the year we will provide updates.

Okay.

Thanks.

Your next question comes from Gene Munster with Piper Jaffray.

Good afternoon everybody and congratulations on growing these business.

It's kind of unheard of to see big software companies and have some solid guidance like this so, well done.

Thank you.

And in terms of I guess a follow up on some other questions that have been asked, in terms of hypothetical timing of new products I can think of a lot of products that the combined companies could put together should we generally be thinking about CS3 as the first event, I know, Shantanu, you talked a little bit about it or should we think there could be some combined products that could periodically find their way to the market prior to CS3?

I would like to be able to answer those questions.

We don't want to stall existing business, we don't want to tip our hats to our competitors.

As Shantanu said previously, here are a number of products that we plan on rolling out throughout the year.

You will see more and more integration as we go through this year as we move into '07 and for something like the engagement platform it will take us a number of generations for us to get to where we ultimately want to be.

But I can give you confidence that we have done a great deal of planning and that now that we are one company the engineering teams are aggressively [inaudible] away.

Just in terms of revenue per customer, I know that Jay's question touched on this bundle and you guys probably aren't going to give you us some of that research that you've given. but can we look at it this way if we go back and look at the historical revenue per customer changes when Macromedia has gone to a bundling strategy or when you guys first did it with CS1 is there any reason to believe that that trends won't continue as far as revenue per customer as we look at it with some of the Web bundle we have today is going to provide?

What I can say is that as part of the integration effort we really did a comprehensive customer segmentation of looking at people who were creating content for print, for Web, for video and for wireless, not just the creative part of it but also developer community, and we did find that the penetration of all of our products, there was upside in terms of getting more people to standardize on the complete bundle kind of offerings that we are providing.

So we certainly believe that there's upside and as just we will continue to deliver these bundles to address that opportunity that we believe we have.

One thing that we are confident of, Gene, as long as the economy continues to be as stable as it is, our customers will pay for the value.

We are thrilled that the Creative Pro business is growing 20% year over year and that is an example of that kind of willingness to pay for value.

They appreciate what we have done with Creative Suite 2.

We believe that we have the Macromedia products available to them, that we can continue to increase our average ASP per customer.

How are you going to be marketing that bundle?

We don't have the advantage of having new product releases when you are going out with the bundle.

Well, I think we started to market through the traditional channels that we have available to us, certainly on the Web site, through the communities that we both have access to.

As well as our direct customer base, Gene.

I mean we have a fair amount.

Macromedia had a fair amount of customers that they have.

And we are actively targeting those customers, certainly again as we talked about the video bundle that's going to be coming out early in 2006.

All these are opportunities for us to get the word out.

One last question, obviously, Apple, in the next year is going to be going through a platform change.

I know Bruce you were at the Apple's developers conference last year talking about Rosetta.

Any thoughts in terms of how quickly Adobe could have product to run on Apple's new platform?

Again, gene, our general philosophy with respect to platforms, whether it's with Apple's move to the Intel architecture or the Microsoft shift to Vista is we stay focused typically on our own product schedule and making sure that as a result of a new product release that we do that we support any new operating system that might be available at that point, or new hardware platform, and therefore as you can imagine, we are well on our way of making sure we support the Intel Mac platform in the next version of our products.

We do know that when customers switch, it is a greater opportunity for us to sell them more software.

They typically will either upgrade or buy new sets of products.

Would there be a new version that would come out after the Intel switch that would be CS2 for Intel, for Apple Intel or something like that?

Or would the existing CS work on, I guess CS uses Rosetta, but maybe do we expect kind of a dot upgrade to capitalize on the new platform?

Typically our philosophy has been to not introduce a specific release for our new platform, rather to support that in our new version.

There is no reason why our existing products should not continue to work on the new platform.

Gene, it's important to separate Apple's customers from those that are both Apple and Adobe customers.

Clearly the more consumer oriented customers who will buy the new Mactel machines as quickly as they are available.

Our customers will take the time to both evaluate them and also make sure that the software is right for that environment.

For Adobe it doesn't, wouldn't make sense for us typically to do an operating system or architecture version only.

We would want to incorporate that into a rev of the product.

Great.

And finally, Murray, I guess if anyone deserves a vacation it is you after what you have financially done for the Company so congratulations and enjoy it.

Thanks a lot, Gene, I appreciate that.

Your next question comes from Sasa Zorovic from Oppenheimer.

Question regarding product for now I guess a segment classification the product that Macromedia was very excited about ended up in the other category, I guess the Other category although important for Adobe wasn't once that was growing that much and contributed in particular does it mean that you are going to be de-emphasizing these products or sort of I guess maybe more meriting other categories in a different one?

In looking at the business segment classifications and we came up with those, Sasa, one of the things we have to do also based on the SEC requirements is to look at how we are running the business within the Company and making sure that the business segment classification support how we are managing the processing internally.

I think as you look at Contribute, it certainly is for people who want to update Web sites.

It's an important aspect of working in conjunction with, the Web sites that exist.

So we will continue to invest in that business.

My second question is sort of similar to the Apple platform regarding looking at coming out sometime roughly a year from now or so.

What sort of is your position regarding what kind of a refresh that might be as far as you're concerned?

I think it's a little too early to the tell just because I don't know exactly whether this is going to ship right now, Sasa, so our perspective is we are going to focus on delivering the next versions of our products.

I think the innovation ideas associated with putting together the engagement platform are tremendous.

So when it comes we'll support it.

Great.

Thank you very much.

Murray, let me join everyone in thanking you for what you've done for Adobe.

Thank you, Sasa.

Your next question comes from Tom Berquist with Citigroup.

Thank you.

A lot of questions have been answered but I'm curious and you maybe answered this earlier but I was jumping from call to call, did you that you can at all about the intelligent document server business and also the relationships with SAP?

IBM and others and how it's going.

We did have record revenue.

I think if you look at the performance in the year we continued to have the deals greater than 50,000, we have a record 63.

Clearly the second half in 2005 grew significantly over the first half of 2005.

It was over 25% growth in the second half.

And so we continue to be excited about that business.

We have more reference accounts now that are available across the verticals that we targeted, government, Financial Services and other regulated industries.

We did say that SAP is now starting to offer interactive forms as well as as part of the netweaver platform and our relationship with the MC C. is also strong from a revenue and a marketing perspective.

So we continue to feel that we have momentum in that business going into 2006.

And Flex and Cold Fusion will just add to that as well.

In terms of how those will add to it there's obviously some relationship between what happened people do with application and Web servers versus what they do with intelligent forms.

How do you envision those things going together where you have Web pages that are combinations of both HTML and Adobe forms, how do you think about that?

Well, Tom, I can give a couple of scenarios that already seen to be resonating with our customers that we've talked to.

For example, in terms of being able to do the data capture and using Flex as an immersive way to create an experience that can be used for data capture as a front end to the digital -- as a front end to the PDF processes gaining some interest.

Macromedia also announced some very exciting data services as part of their recent max announcement which we can use to synchronize the data whether that comes from PDF or HTML back into the enterprise.

I think having the new Flex Builder application enables to us give more tools to help us to engage in this platform that we are talking about.

As exciting as we've been talking to some customers who have been using Flex and using and LifeCycle independently and they clearly see the benefits of us being able to put them together.

When we think about future product synergies there is a lot of synergies on the Creative Suite side but a fair amount of opportunities for bundles or suites that across over on intelligent document servers for Macromedia?

We are certainly believe that the combination of flex and Cold Fusion and live cycle enables us to deliver a more comprehensive offering to the CIO as they think about how they want to have an experience either on Web or other paper.

How that will reflect itself in products is a little early to tell.

Okay.

Thanks a lot.

Operator, we will take one more question.

Okay.

Your next question comes from Steve Ashley with Robert W. Baird.

Made it in under the wire.

I have a question for Shantanu.

If we look at the new bundles, if we were to look at the design bundle, from a designer's perspective what would you say was the value proposition other than the financial economics of that bundle, what other things would entice a designer to buy the design bundle over CS2?

Well, what we are hearing, Steve, from our customers, are the people who are today producing content for print, a lot of them want to start to deal with multi-media.

They want to start to make their offerings available on the Web.

And, with video really exploding on the Web as well as using DVD, I think the ability to use animation and take that content that they had produced for one medium and move it on to the Web is what developers in particular found very exciting.

The other example that I would give is a number of these customers use Illustrator to create a content and then wanton animate it and by having Flash in addition to Illustrator allows them to integrate that work flow.

So just two small example.

I think about the Adobe customers they have relied on us for many solutions they can now provide them with Flash offering in the same box gives them comfort in trying it and testing it knowing that that's an area of focus that is required for them to be successful in the future.

That's it for me.

Thank you.

This concludes our call today.

We thank you for joining us.

Have a great and safe holiday season and we will see you in January at the analyst meeting.

Thank you for participating in today's conference.

You may now disconnect.