Adobe Inc (ADBE) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Adobe Systems third quarter fiscal year 2007 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; Shantanu Narayen, President and COO; and Mark Garrett, Executive Vice President and CFO.

In the call today, we'll discuss Adobe's third quarter fiscal year 2007 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, you can go to www.adobe.com under the Company and press "Links" to find it.

Before we get started, I want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans is based on information as of today, September 17, 2007, 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 the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe's SEC filings, including our Annual Report on Form 10-K for fiscal year 2006 and our quarterly reports on Form 10-Q in fiscal year 2007.

During this call, we will discuss GAAP and non-GAAP (inaudible) are available in our earnings release and on our Investor Relations 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 maybe available in Acrobat Connect on Adobe's Investor Relations website for approximately 45 days, and it 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 like to now turn the call over to Bruce.

Thanks, Mike.

I'm pleased to report that Adobe achieved outstanding growth in our third quarter of fiscal 2007.

Revenue was a record $851.7 million, which far exceeded the high end of our target range and represents 41% growth over the same quarter a year ago.

Non-GAAP diluted earnings per share were $0.45, which also exceeded the high end of our target range.

The record results were led by outstanding Creative Suite 3 adoption and continued momentum with Acrobat.

We also drove strong revenue growth in each of our new business initiatives including Enterprise, Mobile and Video.

In a few minutes, Shantanu will provide additional business highlights for the quarter, but first I'll turn it over to Mark for review of our financial results.

Mark?

Thanks, Bruce.

For the third quarter of fiscal 2007, Adobe achieved record revenue of $851.7 million.

This compares to $602.2 million reported for the third quarter of fiscal 2006 and $745.6 million reported last quarter.

GAAP operating expenses for the third quarter of fiscal 2007 were $504 million compared to $474 million last quarter.

Non-GAAP operating expenses were $448.4 million compared to $417 million last quarter.

GAAP operating income in the third quarter of fiscal 2007 was $255 million, or 29.9% of revenue.

This compares to GAAP operating income of $110 million, or 18.3% of revenue in the third quarter of fiscal 2006, and $180.4 million, or 24.2% of revenue last quarter.

Non-GAAP operating income in the third quarter of fiscal 2007 was $340.9 million, or 40% of revenue.

This compares to non-GAAP operating income of $207.2 million, or 34.4% of revenue in the third quarter of fiscal 2006, and $282.1 million, or 37.8% of revenue last quarter.

Adobe's effective tax rate for the quarter was 25.9%.

GAAP net income for the third quarter of fiscal 2007 was $205.2 million compared to $94.4 million reported in the third quarter of fiscal 2006 and $152.5 million last quarter.

Non-GAAP net income was $269.4 million compared to $171.5 million reported in the third quarter of fiscal 2006 and $223.2 million last quarter.

GAAP diluted earnings per share for the third quarter of fiscal 2007 were $0.34 based on 597.3 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.16 reported in the third quarter of fiscal 2006 based on 600.9 million weighted average shares, and GAAP diluted earnings per share of $0.25 reported last quarter based on 603.4 million weighted average shares.

Non-GAAP diluted earnings per share for the third quarter of fiscal 2007 were $0.45.

This compares with non-GAAP diluted earnings per share of $0.29 in the third quarter of fiscal 2006, and $0.37 reported last quarter.

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

Creative Solutions segment revenue was a record $545.5 million compared to $331.6 million in Q3 of fiscal 2006, and $436.6 million last quarter.

On a year-over-year basis this represents 65% growth.

Knowledge Worker segment revenue was $176.8 million compared to $150.6 million in Q3 of fiscal 2006 and $184.8 million last quarter.

On a year-over-year basis this represents 17% growth.

Enterprise and Developer segment revenue was a record $59.3 million compared to $49.4 million in Q3 of fiscal 2006, and $52.3 million last quarter.

On a year-over-year basis this represents 20% growth.

Mobile and Device segment revenue was $13 million compared to $9.1 million in Q3 of fiscal 2006 and $12.3 million last quarter.

On a year-over-year basis this represents 43% growth.

Finally, our Other segment revenue was $57.1 million compared to $61.5 million in Q3 of fiscal 2006 and $59.6 million last quarter.

On a year-over-year basis this represents a decline of 7%.

We experienced record revenue in all of our major geographic markets.

Geographic results on a percent of revenue basis were as follows: The Americas 47%, Europe 33%, Asia 20%.

Regular employees at end of the third quarter totaled 6,677 versus 6,427 at the end of the second quarter of fiscal 2007.

The majority of the head count increase from last quarter was in Research and Development.

Our trade DSO in the third quarter of fiscal 2007 was 28 days.

This compares to 43 days in Q3 fiscal 2006 and 39 days last quarter.

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

Deferred revenue declined sequentially in Q3 as we expected based on the shipment of Creative Suite 3 upgrades to customers entitled to receive them.

During the quarter, cash flow from operations was $425.2 million.

We repurchased 17.6 million shares at a cost of $703.5 million as part of our share repurchase program.

Our ending cash and short-term investment position was $2 billion which compares to $2.3 billion at end of last quarter.

This concludes my discussion of our financial results.

I would now like to provide targets for our fourth quarter of fiscal 2007.

With good momentum exiting Q3, our targets in Q4 are based on the assumption that we expect all of our businesses to grow revenue sequentially from Q3 to Q4.

We are targeting a revenue range of approximately $860 million to $890 million.

In addition, we are targeting a GAAP operating margin of approximately 30% to 31%, and a non-GAAP operating margin of approximately 41%.

We are targeting our share count to be approximately 588 million to 590 million shares.

For Other income, we are targeting approximately $16 million to $19 million.

For our GAAP effective tax rate we are targeting approximately 25% to 26%, and a non-GAAP effective tax rate of approximately 26% to 27%.

These targets lead to a GAAP earnings per share range of $0.35 to $0.37 per share, and a non-GAAP earnings per share range of $0.46 to $0.48.

This concludes my section.

I'd now like to turn the call over to Shantanu.

Thanks, Mark.

I'll spend the next few minutes reviewing highlights from our performance in Q3 starting first with the Creative Solutions business.

Overall, version over version through the end of the quarter we have achieved a 36% increase in revenue with our CS3 family of products for the comparable CS2 time period.

We remain excited about the long-term market dynamics that drove this performance and continue to expect CS3 to have a long tail.

In Q3 we had the following CS3 results.

Within the Suite offerings Design Premium achieved the highest revenue followed by Design Standard, Master Collection, Web Premium, Production Premium and Web Standard.

We continue to see strong demand for Macintosh versions of CS3 which support the new Intel architecture.

Photoshop, including Photoshop Extended, posted strong year-over-year growth with approximately 20% of revenue coming from the new Extended version.

Our Digital Video business had a strong launch quarter posting record revenue with over 70% year-over-year growth.

More than 30% of that revenue came from Macintosh versions reflecting high demand for our video solutions across Windows and Mac platforms.

We continue to be excited about our dynamic media opportunity.

Our strategy is to provide the leading complete end-to-end solution from content creation tools to service solutions which provide for delivery of rich video content online to ubiquitous playback across platforms and non-PC devices.

In August, we announced the latest version of Adobe Flash Player which includes H.264 standard video support.

This month we started previewing Flash Media Server 3, our next generation streaming media server which delivers video to PCs and mobile handsets.

We have also started to see strong early adoption of Adobe Media Player by key companies involved in the creation, management and delivery of online and offline content for the entertainment industry.

Turning to our Knowledge Worker Solutions business, we posted 17% year-over-year growth led by strong Acrobat performance with large wins that included customers such as [Siemens], Rockwell Collins and [Walbo.] Acrobat Professional revenue continues to outpace Acrobat Standard accounting for more than half of the overall Acrobat revenue reflecting demand for advanced collaboration and security capabilities.

In the emerging web conferencing space the U.S.

Department of Defense announced plans to adopt Acrobat Connect to enable deployed troops, support personnel and military leaders to collaborate more efficiently across locations worldwide.

We continue to build momentum in our Enterprise and Developer Solutions business in Q3 posting record revenue up 20% year-over-year.

Following on the launch of Adobe LiveCycle Enterprise Suite in June we announced new document generation solutions.

With these new capabilities, LifeCycle ES integrates document generation with electronic forms, process management and document security to build business processes that extend from the initial request to the final archived document.

Q3 customer wins included the Georgia Department of Transportation, which is using the LifeCycle solution to replace their manual paper-based processes for outing documents between different state, local and federal agencies.

Hang Seng Bank in Hong Kong is using Adobe's policy server and document security server to convert their paper-based statements to E statements available to customers securely via the web.

And the Financial Services Authority, the U.K.

financial industry's regulator, is using LifeCycle forms, rights management and reader extensions to file reports.

In total the number of Enterprise transactions in the quarter with licensing revenue greater than $50,000 for our server products was 104.

In our Mobile business, we had another solid quarter with strong sequential and year-over-year growth that was in-line with our expectations.

Flash Lite adoption continues to be strong across a variety of handsets and consumer electronic devices.

In our Platform business, we continue to drive awareness among developers with a beta version of Adobe Integrated Runtime or Adobe AIR.

We are pleased to see a large number of applications already being developed, including ones from mainstream companies like eBay and Salesforce.com, as well as applications from start-ups like Scribe, Bounce and Virtual Ubiquity.

This concludes my comments.

I will now turn the call back over to Bruce.

Thanks, Shantanu.

Clearly Q3 was a great quarter for us.

The explosion of digital information continues and customers around the world are looking to Adobe to help them create rich, engaging content across a variety of media and devices in a constantly connected world.

As Adobe celebrates its 25th year and we are poised to break the $3 billion revenue mark, we are more confident than ever about our prospects for future growth.

We are performing exceptionally well against our strategy and our position to achieve double-digit growth well into the future.

We look forward to sharing more success with you in the coming months.

Mike?

Thanks, Bruce.

Before we start Q&A, a couple of logistical items.

As we announced previously, Adobe MAX 2007, our annual developer and designer event is coming up soon.

It will be held in Chicago, Monday, October 1 through Wednesday, October 3.

Information about MAX can be found online at www.adobeMAX2007.com.

For analysts and investors from the financial community, we have made available special pricing to attend the event on Monday, October 1 and Tuesday, October 2.

On Monday, October 1, we hill host a Q&A session with Adobe management to discuss news for MAX.

For further details on this offer and on MAX, please contact Adobe Investor Relations or visit the MAX website.

As always, we have posted several documents on the IR page of adobe.com 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 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.

Use conference ID number 6464837.

Again, the phone number is 888-203-1112 with ID number 6464837.

International callers should dial 719-457-0820.

The phone playback service will be available beginning at 4:00 p.m.

Pacific time today and ending at 4:00 p.m.

Pacific time on Thursday, September 20, 2007.

We will now be happy to take your questions.

Operator?

And our question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) And we'll take our first question today from Jay Vleeschhouwer with Merrill Lynch.

Thanks, good afternoon.

Bruce, a broad question about the business, particularly since you're suggesting sustained double-digit growth.

What would you view now with the Company being more diversified as the best macro indicators external to the Company for sustaining that growth as you see it, versus the indicators that you may have relied upon in the past?

Secondly, a question about Acrobat before we ask about CS.

I assume that a good percentage of Acrobat new unit placements are occurring, in effect, through the various CS configurations that have Pro, but in the Knowledge Worker business itself what has to happen for there to be better overall momentum than we've seen year-to-date?

What, for instance, or when would you expect that the various direct selling initiatives that you have underway might begin to have a more material impact?

Jay, let me take the first question.

The three things that impact our business, one is overall marketing spend.

It's a tough number to get to because how companies and institutions are marketing and promoting their products and services is becoming more diverse than ever before.

At one point in time we could look at advertising spend.

That's no longer the case.

You have to factor in things like online advertising, billboard advertising and other types of marketing communications.

The other thing we look at is over all IT spend with products like Acrobat and LifeCycle, corporations and government agencies are looking to be more efficient than ever before, and they will increase their IT spend in order to do that.

And then the third thing we look at and continue to look at is consumer spending at the higher end.

So we'll pay much more attention to luxury good items, sales at the likes of Tiffany's and Nordstrom's versus sales of retailers like a Wal-Mart.

Besides that we continue to look at the number of new websites that are being created, the richness of those websites, the amount of video on those websites because that all means good things for Adobe.

On the second question, Jay, as it relates to Acrobat, clearly, as we look at the CS3 results, the customer adoption of suites is being seen and that's being driven by Acrobat being a key component of that.

But despite that we were really pleased with the Acrobat performance this quarter.

Our direct sales and licensing efforts did contribute to that and we are seeing a number of larger enterprises adopt Acrobat and that will continue to be our strategy, which is both with the direct sales force getting enterprises to standardize on Acrobat, but in addition to that in the mid-market continuing to make sure that small and medium businesses recognize the value proposition of Acrobat and adopt it as a platform as a key part of our go-to-market initiative.

Finally, on CS is it fair to assume that Design Standard and Premium today, or together, are the vast majority of total CS sales, and do you have any reason to believe that there would be a material shift in the mix of the different configurations you've seen thus far?

Well, I'd like to caution people on the call that with CS3 it's still early.

We're certainly very pleased with the results.

In particular, Master Collection also did well this quarter, but it was there for just part of the quarter.

And so I think as we unveil CS3 for another quarter we'll have better results, but as anticipated Design Premium is the best selling suite.

So it's clear that our segmentation is working with the customers.

The suites are still the majority of the revenue as opposed to the independent stand-alone products.

With that said, when we look at the revenue from the independent stand-alone products, it's holding up nicely which gives us cause for optimism as we move into later in the CS3 cycle and into CS4 and beyond.

It gives us an opportunity to convert those customers to suite customers.

Thank you.

For our next question today, we'll go to Adam Holt with JPMorgan.

Good afternoon, and congratulations.

If I could just ask a follow-up on Master Collection.

It was only in part of the quarter and you suggested, obviously, that it was the third largest product, if I heard you right, in the quarter.

Where are you seeing the initial demand for that product?

If you could maybe go through both geographies, as well as what kinds of customers are really migrating towards Master?

Well, the whole strategy around Master Collection was to make sure that creative professionals who wish to create content for print, web, video and wireless that they had a single integrated platform with best of breed products that allowed them to not only use their skills for current print or web content, but in addition to that to branch out to video as well as mobile.

The early adoption that we're seeing for the Creative Suite is primarily with a lot of individual creative professionals and they have been adopting the Master Collection because they see great value in the product and the fact that they can branch out their skills.

We are starting to see larger customers, also both identify needs for the entire Creative Suite, but we think that will continue to happen over the new few quarters, which is why we think there will be a long tail.

I think in the short run it is individual creative professionals.

We certainly expect enterprises to adopt that over the next few quarters.

Overall, we did see particular strength in Europe.

We were surprised, quite frankly, with how quickly the Europeans are adopting our solution.

As many of you know, Q3 is typically a tough quarter for Adobe from a seasonal perspective and most of that weakness we typically find in Europe.

It was surprising that all these people rushed back from their European holidays and from the beaches to go out and buy the Creative Suites.

And if I could just follow up, last quarter you made the comment that you were entering Q3 with pretty good backlog given the early strength in the product.

Obviously, this quarter was even stronger for CS.

Could you talk a little bit about the kind of visibility you've got for Q4?

And then if I could just finish on the Acrobat business what was licensing in terms of a percentage of aggregate revenue?

Thanks.

This is Mark.

So we do have backlog going into next quarter.

Like I said in my script, we do have some good momentum going into next quarter and that's factored into our guidance.

And on the licensing and Acrobat, Adam, we used to give out that number primarily to reflect the fact that Acrobat was being adopted by larger enterprises and to reflect it.

It continues to be the strength in the Acrobat business so, we continue to see quite a significant amount of revenue coming from licensing.

In fact, if you look at our overall business, the bulk of our revenue today or the majority of our revenue today across all of our businesses is not shrink wrapped.

So for those of you who rely a lot on MPD data which tends to be U.S.-based only, that number is becoming less and less relevant, and I really caution you on trying to draw too many conclusions based on that data alone.

Terrific.

Thank you.

We'll go now to Philip Rueppel with Wachovia Securities.

Great.

Thanks very much, and good afternoon.

A couple questions.

First, you mentioned the Mac a couple times and its strength.

Do you sense that that's really sort of a catch up of pent-up demand given the product was not tuned for the Intel-based Macs, or are we going through a time where the Macs as a percentage of your overall CS business is starting to creep up?

Clearly, with CS3 when we supported the new Mac Intel architecture the performance gains that the creative professionals get is tremendous.

The Mac platform is a really important platform for us for the creator marketplace, and while we are seeing growth in both the Mac and Windows, and I want to make sure people understand it's not just on the Macintosh side that we're seeing strength in the CS3 business, the fact is that as the Mac becomes a vibrant platform all the creative professionals who wish to be there are adopting CS3.

The other thing we outlined was the fact our video products we came back to the Mac this time with our non-linearity product, Premier Pro, as well as the entire production premium and that's off to a strong start.

Finally, I would say in the education segment the Mac tends to be an important platform, and, again, that's where we are seeing strength.

Okay, great, and then sort of turning to the Acrobat business, I know that financial services and government are two key verticals, both of which there's been concern about spending in the near-term and going forward.

Did you see any of that impact at all this past quarter and has it impacted your pipeline as you head into Q4?

Not thus far.

We had a strong quarter in both Acrobat as well as in the LifeCycle business in both those verticals.

Great.

Thank you very much.

Our next question today will come from Robert Breza with RBC Capital Markets.

Good afternoon.

Bruce, maybe just a high level question for you as we look at the break-outs in the mix by geography.

It looks like Europe was, obviously, very strong driven by the new language releases, and the Americas came in a little bit below where I thought they would, maybe as a mix percentage.

Can you just comment what are you seeing geography in the U.S., specifically, and in Europe, you've already commented, I guess?

Yes.

As Mark said in his prepared remarks, the performance in each of the major geographies was great.

Europe overshadowed the rest of the geographies, so the over performance of Europe makes the Americas percentage seem smaller, but we were pleased across all of the major geographies.

Maybe just as a follow-up as you look at the number of transactions greater than $50,000, clearly, strong from a year-over-year perspective.

What's really driving that from your perspective?

Is it the change in licensing or just better demand?

How do you kind of nail that down?

Well, in terms of the transactions greater than $50,000, a lot of that is driven by both our direct sales force as well as our partners, and it reflects adoption of LifeCycle ES, frankly, within Enterprises, as well as we are delivering our Connect set of web conferencing and E-learning products, as well as a Flash Media Server for video.

So all of those I included in that.

We had a strong quarter as you point out both from our direct, but in addition to that, we had a strong quarter with our partnership with SAP and so we're pleased to see the revenue that we're also getting from SAP and our LifeCycle business.

And keep in mind that data point only includes deals of $50,000 or greater for our server-based products.

It does not include large deals from our Creative customers or Creative desktop product CS3, or from Acrobat.

It only includes our server-based products.

That's great.

Nice quarter.

Thank you.

We'll go now to Walter Pritchard with Cowen.

Thanks.

Maybe, Shantanu, I'm wondering if you could talk -- you said several times you expect a long tail in the cycle.

I'm wondering if you could give us maybe a few pieces of evidence as you look at your business today and what you're seeing that it convinces you that it's a long tail, and then I'd like to ask a follow-up on the Mobile business.

Well, I think, the market dynamics are playing out, Walter, the way we had outlined, namely the fact that this is the first Adobe macro media release.

We have supported the Mac transition.

As you also know, this was a long cycle between CS2 and CS3 and the new use cases that we've been talking about, which is video and mobile, what we are particularly pleased with is that the customer response to CS3 and that the reviews have been really outstanding and the feedback is we've done a really great job both on the point products as well as delivered a comprehensive integrated solution.

So we've seen it being strong out of the gate, but we know as we work with enterprises who will take a little while to evaluate the product, and as we do our own customer research with our customers who have not yet moved, every indication is that it will continue to be like CS2 which is -- have the initial bump with a number of upgrades, but then it will settle in at a higher base and continue to have a long tail.

Great.

Then just on the Mobile business, I note that since November of '06 the business has been, you know, $12 million, $13 million, $14 million in revenue a quarter, and you've had great traction in terms of announcements of different partners and so forth, and I'm just wondering going forward how we should expect to see those announcements turn into a ramp of business?

Is it the case that it will continue to be sort of flattish year as that ramps and then start to accelerate, or do you expect it to be more gradual and sustained than that?

Before we answer your second question, Walter, I want to make sure that I have a chance to pass my observations on why we believe the long tail of CS3 will exist, and why we believe that the run rate and the revenue will consistently be above that of CS2 throughout the cycle.

Great.

The over achievement in Q3 which was greater than the street anticipated and greater, quite frankly, than we anticipated by a large margin for us is validation that the market dynamics of people, corporations, marketing firms, government institutions and anybody who needs to communicate needs to do so in a rich, engaging way across multiple platforms and we think that is the reason why we grew this business 41% year-over-year, why we believe based on the current guidance we'll grow on an annual basis 21% to 22% year-over-year.

It's why our Knowledge Worker business unit, we believe, grew 17% year-over-year.

It's why our Enterprise business grew 20% year-over-year.

People need reliable, engaging information that works across platform and Adobe is a vendor that they turn to.

On the Mobile business, specifically, again, let me just quickly outline the three ways in which we make revenue on the Mobile business.

The first is royalty, where people who wish to use their mobile handsets to either browse the web or create compelling user experiences are licensing Flash Lite.

So the royalty business, that's the majority of our revenue today, and with the attention that's being paid on those handsets to need web browsing we continue to think that that will be the majority of the business.

Clearly, we also get revenue that's related to the Mobile business, but is reflected in the offering and this is where people are using our offering tools to create content for these mobile devices.

The third aspect, which we've said is more speculative and nascent, is the Services business and that's where in conjunction with partners like DoCoMo in Japan and with Verizon in the U.S.

we will be introducing services.

So as we look to 2008, we expect the revenue to continue to be primarily the royalty-based revenue with the services being delivered to the customers, but being a small percentage of the revenue.

Great.

Thanks a lot.

Our next question comes from Ross MacMillan with Jefferies.

Thank you, and congratulations.

Just on the Enterprise business first, do you attribute the kind of breakout there above the historic trend as simply the LifeCycle release, or is there something else going on in there that could be helping that growth?

Thanks.

Well, on the LifeCycle business it really isn't like our traditional desktop business where the release of a new product leads to an inflection.

I think it's been the effort that we've been putting over the last few years both in terms of getting the product right, getting more customer references, getting the partners and the entire ecosystem and the field organization trying to be able to go out and sell those solutions.

So it's something that we've been working on for many years and we've always said we continue to expect to see sequential growth, but don't expect a sudden inflection point.

So we're pleased with the results.

I think it's clear that our value proposition is resonating with customers, but I attribute it less to the release of LifeCycle ES than the work that we've actually done over the past few years.

And just maybe a follow-up, a general follow-up.

Now that Server Lite's out there formally, what's your sense as to the kind of market reaction to that, particularly, with your own Flash community, just curious to kind of get your first take on that?

Sure.

I think with respect to video we have been talking for a while now about how we think video is just a far more compelling way of communicating and we've been working hard.

The reality is that Flash has the ubiquity across both platforms and devices, and we have all the offering tools that people are using to create it.

We continue to be paranoid with what Microsoft does, but, frankly, as we look at what's happening out there and the solutions that people are using it's really using the video we have within Flash that continues to be the key standard in that marketplace.

We haven't rested on our laurels.

We've done H.264 support so that we can have high definition and use the Flash Player from everything from a mobile handset all the way to our living room and we continue to work with large media companies to make sure that they adopt our end-to-end solution from our [offering] to our Flash Media Server to the Player.

And we're also excited about the new Media Player that we announced which allows both media companies as well as people providing long tail video content to be able to monetize their video and use it in an offline mechanism.

So we think we're ahead and we're continuing to innovate.

The data is very revealing.

More than 98.5% of people with computers have a Flash Player on it.

Within the first year of release, about 90% of the people upgrade their Flash Player.

That's more than any other desktop software, period.

More than 70% of the video that is streamed on the web is currently streamed and played through the Flash Player.

And it's even more telling that Microsoft itself is probably one of the biggest Flash streaming customers in the world.

Even their own MSN site has a significant amount of Flash and Flash Video on it demonstrating that Server Lite is not yet there.

Our next question?

We'll move on to Brent Thill at Citi.

Thanks, Bruce, just back to your comment that CS exceeded your expectations by a pretty wide margin.

What would you point to as the one or two things that really exceeded your view internally?

It was Europe.

We did well throughout all of the regions as well as expected, but Europe was the big surprise.

You know, most people in Europe are on vacation, are business people in the July, August time frame.

We usually get about a week or two weeks of sell-through.

The last couple weeks in August, just the amount of revenue that we saw come through was just greater than we had anticipated.

People are finding a need to go out and buy the entire suites and our percentage of suites over stand-alone products continues to be significant.

So we invested a lot.

We're getting more usage per customer than we had anticipated.

I think one of the things we also are pleased with is the fact that we were able to talk about the suites early on.

We did public betas.

In retrospect, we did a better job of priming the market and getting them aware of all the solutions and messaging it, so we think that's helped, as well.

What's great is, as Shantanu alluded to earlier, is that many, or the majority of our corporate customers, we believe, haven't yet upgraded or moved over to CS3 and that represents a nice opportunity going forward.

Brent, this is Mark.

So to give you a little bit more color on that, in Q4, we do expect that all the business units would be up sequentially with a slight increase in Creative and a more modest increase in Knowledge Worker, Enterprise, and Mobile.

And we would expect that the CS3 revenue would peak in the fourth quarter due to the gradual slowdown on upgrades, and that with the long tail the CS3 similar to CS2, we believe that CS3 revenue would continue to be above CS2 levels throughout its cycle.

Mark, just a quick follow-up.

You've consistently talked about high 30% op margins, and I think this is the first time you're going to go above 40% in operating margins into Q4 and your target range of 41%.

So just how we think about the business, I know you're not giving guidance but certainly should we continue to anticipate that high 30% target as the going target?

Sure.

So as you know, Brent, in the beginning of the year our guidance was 37% to 38% operating margin for the year.

We'll likely end the year close to 39% when you look at what we've done so far plus our guidance for the fourth quarter, and I'd anticipate margins to stay at those levels.

We continue to believe there's an incredible opportunity for the business and we want to take advantage of those opportunities by continuing to invest back in things like R&D.

We really want to grow our earnings through revenue growth, not through savings.

Thank you.

Our next question today comes from Brad Manuilow with American Technology.

Thanks for taking my question.

So there was about a 24-month time lag between Creative Suite 2 and Creative Suite 3 product launches which is a bit longer compared to what we've seen with some of your other product cycles.

Just wondering going forward how we should look at the time gap between Acrobat and Creative Suite product cycles?

Well, with Creative Suite 3 we're so early in the process right now, Brad, I think the team is still excited about the initial reception.

So we're clearly not going to be making announcements about the next release.

I think as it relates to Acrobat you can look at historical releases to get a sense of when you might expect the next version of Acrobat, but again we're not making any product announcements right now.

Even with Acrobat, we were really pleased with how much growth we were able to get in a product that's been in market for three quarters.

Okay.

And just as a follow-up, how much do you guys have left on your share buyback authorizations?

Hi, this is Mark.

So with the 17 million shares that we bought in the quarter, 4 million of those were related to the existing program that we had in place to offset dilution, and roughly 13 million were related to the new program I announced last quarter to buy back 20 million shares.

So shares delivered so far against the 20 million share program are about 13 million.

Great.

Thanks.

Our next question will go to Heather Bellini with UBS.

Hi, great, thank you.

I was just wondering -- most of my questions have been answered, but in particular I was wondering if you've seen an uptick in this cycle versus the CS2 cycle of the amount of volume or the number of units being sold through adobe.com website here in the U.S., which would make the NPD data even less relevant?

Heather, I think Bruce has already told you about the caution that we apply to people making conclusions, drawing conclusions.

Yes, I heard that part.

I was just wondering have you seen a bigger uptick, though, with Adobe.com sales?

Certainly, I think as it relates to online commerce, we continue to see online commerce increase and Adobe.com is a fairly material part of our shrink wrap sales in the U.S., so yes, we continue to see that go up.

And when Shantanu says shrink wrap, that includes people who are actually downloading the entire CS3 electronically, which is more significant that we had imagined it would be given the size of the combined applications.

Okay.

Great.

Then just a follow-up would be looking out to next quarter it seems as if Asia Pac has been the one region which really hasn't seen the big pop like the U.S.

and Europe has.

I was just wondering if, given the timing of the release, is that something we should expect to see in terms of an uptick in adoption in the November quarter?

Heather, no.

It's Mark.

I mean we do anticipate each region to go up next quarter, but I would not anticipate anything overly significant in Asia.

And keep in mind that Asia for Adobe is heavily driven by the Japanese performance because the rest of Asia we have to deal with a lot of piracy issues.

And the strongest quarters typically in Japan are Q1, Q2, not Q3, Q4.

So if anything, what you'll see is a sequential growth in Asia as we move into Q1 and Q2 to take advantage of the end of fiscal year for both government and businesses in that region.

Okay.

Great.

Thank you very much, and congratulations.

Thank you.

We'll go now to Gene Munster with Piper Jaffray.

Congratulations.

Bruce, I'm just kind of fast forwarding to tomorrow to kind of the notes that are going to be written and it's going to be the home run, giving you credit for the home run quarter you had, and as has been asked a few times here the talk about is this it?

And you've very clearly addressed why you feel that this is not it.

Is there -- you mentioned that CS3 is tracking 36% above CS2.

Is there anything we can look at in terms of percentage of installed base that typically upgrades that might help us better get comfort with the concept that there's going to be a long tail on CS3?

There's a lot left in the tank.

Yes.

So no specific data.

However, I think, a) you want to ask yourself why did we over achieve in Q3, and you heard our conclusion is that it's a validation of the market dynamics that existed in the marketplace.

The other is you want to ask yourself about, or at least we certainly look at in terms of larger customers how long it typically takes for them to both evaluate and make the necessary changes to upgrade their infrastructure, and clearly that's not a one quarter phenomenon.

That's something that happens over multiple quarters.

Okay.

Great.

The rest of my questions have been answered.

Our next question comes from Peter Kuper with Morgan Stanley.

Great.

Thanks.

Real quickly, guys, we talked about CS3 to CS2.

Has there been any indication that CS1 will see an upgrade of people catching up to spend there?

Well, the way we have our products configured, Peter, we know what the upgrade revenue is and whether people upgrade from CS1 or CS2 it reflects as the same upgrade.

Certainly, in the past we have seen generation skippers and we believe that CS3 is a good must have release.

But we're not going to be sharing any data, specifically, on the number of upgrades between CS3 from CS2 and CS1, but there is CS1 customers out there who are certainly part of the customer base we're targeting.

Okay.

And then very quickly, Shantanu, or whomever, on the Mobile, while it's still a small part, do you still feel comfortable that the royalty model is the right way to go, or could that be a future Acrobat kind of model where you give away Flash Lite to help really dominate the mobile market, or is it just too soon to tell?

Do you feel you're going to dominate anyway even with a proprietary-based model right now?

Well, we think as long as browsing the Web on those handsets continues to be a key way in which people use those handsets, the usage of Flash Lite on those devices is critical.

We're not going to make any decision that jeopardizes our long-term prospects in Mobile for short-term royalty revenue, but in the royalty business we actually have to do a fair amount of work with both the handset manufacturers and the carriers to make sure that Flash Lite is optimized.

We have delivered more value recently along with Flash Video which allows them to monetize it in different ways.

And so while that's a balance we are confident that our ability to monetize it will continue in 2008 and that's the right strategy and we're not jeopardizing any long-term revenue prospects.

We've been charging royalties in the Japanese market for many years now and we are on 100% of the mobile handset devices.

We suspect, given the need, we will get to that kind of market share position over time in the rest of the world.

Last quick follow-up, has there been any indication you've seen, given your place in that mobile hierarchy, or the iPhone is kind of putting pressure on other carriers to up the ante for the user-rich environment which could definitely help you guys, give you further penetration, let's say beyond Asia Pac?

The iPhone was a blessing for Adobe.

It's a great handset, a great device.

The majority of the reviews, including the most recent one in the Wall Street Journal, clearly indicates that not having the Adobe Flash Player on that device is a deficiency.

Those handset manufacturers that are looking to replicate the success of the iPhone and enhance the success of the iPhone are certainly reading those reviews and that makes us -- leads us to believe you'll find the Flash Player on more and more devices in the future.

Great.

Thanks very much.

For our next question we'll go to Trip Chowdhry with Global Equities Research.

Thank you, and, again, very good execution.

Two quick questions.

First is regarding the MSR fee on Creative Suite 3.

Europe has about over 70% more of price points versus the U.S.

Where do you see Asia Pac being, and then I have a follow-up question?

Well, I think, Trip, as it relates to our pricing we do extensive research and, it depends on a country-by-country basis, and we are certainly incur costs in each of those countries in the local currency, and so it's hard to answer a question like that in absolute terms.

But I will say that we do a lot of research and make sure that we have the appropriate pricing by country.

And, clearly, where the dollar is weaker is where our product is more expensive.

Perfect.

Follow-up question is on the various tools business that I was thinking, like if you see historically tools companies haven't done too well, Borderline, Bend River being just a few examples where you have to create more tools, sell them to certain developers or the other way around, find new developers for the same set of tools.

I think the question I have is what's next?

You are doing some server products.

You did open sort something in flex which is having a lot of traction, but how should an investor think through the tools business and maybe evolving into a server business, some open sorts?

How should we think about what is sustainable other than product cycle story?

Thank you, and again, congratulations on very good execution.

Thank you.

So first of all, the opportunities for Adobe are numerous.

If you think about in addition to our ability to add value to our Creative Suites and, in effect, being able to get more money where appropriate for that additional value, but at the same time we continue to diversify our product portfolio to reach new customers.

If you look at what we have done with Photoshop Extended to reach those who are in medical imaging or dental imagery or engineering for their imaging requirements.

If you look at what we've done with Acrobat 3D to address the manufacturing market.

If you look at what we've done over the last couple years in the Enterprise with LifeCycle we now have a business that's approaching $200 million, $250 million a year.

If you look at the energy and efforts in mobile data services, in mobile licensing, major initiative.

If you look at what we're doing in the consumer markets with products like Premiere Express and Photoshop Express, major opportunity.

If you look at how we're trying to leverage our position with Acrobat in realtime collaboration and E learning and training with Acrobat Connect, major opportunity.

If you look at what we're doing to address the complete workflow of video with not only our tools but our Flash media streaming server, the Adobe Media Player, the ability to offer up analytics and advertising knowledge to our customers, big opportunity.

The list goes on and on and on.

If you look at Adobe, we are not a product cycle business.

Yes, when we have a major release of our product, our upgrades go up, but as our revenue goes up, but as you saw with CS2 our revenue kept going up even at the last quarter of that release.

Perfect.

Thank you.

Operator, we'll take two more questions, please.

Okay.

Our next question then comes from Sasa Zorovic with Goldman Sachs.

Thank you.

My question would be sort of if you kind of compare the outstanding results that Creative Suite 3 has had here, you compare that to Acrobat and we're looking sort of in having just had a quarter with a lot stronger year-over-year growth that we've had for quite a few quarters, but still the question kind of begs itself right here, why aren't we seeing more growth with Acrobat?

So what would get the growth sort of further up so to come anywhere closer to where the Creative Suite 3 is?

How different are the dynamics there to make that growth rate somewhat slower in comparison?

To be clear, Sasa, we are very pleased with 17% year-over-year revenue growth in our Knowledge Worker business unit.

That is a sizable business for Adobe, $600 million, $700 million dollars a year that if we're able to sustain that kind of growth we will continue to be very pleased.

As we've indicated in previous calls, we believe that there are about 95 million or so Knowledge Workers that could take advantage of the capabilities of Acrobat.

We shipped, at least what we said back in March, we have shipped about 25 million new units which means that the market opportunity for Acrobat continues to be significant.

We'll continue to add capabilities to address new verticals as we did with architectural engineering and construction industries, as we're doing in the legal industry, and we'll take advantage of our ability to incorporate realtime collaboration as part of the Acrobat experience.

So the fact that we have a business and the creative business that happened to grow 65% year-over-year is great news.

The fact that we have other businesses that are growing 17%, 20%, et cetera, is also great news.

I don't see that as a problem.

I see that as a very pleasing result.

Okay.

And my second question would be regarding the currency contribution in the quarter, if you could provide the detail, please?

Yes.

Sasa, this is Mark.

From a year-over-year basis, the benefit to revenue from currency was approximately $11 million.

That's $14 million favorable from the euro and $3 million unfavorable from the yen on a year-over-year basis.

However, keep in mind that if you look at at the time that we provided guidance there has been zero impact as it relates to currency changes to our business.

So when we provided guidance of $760 million to $800 million the currency that we forecasted at that time is exactly where it was today, or was during the remainder of the quarter.

So there was no impact on currency on that $851.7 million over achievement.

Right.

Great.

Thank you very much.

And our last question of the day comes from Steve Ashley with Robert W.

Baird.

Hi.

Thanks for taking my question.

Have you guys looked at the average transaction size within the Creative Solutions business for CS3 versus the past collections like CS2?

We do.

It's something we don't typically disclose other than at our annual meeting.

Okay.

And then maybe we could get an update on Acrobat Connect and what kind of demand you're seeing for that product?

Steve, this is Shantanu.

We're pleased with what we are seeing with the Connect product.

You know, I think branding it Connect and integrating it with Acrobat was clearly the right strategy.

I think one of the things I should probably clarify for everybody on the call is the real focus for Acrobat Connect is really in the E learning segment.

There's a very broad Web conferencing segment and there's an E learning segment that's part of that which allows for corporate training especially in sales departments, marketing, R&D groups around the world.

That's where we've been focused and we are seeing significant wins and year-over-year growth in the Connect business.

Great.

Thanks, and congratulations on the strong results.

Thank you, Steve.

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

Once again, ladies and gentlemen, this does conclude our conference.

We appreciate your participation.

You may disconnect at this time.