Adobe Inc (ADBE) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Adobe fourth-quarter and fiscal year 2006 earnings conference call.

Today's call is being recorded.

At this time I would like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations.

Please go ahead, sir.

Good afternoon and thank you for joining us today.

Joining me on the call are Bruce Chizen, our CEO and acting CFO;

Shantanu Narayen, President and COO, and Rich Rowley, our new Vice President and Corporate Controller.

In the call today we will discuss Adobe's fourth-quarter and fiscal year 2006 financial results.

By now you should have a copy of our earnings press release, which crossed the wire approximately 45 minutes 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 on this call, particularly our revenue and operating model targets and our forward-looking product plans, is based on information as of today, December 14, 2006 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 2005 and our quarterly reports on Form 10-Q in fiscal 2006.

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 available on our website.

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.

An archive of the call will be made available in Acrobat Connect on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe Systems.

The audio and archive 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.

Thanks, Mike, and good afternoon.

I'm pleased to announce Adobe is reporting record quarterly and fiscal year revenue.

Revenue in Q4 was $682.2 million, which was near the high-end of our targeted range and represents 34% year-over-year growth.

In addition to revenue from the Macromedia acquisition, driving our results in Q4 were the release of Acrobat 8 and our new hobbyist products.

The latest version of our Acrobat family of products achieved record revenue in the quarter, and early feedback from customers has been overwhelmingly positive.

Revenue in fiscal year 2006 was $2,575,000,000, an increase of 31% over fiscal 2005.

This was our fourth consecutive year of double-digit revenue growth.

Non-GAAP annual net income also grew by 31% as a result of our strong revenue growth, combined with the operating margin leverage we achieved from the successful integration of Macromedia.

Overall fiscal 2006 was a great year with solid revenue in our core businesses and record revenue in strategic and growth businesses such as InDesign, LiveCycle and our digital video products.

We also demonstrated significant technology integration milestones as we folded Macromedia into Adobe.

These accomplishments include delivering Flash video support in Production Studio, our suite of digital video products, as well as relaunching Macromedia Breeze as Acrobat Connect.

Most importantly, however, we started executing against our strategy as a combined company, leveraging our assets and skills to deliver growth in fiscal 2007 and beyond.

I will now turn the call over to Rich.

Thanks, Bruce.

I would first like to say I'm happy to be with Adobe.

Before I review our financial results, I would like to point out we are now providing combined year ago Adobe and Macromedia results for comparison purposes as we have previously stated Adobe and Macromedia reported their results on different fiscal quarters, which limits our ability to provide accurate comparisons.

Therefore today we will compare our fiscal 2006 results with pre-acquisition Adobe-only results in fiscal 2005.

Similarly we will compare Q4 fiscal 2006 financial results to our Q3 fiscal 2006 results, as well as with pre-acquisition Adobe-only results of Q4 in fiscal 2005.

We also have the challenge of meaningfully comparing our fiscal 2006 results versus our fiscal 2005 results due to acquisition accounting and the implementation of stock-based compensation under FAS 123R.

In my remarks I will discuss non-GAAP financial results.

Our non-GAAP results exclude as applicable the following items.

Amortization of purchase intangibles; amortization of Macromedia deferred compensation; restructuring charges related to the Macromedia acquisition; a charge for incomplete technology related to a small acquisition;

FAS 123R stock-based compensation; investment gains and losses; tax differences due to the timing and deductibility of certain adjustments and the net tax impact of the repatriation of certain foreign earnings.

A reconciliation between our GAAP and our non-GAAP results are provided in our press release issued today and are available on our website.

I will first comment on our fiscal year 2006 results.

Adobe achieved record revenue of $2,575,000,000 in the year compared to $1,966,000,000 in fiscal 2005.

This represents 31% year-over-year revenue growth.

Adobe's annual GAAP net income was $504.4 million in fiscal 2006 compared to $602.8 million in fiscal 2005.

Adobe's annual non-GAAP net income was $752.5 million in fiscal 2006 compared to $575.1 million in fiscal 2005.

GAAP operating profit in fiscal 2006 was $549.4 million compared to $728.4 million in fiscal 2005.

Non-GAAP operating profit in fiscal 2006 was $956.7 million compared to $728.4 million in fiscal 2005.

Our GAAP operating profit margin for the year was 21.3% compared to 37% in fiscal 2005.

Our non-GAAP operating profit margin was 37.1% in fiscal 2006 compared to 37% in fiscal 2005.

GAAP diluted earnings per share in fiscal 2006 were $0.82 compared to $1.19 in fiscal 2005.

Non-GAAP diluted earnings per share were $1.23 in fiscal 2006 compared to $1.13 in fiscal 2005.

Now I would like to discuss our Q4 fiscal 2006 results.

For the fourth quarter of fiscal 2006, Adobe achieved revenue of $682.2 million.

This compares to $510.4 million reported for the fourth quarter fiscal 2005 and $602.2 million reported last quarter.

GAAP net income for the fourth quarter of fiscal 2006 was $181.9 million compared to $156.3 million reported in the fourth quarter of fiscal 2005 and $94.4 million last quarter.

Non-GAAP net income was $197 million compared to $151.5 million reported in the fourth quarter of fiscal 2005 (inaudible) $171.5 million last quarter.

GAAP diluted earnings per share for the fourth quarter of fiscal 2006 were $0.30 based on $602.2 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.31 reported in the fourth quarter of fiscal 2005 based on 508.6 million weighted average shares and GAAP diluted earnings per share of $0.16 reported last quarter based on [600.9] million weighted average shares.

Non-GAAP diluted earnings per share for the fourth quarter of fiscal 2006 were $0.33.

GAAP gross margin for the quarter was 88.3% compared to 94% in the fourth quarter of fiscal 2005 and 88.5% last quarter.

Non-GAAP gross margin was 93.7%.

GAAP operating expenses for the fourth quarter of fiscal 2006 were $441.1 million.

Non-GAAP operating expenses were $385.2 million.

Regular employees at the end of the fourth quarter totaled 6068 versus 5879 at the end of the third quarter of fiscal 2006.

The majority of the headcount increase from last quarter was in research and development.

GAAP and non-GAAP expenses as a percent of revenue breakdown as follows.

Research and development GAAP 20.9%, non-GAAP 18.2%.

Sales and marketing GAAP 32.6%, non-GAAP 30.7%.

G&A GAAP 8.6%, non-GAAP 7.6%.

GAAP operating income in the fourth quarter of fiscal 2006 was $161.5 million or 23.7% of revenue.

This compares to GAAP operating income of $191.9 million or 37.6% of revenue in the fourth quarter of fiscal 2005 and $110 million or 18.3% of revenue last quarter.

Non-GAAP operating income in the fourth quarter of fiscal 2006 was $254 million or 37.2% of revenue.

This compares to non-GAAP operating income of $191.9 million or 37.6% of revenue in the fourth quarter of fiscal 2005 and $207.2 million or 34.4% of revenue last quarter.

Other income for the fourth quarter of fiscal 2006 was $19.6 million.

Adobe's GAAP effective tax rate for the fourth quarter of fiscal 2006 was 26%, and Adobe's non-GAAP effective tax rate was 28%.

Our non-GAAP tax rate was higher than targeted due to the annual geographic mix of revenue.

This affected our annual non-GAAP tax rate, and an adjustment was necessary in our Q4 rate.

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

Creative solutions' segment revenue was $359.9 million compared to $328.1 million last quarter.

This sequential increase was driven by our new hobbyist products and our Creative Suite products.

Knowledge Worker segment revenue was $185.1 million compared to $154.1 million last quarter.

Our Acrobat desktop products achieved record revenue.

Enterprise and Developer segment revenue was $52 million compared to $49.4 million last quarter.

Mobile and Device segment revenue was $12.1 million compared to $9.1 million last quarter.

Revenue in this segment continues to be impacted due to purchase accounting from the Macromedia acquisition.

Other segment revenue was $73.1 million compared to $61.5 million last quarter.

Sequential growth in this segment was driven by revenue associated with monetization of our free client software downloads.

Turning to our geographic segments, the results in Q4 fiscal 2006 on a percent of revenue basis were as follows.

The Americas, 49%;

Europe, 32%;

Asia, 19%.

We experienced solid demand across all of our major geographies.

Our trade DSO in the fourth quarter of fiscal 2006 was 48 days.

This compares to 31 days in Q4 of fiscal 2005 and 43 days last quarter.

Our DSO was higher in Q4 due to the launch of Acrobat 8 late in the 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 2006, cash and short-term investments were $2.3 billion compared to $2 billion at the end of the third quarter of fiscal 2006.

In regard to share buyback, during the quarter we repurchased 2.2 million shares at a cost of $81.8 million as part of our share repurchase programs.

This concludes my discussion on our financial results.

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

Thanks, Rich.

I will spend the next few minutes reviewing highlights from our performance in Q4, starting first with Creative Solutions.

Overall our Creative business grew sequentially in Q4 over Q3 and was in line with our expectations.

We also continued to be on track to deliver the next version of Creative Suite in Q2.

Early response from beta customers to the next generation products has been extremely positive.

We are excited to announce that for the first time ever we will deliver a public beta of the next generation of Photoshop.

The beta version of Photoshop CS3 will be available on the Adobe Labs website tomorrow morning and will allow current CS2 customers to trial some of its innovative new features and more easily transition to the latest hardware platforms, particularly Apple's new Intel-based systems.

In our digital imaging business, Photoshop revenue remains steady in Q4 more than five quarters after the last version shipped.

In fact, full units of Photoshop grew quarter-over-quarter and year-over-year when factoring in sales of Photoshop, Creative Suites, the Bundle and Production Studio.

In our hobbyist segment, we achieved record revenue based on the new Photoshop Elements 5.0 and Premiere Elements 3.0 releases.

These new releases have already received numerous accolades in the press, including a PC Magazine Editors Choice Award for Premiere Elements.

The Chicago Sun-Times called Photoshop Elements, "The most valuable accessory to your digital camera."

Our digital video business grew 39% year-over-year, and we continue to be excited about the overall video opportunity.

In addition to strong revenue growth, we continue to receive accolades in the industry.

We recently won a technical and engineering Emmy award for our Flash Video technology.

This recognizes the inherent advantages of the Flash Video format, which leverages the ubiquity of the Flash player to enable broadcasters and websites to deliver a seamless branded experience to their viewers.

In our Knowledge Worker Solutions business, we achieved record revenue with our Acrobat family of products based on the release of Acrobat Version 8.

Acrobat 8 enables business professionals to more effectively engage with the rich high-value information and PDF documents and forms and more reliably and securely drive their work to completion, leveraging the ubiquitous free Adobe Reader.

Although it is early in the release cycle, revenue and units in the Acrobat 8 cycle have exceeded what we achieved with Acrobat 7 in the comparable timeframe.

We have seen a healthy mix of new and upgrade revenue.

In terms of mix, the ratio of Acrobat Professional to Acrobat Standard has actually grown in favor of Acrobat Professional thus far in the Acrobat 8 cycle.

Concurrent with the release of Acrobat 8, we also launched the Acrobat Connect product line.

Acrobat Connect is the first Web conferencing and collaboration solution to offer always on personal meeting rooms.

Acrobat 8 and the free Adobe Reader now include a stock meeting feature, offering an immediate link into a connect meeting room for real-time collaboration.

Acrobat Connect began shipping last week.

In our Enterprise and Developer solutions business, we achieve sequential and year-over-year revenue growth in Q4.

Driving this performance was our life cycle solutions business which achieved record revenue in the quarter.

Some wins in the government market include Japan's Ministry of Internal Affairs and Communications, which plans to migrate all of its paper-based census collection to a national e-solution for the entire country.

The Catalan government in Spain responsible for more than 5 million citizens which plans to use an Adobe form solution to migrate more than 500 paper-based processes to electronic work flows.

Their goal is to reduce public expenses and increase the service levels for citizens while also meeting Spanish and European objectives for e-administration such as accessibility, electronic archiving and digital signature capabilities.

And the state of Delaware, which has established PDF as a standard for all governments and all citizen and business facing forms within Delaware through its adoption of Adobe Reader extension server.

More than .5 million business entities have their legal home in Delaware, including more than 50% of all US publicly traded companies and 60% of the Fortune 500.

Delaware plans to quickly Reader-enable all corporate forms within the next 90 days, allowing a large number of businesses throughout the world to fill out Reader-enabled PDF forms.

LiveCycle wins in the commercial market include the German stock exchange and transaction service provider, Deutsche Boerse AG, which uses LiveCycle Reader extensions and LiveCycle forms to standardize and optimize its forms management.

Benelux banking firm, Fortis Bank NV, which is using LiveCycle to convert, archive and index all customer communication and PDF, a total of about 400,000 documents per month.

And Chunghwa Telecom of Taiwan, the largest telco in Taiwan, with 8 million subscribers, which is using an Adobe document solution to streamline and control internal processes by utilizing digital signatures, watermarks and other document controls.

In total, the number of enterprise transactions in the quarter with licensing revenue greater than $50,000 for server products including LiveCycle, Flex, Connect, Breeze, and Flash Media Server, was 104.

In our Mobile and Device Solutions business, our momentum continued in terms of deployments with the distribution of our Flashlight technology.

Cumulatively Flashlight is now on more than 150 handset models, more than 250 device models, and more than 150 million devices have shipped.

New deployments in addition to mobile handsets include the Sony PlayStation 3 and the Nintendo Wii.

The presence of our Flashlight client on tens of millions of devices is helping Adobe to build out our content creations desktop solutions, as well as our server-based data delivery solutions.

This momentum is helping to drive important customer and partner relationships.

In October we joined with Verizon Wireless and QUALCOMM to announce the availability of Flashlight technology via Verizon Wireless network.

Flashlight for BREW facilitates Flash content to run on Verizon's "Get It Now" enabled phones and enables over the air distribution, giving customers the ability to purchase applications and automatically Flash enable their phones.

Reviewing news in our other business category, we had solid performance, including a slight year-over-year growth in our PostScript business.

We were pleased to see major OEM printing partners demonstrate the integration of the new Adobe PDF print engine into their printing systems.

Partners include [Ad for Graphics], [Dinabone Screen], Fuji Film, Heidelberger and Kodak.

We also made the new Adobe Reader 8 software available as a free download, and it now offers the option to install the free Google Toolbar.

Finally, in early November we announced Adobe has contributed source code to the Mozilla Foundation for the ActionScript Virtual Machine, which is our powerful standards-based scripting language engine in Flash player.

Mozilla will host a new open source project called Tamarin to accelerate the development of the standards-based approach for creating rich and engaging Web applications.

Industry response to this move was extremely positive and supports how we're working to bring the HTML and Flash developer communities together around a common language.

This concludes my comments.

I will know turn the call back over to Bruce.

Thanks.

Before I provide some closing comments, I will discuss our fiscal year 2007 financial targets, as well as our targets for the first quarter of the year.

For fiscal year 2007, we are targeting annual revenue growth of approximately 15%.

We are also targeting a GAAP operating margin range of approximately 25 to 27% and a non-GAAP operating margin range of approximately 37 to 38%.

Our full-year financial targets include the following assumptions.

We expect to ship new versions of our creative products in English late in Q2 with the bulk of the major foreign language versions expected to ship in Q3.

We expect overall revenue in Q3 to be substantially higher than revenue in Q2 because of the launch timing.

Finally, we expect Q4 to be the highest revenue quarter of the fiscal year.

Turning to Q1, we are targeting a revenue range of approximately 640 to $670 million.

In addition, we are targeting a GAAP operating margin of approximately 19 to 21%.

On a non-GAAP basis, which excludes acquisition-related costs and stock-based compensation, we are targeting an operating margin range of 33 to 34%.

We are targeting our first-quarter share count to be approximately 609 to 611 million shares.

For other income, we are targeting 20 to $22 million.

For our GAAP and non-GAAP effective tax rates, we are targeting approximately a range of 26 to 28%.

These targets lead to a GAAP earnings per share target range in Q1 fiscal 2007 of $0.17 to $0.20 per share and a non-GAAP earnings per share target range of $0.28 to $0.30 per share.

I would like to close with some thoughts on Adobe's future.

Since the close of the Macromedia acquisition one year ago, Adobe has made significant progress integrating the two companies and leveraging our combined assets to provide solutions that truly redefine the way people engage with ideas and information.

The overarching market trends that continue to drive our strategic vision remain the same.

These trends include the explosion of digital content, the proliferation of non-PC Internet connected devices, and finally, the advent of Web 2.0, which ultimately will drive the Next Generation of rich Internet applications for a constantly connected world.

All these trends are reinforcing the need for the kind of cross operating system, cross device platform Adobe is delivering based on our ubiquitous clients and our market-leading applications solutions, all of which are based on a common set of industry standards.

We believe this platform approach will drive continued growth in our Creative Professional and Knowledge Worker businesses, while accelerating our momentum in newer growth markets which we are investing, including the enterprise, digital video, mobile and Web conferencing.

We are excited about the future of Adobe.

We look forward to sharing more details with you about our strategy and progress during the coming year.

I will now turn the call over to Mike.

Thanks, Bruce.

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

First, starting with Q1 of fiscal 2007, we have decided we will no longer provide a regular intra-quarter business update.

Second, we're also announcing today that we are changing the date of our annual financial analyst meeting.

The new date is Wednesday, March 28, and the location will be in New York City.

We are moving the date to March 28 to coincide with a major customer event that week.

An e-mail invitation will be sent out later in February.

We have posted several documents on our Investor Relations web page related to our earnings report today.

They include today's earnings release, our updated investor data sheet and a table providing reconciliation for GAAP to non-GAAP financial data.

To access these documents and other investor-related information, you can go to our website at www.Adobe.com/ADBE.

For those who wish to listen to a playback of today's conference call, a Web-based Acrobat Connect archive of the call will be available from the IR page on Adobe.com later today.

Alternatively you can listen to a phone replay by calling 888-203-1112.

The conference ID, 607-9884.

Again, the phone number is 888-203-1112 with conference ID number 607-9884.

International callers should dial 719-457-0820.

The phone playback service will be available beginning at 4:00 PM Pacific time today and then again at 4:00 PM Pacific time on Monday, December 18, 2006.

We would now be happy to take your questions.

Operator?

(OPERATOR INSTRUCTIONS).

Jay Vleeschhouwer, Merrill Lynch.

Bruce, I would like to ask you about the product launch plans around CS in the spring.

Specifically it appears you're going to have multiple iterations of Creative Suite we think where you combine all the different bundles under the CS umbrella?

The question is, would you expect to have more bundles, more segmentation than you have had to date?

And if so, could you talk about any issues with respect to positioning or pricing or messaging around an increasingly discrete segmented product line?

And secondly, with respect to the Mac part of the business, to date it has been relatively weak as we know.

You commented on it in previous quarters.

Is it fair to assume that with the new launches next year that we should see an equal and offsetting rebound in the Mac part of the business by comparison to the weakness we have seen thus far this year?

I will take that question.

First, with respect to the product launch plan for the next version of Creative Suite 3, we are excited.

We have been talking to a number of customers, and we have got some really good feedback about rationalizing the various offerings.

It is clear to the creative customers that whether they be print professionals, whether they be Web professionals, people doing video, as well as mobile, they are excited about our ability to provide more of an integrated workflow, as well as some really innovative features.

So what you can expect from us when we announce CS3 is really taking into account all of that different feedback that we have got and better targeted products to meet the needs of all of those customers.

We also hear increasingly from a number of the creative professionals that they actually want the entire suite of products and are excited about our ability to bring them the entire suite of products in a particular offering.

So while we are not giving more specifics about the CS3 launch, we're excited.

It will start in Q2 as Bruce mentioned in his prepared remarks, and we will see the bulk of the products ship in Q3.

With respect to the Mac, yes, we certainly expect that as the entire suite of products becomes Mactel-savvy and Mactel aware that Mac customers who have held off moving to the Creative Suite will move to it.

Frankly, I think getting Photoshop beta out there also enables a number of those customers to start out their transition with the beta version.

Some additional color as it relates to the number of suites compared to the number of different bundled configurations we have today.

That is something that we are not being specific on, but clearly moving away from bundles to more integrated suites is one of our objectives, and we will do that with the Creative Suite 3 launch.

So, as we entered this year, we had bundles like the video bundle and Web bundle.

You can imagine some of those bundles, the loosely connected, shrinkwrap offerings turning into different configurations as an integrated solution.

As it relates to Mactel, I think when you look at -- when our customers look at the performance of Photoshop CS3 running, even though it is in beta running on a Mactel CPU, they will be extremely impressed with the performance enhancements, let alone all the new features that are in that product.

I believe it is something like 44% quicker on a Mactel versus a previous G5 CPU.

Just lastly for clarification, is there anything in your '07 outlook that encompasses a business or product effect from Apollo, or is it still going to be in the development phase and market development phase throughout next year?

Well, we are really excited about Apollo and at Mac we got tremendous feedback.

The '07 outlook does not take into account specific revenue associated with Apollo.

Remember, however, that clearly anybody who starts to create the next generation of rich Internet applications using Flex and Flash back towards Apollo and clearly any acquisition of whether it is Flex Builder or Flex Data Services from Adobe is a good path towards Apollo.

Steve Ashley, Robert W. Baird.

I was wondering if you would be able to give us a comment on the outlook in the first quarter for Acrobat revenues, and again qualitatively should we expect those revenues to be up sequentially or down sequentially?

While it is still clearly early for this particular version, the initial results as we have said have been really positive, as well as customer reception and analysts review.

With four weeks of shipment of Acrobat 8 in the quarter in Q4, we achieved record revenue.

Since Q1 will be our first full quarter and we will have all the other localized languages available, we do expect a sequential increase in Q1 from Q4.

What we have seen in all prior versions is that the quarter after the first full quarter of shipment declined slightly, but then it, as always, achieved a new plateau for quarterly revenue, and that is what we expect moving forward for Acrobat 8.

Perfect.

And I was wondering if we could get some more color on the hobbyist products?

Just again, maybe sizing it as a percentage of total, is it now maybe greater than 5 or 10% of revenue?

And I understand there is a seasonal element to that.

If you could talk about kind of -- I know the kind of growth you might have seen year-over-year in that in those products?

So, the hobbyist business right now, which is Premiere Elements and Photoshop Elements, that is over $100 million business for Adobe.

I think it is clearly being driven by what we are seeing, which is trends as people move to both digital photography and increasingly video.

I think the number -- amount of video that is being shared over the Internet is dramatically increasing, and our products really enable us, enable customers to effectively both edit, as well as share the digital content.

So Bruce has been talking about video publishing opportunity for quite awhile now, and I think we are seeing with both broadband exploding, as well as digital cameras and the ability to use that technology on standard PCs, that more people are using video.

In terms of year-over-year growth, Steve, we don't break that out, but it is up year-over-year, and we continue to gain market share at least based on the MPD data that we have axis to from our competitors, and we do continue to expect it to be a growth category for us.

And just lastly, in your revenue segments, the other revenue up nicely $72 million.

You talked about monetizing some of your downloads.

I'm assuming that is that Google relationship and others.

How should we think about the sustainability of that revenue level we saw in the fourth quarter?

And is that something that is going to spike up and down or can it grow and just again how we might think about that?

Well, there are two elements to that segment.

The first is PostScript, which we said had a slight year-over-year increase.

The second is some of the monetization revenue that we are seeing from Google.

The terms of that contract are confidential, so we are really cannot share more at this point about the revenue than will be reported in that segment.

And keep in mind, there is other products in there.

There is quite a few products in that category, including some important products, while not major revenue producers, products like FrameMaker for technical publishing used by many enterprises around the world, Captivate which is used for e-learning.

When you add it all up, it ends up being a nice piece of revenue for us.

So it will vary quarter by quarter.

Tom Ernst, Deutsche Bank.

I wanted to follow-up.

You have talked in the past and we have discussed a little bit here the expectations of seeing some lift from the Mac-Intel customers, and that is clearly something we're looking forward to.

I am wondering particularly with the strong outlook for next quarter on Creative Solutions, are you able to capture how painful do you think it has been here recently and might that intensify a little bit, and how did you get comfortable with what looks like a very strong outlook ahead of the launch?

Well, specifically with respect to our outlook for Q1, we are expecting Acrobat to be sequentially up.

The enterprise business we are expecting to be sequentially up.

The Creative business and Creative Suite we have been stating that we expect to see a sequential decline until the launch of CS3.

And in Q1 we do expect a sequential decline in that business as opposed to that business being up.

And do you have -- I recognize you have good read into your channel.

Do you have a way that you have been able to quantify that to get your arms around it?

Because it looks like just a modest sequential decline, which is great news for us, and I am wondering how solid do you feel about that at this point?

That has been factored into the guidance that we have provided.

So, as Shantanu said, we do expect a decline.

We do get sell-through data from our distributors, and we do manage and watch the channel inventory very carefully, and that does get audited by both our audit committee and the external auditors.

So we feel good about our forecast.

Now clearly we are expecting that more users will hold off as we get closer to the actual launch of CS3 since we have been so public about it.

Now if that does not happen, obviously we will be closer to the higher end of the range than the lower end of the range.

But all of that has been factored into the guidance that we are providing today.

Okay.

Perfect.

Thank you.

One brief follow-up as well.

It looks like some of the strength this quarter was also in Europe with a little bit of super seasonal strength there.

Anything in particular you saw that drove that stronger in Europe?

Well, keep in mind we did have some small amount of FX benefit in Europe.

It was about $9 million that was offset by the FX exchange rate with the Yen where we actually lost a few million.

So that helped us a bit.

But if you look at it as a percentage of our overall revenue and you compare that to a year ago, it is pretty consistent from region to region.

In fact, we think that overall it has been a very solid market for us or a solid economies.

The one thing that did benefit the US and benefited parts of Europe is that the English version of Acrobat shipped a little bit earlier than the Japanese versions of Acrobat.

Rick Sherlund, Goldman Sachs.

I wonder if you could just touch on the timing difference between Creative Suite for English and the other language versions?

How much of a time differential would you expect there?

Before I turn that question over to Shantanu, I want to congratulate you and wish you well on your retirement from Goldman Sachs.

Thank you.

That is correct, retirement from Goldman Sachs but not retirement.

So we are not breaking that out.

Traditionally what we have done is after getting English out a couple of weeks later, we get the French, German and Japanese versions out a little bit later after French and German.

So that is what we call our Tier 1 languages, and then the Tier 2 languages ship a little later.

But, as we get closer to the launch of CS3, we will be able to provide more color.

It just seems like you are kind of fine-tuning it, and you're saying we will get the English language out in Q2, but the other language is out in Q3.

It just makes me a little nervous that gee if that is -- we're only talking a couple of weeks how confident are we that we are going to meet that window and actually get it out in the May quarter.

Well, at this point, we are confident of our ability to ship CS2 in the second quarter of fiscal 2007.

Clearly, as we were trying to provide some color into what the revenue would be for Q2 versus Q3, Bruce was trying to clarify that.

We would expect to see more revenue associated with the Creative Suites also in Q3.

At this point in time we have a lot of confidence in those dates.

If you look at our history, our track record, we have done a pretty good job of meeting our delivery dates on the major products.

The other thing to keep in mind we gave ourselves more time for this release to allow us to both optimize and make sure we were compatible with the new operating system and to also make sure that we could both add great new features, as well as integration features.

So the amount of time between releases is approximately 24 months.

So we feel very good about meeting that date.

In fact, the reason we could make the Photoshop CS3 beta available is because of how solid it is at this point in time.

And should we expect margins to increase sequentially throughout the year along with the revenue?

Yes, we are not breaking those margins out per se because we have not given specifics, but that's a logical conclusion as we have seen historically as our revenues increase.

Especially as they increase significantly through the years, we're not able to spend as quickly or as quickly and as wisely as we would want to.

So you can expect the operating margins for the most part to continue to expand as we move through the years -- through the year.

Walter Pritchard, Cowen.

I was wondering if you could just, Bruce, maybe on the headcount, it looks like you have hired just about 200 people every quarter this year.

Is that the level you feel like is the right level going forward?

Is that sort of decapped by your ability to integrate those people, or do you think you were hiring above or below trendline in '06?

That is something that we are not commenting on.

Keep in mind, many of those people now work in lower-cost geographies, so that needs to be factored into any analysis that you are doing.

But in terms of specific headcount, growth that is something that we are not commenting on.

We will continue to watch our expenses carefully, and at the same time, we want to make sure we are investing in the future.

The bulk of our headcount additions continue to be in research and development.

And then just relative to the first public data that you're doing here, beyond I guess maybe the obvious pulling ahead, some adoption into earlier quarters as people become more comfortable, is there any other change in buying behavior you expect that to induce?

No, we are excited about the progress that we have been able to make and to enable our customers to really take advantage of the Photoshop beta.

Remember that only current customers of CS2 can use the beta.

So we think that in addition to getting a whole bunch of feedback we also generate customer goodwill.

And just to clarify, we're not pulling revenue in.

That beta does expire, and anybody who wants to use CS3 Photoshop after I believe the May timeframe has to go out and either upgrade from their current CS2 product or buy a new product.

Understood.

Yes, I guess I'm just assuming more people would probably upgrade sooner knowing that they are comfortable with it?

What is interesting, Walter, is that when you look at the dynamics around that whole business, the amount of rich media creation that is going on from both aspiring creative professionals who are at home or at work or people doing marketing within corporations or people doing marketing within the publishing houses or in graphic shops, they are trying to create and enhance more rich information than ever before across all different types of both media types and platforms.

So you have to factor that dynamic in to just the product upgrade.

We believe that dynamic, that variable, will continue to drive our overall Creatives business well beyond just the release of Creative Suite 3.

Great.

And then just lastly, Bruce, any comment on how close you are on both the CFO slot and the head of sales slot that you're looking to fill here?

Yes, so, first of all, in terms of a CFO slot, I just want to make sure everybody understands how disappointed we are that Randy Furr is leaving the organization.

It is something that we did not want.

It is something our Board did not want to see.

And I suspect there is probably a piece of Randy, and potentially large piece of Randy, that he did not want to have to make that decision.

So I wanted to make sure that that was absolutely clear.

We are aggressively looking for a replacement.

We want to make sure that we hire somebody of the caliber of Randy.

We are seeing some attractive candidates, but we want to make sure it is the right person.

Fortunately we have a good team in place.

We have had had a good team in place, and with the addition of Rich Rowley as Controller, we're enhancing that team.

So I'm optimistic, but I want to make sure we get the right candidate in place.

On the sales side, Walter, I expect to have somebody who heads up global field operations starting January 1.

Adam Holt, JPMorgan.

You all had a practically strong deferred revenue number up about 30% sequentially.

I wanted to get your sense for what the relative contribution toward there between Acrobat 7 activity in front of the 8 release in currency?

And if it is -- to the extent that there was a lot of 7 buying, how do you see that rolling off the balance sheet into the P&L?

So a lot of that deferred revenue is the result of Acrobat 8 shipping late in the quarter, and they are shipping a lot of it late in the quarter, and we do reserve or defer some revenue for the updates that could potentially go out for bug fixes.

We typically reverse those out in the following quarter.

Okay.

And then just secondly, you all made some changes to your licensing manager for Acrobat 8.

I was wondering if you could talk about any impact that might have had on recognized revenue in the quarter and whether or not there is any lasting impact into the upcoming quarter from those changes?

Certainly there is no issue in terms of recognizing our revenue.

It did not change any behavior in any respect.

In terms of the specifics, what we have done is introduce in Acrobat 8, the ability for larger enterprises to be able to track the number of copies of Acrobat that they have installed and deployed within the enterprise, and that is what was rollout.

There have been no technical issues with the rollout.

We are working through some of the communication issues.

But clearly it is something that as licensing has continued to grow with Acrobat and all of our other products, we want to enable enterprises to keep track of deployment within the enterprise.

Just if I could, one final question on the mobile business, which saw a pretty nice sequential uptick as well.

Should we be thinking about that number as a baseline looking forward, and can you talk a little bit about some of the key drivers for the nice sequential uptick in the mobile business?

There's a couple of dynamics that are going on in our mobile business that one needs to be aware of.

First of all, we still are dealing with some purchase accounting issues, so next year we anticipate about $15 million of what would have been revenue from Macromedia gets lost from a P&L perspective to methods in purchase accounting.

The second thing to remember is that Macromedia had a number of large deals in which the customer, and they were structured in such a way, where the customer prepaid for X number of devices.

And it will take us at least another year and possibly a bit longer for us to work through those prepayment advances to those devices shipping.

So I would not expect -- while we're not breaking out revenue by business segment in terms of targets for the year, I would not expect large increases through fiscal year '07 because of that.

The other is we have just begun to market and start getting adoption of the FlashCast server into the carrier market as we're doing with NTT DoCoMo.

And that will take us a couple of years for us to realize the revenue from that because the time it takes in which to install, educate and get the ecosystem up and running does take us time.

Thank you.

Having said that, it is great to see the momentum we're having NTT DoCoMo, which launched their iChannel service back in October, which is based on how FlashCast server is generating on average about $4.00 per user per month and they now have 5 million of them.

And our revenue model on the FlashCast server is either one based on a number of subscribers or based on the amount of content they consumed, and we get a percentage of that consumption.

So today we could talk about DoCoMo.

We look forward to announcing additional carriers as we move through next year.

Heather Bellini, UBS.

Congratulations.

I just wanted to ask you a question.

If you could talk to us a little bit about how you expect the CS3 cycle to play out versus the cycle you saw with CS1 and CS2, and if you could give us a sense of why you feel that way?

And also I just wanted to confirm, would the CS3 launch follow the similar product introduction that you normally do for your other products where you would drain inventory and replenish the channel all in the same quarter?

Thank you.

First, with the CS3 cycle, we do believe that if you look at some of the conditions that CS3 is going to be introducing that the demand for that product, we expect it to be fairly good.

Firstly, there is the Mactel transition.

Secondly, there is Vista that is going to be coming out, and in the past we have seen as people buy new hardware they do also makes software purchases.

Third is clearly there is a tremendous level of excitement associated with the fact that this will be the first major release of the products with both the Adobe and former Macromedia products offered, as Bruce said earlier, in an integrated suite.

So from the perspective of customer adoption and we have been able both at MAX, as well as with other early data customers to get feedback, and the feedback has been really positive.

So we are excited about the prospects for CS3.

With respect to the launch, yes, typically what we do is we try and make sure that after we announced the product that we have both done the proven thing by making sure there is not too much excess inventory in the channel, and we are able to get enough product out there to satisfy end-user demand.

And can you give us a little bit more clarity in terms of how big you expect this to be, whether it is more similar to CS1 or CS2?

I think that is a big question on the minds when people are modeling.

What we will do is provide more color after we announce the products.

What I think is clear if you look at the dynamics that Shantanu just talked about, the pent-up demand, the 24-month cycle, the compatibility and/or optimization to operating systems, the integration with the Macromedia products, the added features, one would suspect that this should be the biggest release ever.

The reality is for Adobe this is the biggest release ever, and for the industry for desktop software, this is probably the biggest release of all time.

So we are very optimistic.

We are excited, and we will share much more with you when we actually announce the product.

John McPeake, Prudential.

Nice quarter.

I just have one question here.

It is around the Flash opportunity for the Company beyond this product cycle.

I think, Bruce, you have talked about as potentially a bigger opportunity than Acrobat over time.

I was hoping you could give us a little more color as to how with FlashCast, Flex and maybe some of the run times you get from Apollo that that could be another leg here beyond the product cycle.

John, let me first take a stab at why we are excited about the Flash opportunity.

Clearly if you look at the ubiquity of the Flash player, it is on virtually every single desktop that is out there.

And with statistics that we just gave with respect to mobile and alternative devices, we're seeing the same kind of adoption on alternative devices.

In terms of monetizing the Flash player ubiquity, there are multiple opportunities for us.

In addition to the authoring application, which is clearly used to generate all of that Flash content for the Web, Flash video -- we're seeing increased use of Flash video.

If you go to ABC.com or Disney, increasingly all the video that is available on the Web is through Flash video, and we also think that over time that is going to be a large opportunity on mobile devices.

If you look at Web conferencing and real-time collaboration, increasingly customers around the world want the ability to do real-time collaboration and Web conferencing.

And the fact that there is both audio, as well as video built into Flash, we think is a tremendous advantage for us.

Rich Internet applications is the next generation as the Web emerges and we find all the limitations that exist in today's Web infrastructure and standards, Flash is again with everything we have done with Flex, as well as with MXML, which is the XML description language to create these next generation applications, we think we're uniquely positioned, which will result in both opportunities for us on the tooling side, as well as on the server side.

Just like video also has resulted in opportunities on the streaming and service side.

And all of this culminates in the opportunity associated with Apollo, which is as we deliver the next generation client, leveraging everything we have done with PDF and Flash, you know we just think that a brand-new set of applications will emerge as well that leverages this platform.

And we will continue to look for ways of monetizing the Flash client for non-PC devices.

For example, both the Sony PlayStation 3 and the Nintendo Wii currently includes the Flash player in which we get a royalty on both.

And, of course, we will continue to sell FlashCast like servers to the carriers to take advantage of those non-PC devices, and ultimately we will be able to do the same for both set-top device manufacturers and cable providers.

Do you see this as an accelerator to your growth in '08 without talking about guidance that far out?

We will touch much more on '08 and '09 in the future at the analyst meeting in March.

Brent Thill, Citigroup.

Just on project Apollo, I think you have been clear that the components, some of the components like Flash and Flex are already shipping.

But how do we think about this in terms of a release?

Is this going to be partly embedded in CS3, or is this something that comes at a later point after CS3 in a broader stack for the developer community?

I think you will see a couple of things this year.

Again, this year from a revenue perspective, we don't expect the revenue to come from Apollo per se.

But the things that you might expect from Adobe this year is more of a public data offering Apollo client run time, which enables people to create new applications.

We certainly started showing that with MAX, and we showed some really interesting applications like the eBay application that was built on top of Apollo.

The other thing you have seen us do this year already to position Apollo for the next generation of Web applications is to partner with Mozilla on the ActionScript VM engine so that we can have both Web developers as well as Flash developers standardize on an open standard which will enable more cross platform playback.

With respect to CS3 in particular, we will continue to make sure that the interaction between the designer and developer workflow, which is something really important to this communicate, is enhanced.

And again, for example, what we showed with the ability to take Illustrator content and take it into Flex Builder and vice versa showcases what we can do to enable those designers and developers to work collaboratively.

So you will see a lot of activity this year, but really Apollo the big news will be when we do a public beta.

What you want to do is think of Apollo the same way or a similar way in which you think about the free Adobe Reader and the Flash player.

It is a client.

What we do is we have an opportunity to both take existing applications and build new applications that take advantage of that unique environment and to sell tools to help others build unique applications.

The same way that we were able to leverage Reader with Acrobat and LiveCycle, the same way we have been enable to leverage the Flash player with applications like or servers like FlashCast, Flex, applications like Flash authoring and so on.

So by having a client that takes our current client to the next level and takes advantage of the current format, PDF and Swift which is the Flash format, we believe that opens up a wealth of opportunities well into the future.

Okay.

Just a quick follow-up on the op margin guidance.

If that holds true, your op margins would be roughly flat over the last three years.

I think it is considering the meaningful impact of the CS3 launch, how are you keeping these margins constrained?

Where is this money flowing?

Well, as we indicated earlier, we do expect that over the year you will see margin expansion in this quarter somewhere between 33 and 34 with an overall average of 37 to 38% for the year.

What we want to do is make sure that we continue to invest in the many, many growth opportunities ahead of this Company.

We have had four years of double-digit growth.

We anticipate yet another year of double-digit growth in '07, and we want to continue to fuel that.

So while our operating margin might not be increasing at the rate that some of our shareholders would like because our revenue growth continues to increase at a substantial rate, our overall earnings continue to be impressive.

And that is the strategy that we prefer to take.

Phillip Rueppel, Wachovia Securities.

Regarding the public beta, could you -- do I understand correctly that there are no plans for other pieces of CS3 in the public beta side?

Secondly, the decision to do one of these, was it driven by the desire more to have a broader testing audience or general audience or to give relief to the Mac customers that are really kind of dying to use the Mactel platform?

If the question was specifically about the Photoshop CS3 beta, it was a really driven by our desire to get customers to really participate with some of the new innovative features that we're developing, as well as help them transition.

There are some hardware and software transitions that are coming in the industry, both Mactel as well as Vista, and that is the reason for us to both generate goodwill, as well as get their help in making sure the transition is really seamless.

There are no other announcements that we are making with respect to public betas at this time.

Okay.

And then given that the public beta requires customers to be on CS3, do you anticipate any meaningful upgrade activity over the course of the next couple of months from folks that are still on older versions CS1 or other versions of Photoshop?

Yes, we have not factored that as a variable in our guidance.

Could there be some customers that are so anxious to get their hands on the CS3 beta for Photoshop that will upgrade to Photoshop CS2 or CS2 from either CS1 or stand-alone products?

Yes, we just have not factored that into our financials.

Ross MacMillan, Jefferies.

I just wanted to go back onto Rick's question regarding the timing of CS3 and the impact to revenues between Q2 and Q3.

Is there anymore color you can give us to help us understand the kind of magnitude of the uplift sequentially, if you will, into Q3?

Somehow to frame that just so we know what sort of size difference in absolute revenues we are talking about?

Yes, so we would typically see a seasonal decline in Q3 given the way our quarters fall out, the fact that it is a June/July/August quarter, and we have a lot of strength in Europe, as well as the US where summer tends to fall off a bit.

We are not being specific in terms of the actual numbers, but because we will have a full quarter of shipment in Q3 of the English product, and we intend to at least today ship the foreign language products, especially the major ones, French, German and Japanese, very early in the quarter.

We do believe today that there will be a significant uptick Q3 over Q2.

Okay.

Thank you.

And maybe just one quick follow-up and it's more a housekeeping, but I know for Q1 you're guiding to share count of 609 to 611, but you exited Q4 with 602 diluted shares.

Can you just help me understand the magnitude of the uplift?

Is that simply on some assumptions you have made, or are you not going to buy back stock, or is there something else that is impacting that share count?

Yes, there is a number of variables that go into that calculation.

We do have our normal stock buyback plan and how much stock we buy back in any given quarter certainly impacts that.

The price of the stock impacts that, and we certainly try to make our best guesstimate that is a difficult task to do, and then how much stock that gets sold as part of the employee stock option plan.

Gene Munster, Piper Jaffray.

Good afternoon and congratulations.

A quick question.

It seems the creative segment was particularly strong in the November quarter, and was that because of the professional side of the creative, or was it the prosumer side?

And if it was the pro, what logic would you put around strength this late in the cycle?

Firstly, the Q4 numbers we were at the higher end of our targets, both as a result of the hobbyist products having record revenue, but in addition to that the CS decline was not as much as we had expected.

As we had stated, and you know, we also did release a new version of the bundles with the new Acrobat product late in the quarter.

But again -- and we had expected, frankly, between Q3 and Q4 the normal sequential uptick because Q3 is a seasonally weak quarter for us in Europe.

We do expect Q1 to be sequentially down again in anticipation of CS3.

In terms of who is buying it because of the world in which we are living in, it is the combination of both the professional as well as the aspiring professional.

People want to express themselves.

When you look at the social expression sides like YouTube and MySpace and others, they want the best, and then you look at people who make a living creating content and creating websites and doing video, many of them cannot wait until CS3.

They would need the tools today to get their job done, which despite the fact that we're not optimized or not fully compatible with Mactel, people continue to buy the solution.

Again, had we been compatible, we would have seen more revenue.

We do think we are losing some because we don't have that compatibility, and because we have already announced CS3 not formally but certainly in venues like this.

How is CS2 relative to expectations excluding the CS2 with Acrobat 8?

Well again, we are not breaking all of that out.

Overall, as I said, CS2 the Creative business segment was -- we were pleased with what we saw in the hobbyist products, and the decline was less than expected.

Operator, we will take two more questions.

We're running tight on time.

Sasa Zorovic, Oppenheimer.

Could you provide us please with a little bit more detail as to the reason why you're going to be stopping to provide the intra-quarter updates?

Yes.

First of all, we're one of the few that actually provide an intra-quarter update.

The only other large organization I'm aware of I believe is now Texas Instruments.

We have gotten feedback from a number of our shareholders, especially the longer-term shareholders, that having an intraquarter update has provided a degree of volatility that they believe has not really served us well, and we have come to believe the same.

So we are going to come in line with just about everybody else and just do one earnings call every quarter instead of what was becoming two earnings calls a quarter.

Okay.

And then finally going back to one of the things that you have already mentioned namely the impact of currency which was favorable in Europe, negative in Japan.

But to quantify that, I think there was -- I guess I'm reading you correctly was a slight positive impact from currency?

Yes.

So if you look on our fiscal year, we actually lost $35 million in total due to unfavorable currency.

So for our fiscal year, it was tough on us.

Q4 was a little bit better.

We had a net gain of approximately $7 million.

And on the bottom line?

That was a net gain, and that is in the bottom line.

No, well it does -- in terms of revenue and then obviously that falls into either expenses or profits.

Dan Cummins, Banc of America Securities.

Relative to the other question that was asked about Prosumer, are you assuming a roughly 40% or maybe a little bit better take rate from Prosumer on CS3?

I guess that would be consistent with the history of CS1 and CS2.

And then with respect to Q2, Q3 revenue, if we took as much as $50 million, let's say, out of Q2 and put it in Q3, we would still be left flat Q over Q, Q3 into Q4, and I thought Bruce said that Q4 would definitely be -- or is projected to be the highest revenue quarter of the year.

So I'm wondering do we need to take out as much as, let's say, $50 or $75 million of revenue out of Q2 from the consensus?

First, with respect to the first question on the Prosumer, what we have said is that the Creative Suite if you look at the installed base, that a number of the people who have bought the Creative Suite are not what would traditionally be described as creative professionals, but they are prosumers.

In terms of the adoption of Creative Suite in the first few quarters, we would expect that the creative professionals would move over, and we would continue to see people who are prosumers, hobbyists who are interested in digital content continue to buy CS3.

But the major push would be from creative professionals early in the cycle.

In terms of the Q2, Q3, Q4 revenue split, so let me try to provide a little bit more color.

I'm not sure I'm going to help you fully here.

So Q4 is expected to be our strongest revenue quarter of the year.

Q2 will be up significantly because of the launch of the English product.

And keep in mind our English product not only serves the North American market, which represents about 50% of our revenue, but there are other markets in Europe that are -- that use English language products like UK, as well as other regions like Australia.

With that said, because we will have a full quarter of shipment of the English product in Q3 and the French, German and Japanese products will ship early in that quarter and will be available for the majority of the quarter, we do expect a significant increase.

And it is our intent that the March earnings call should provide you specifics on Q2 guidance, which will then help you with (multiple speakers).

The one thing I just want to clarify is that yes, we did have a $7 million gain this quarter on FX, but we also had increases of expenses because our expenses are also penalized because they end up being higher.

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

Thank you.

Once again, ladies and gentlemen, that does conclude today's conference.

You may now disconnect.