Adobe Inc (ADBE) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Adobe first quarter fiscal year 2008 earnings conference call.

As a reminder, 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 Adobe's President and CEO, Shantanu Narayen, as well as Mike Garrett, Executive Vice President, and CFO.

In the call today we will discuss Adobe's first quarter fiscal year 2008 financial results.

By now you should have a copy of our earnings press release which crossed the wire approximately one hour ago.

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

Before we get started, I want to emphasize that some 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, March 18th, 2008, 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 2007.

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

A reconciliation between the two 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 in Acrobat Connect.

It 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 Shantanu.

Thanks, Mike and good afternoon.

I am pleased to announce Adobe's business continues to perform exceptionally well, with Q1 financial results exceeding the targets we provided at the outset of the quarter.

Revenue in the quarter was $890.4 million, which was above the high end of our targeted range, and represents 37% year-over-year growth.

Non-GAAP earnings per share were $0.48, also above the high end of our targeted range.

Driving our results in Q1 was continued strong demand for Creative Suite 3, and LiveCycle and another record quarter for our Acrobat family of products.

Another significant highlight during Q1 was the public launch of Adobe Air, a key element of our technology platform for designers and developers.

Adobe Air is enabling a whole new class of rich Internet applications that many of our customers are already using to deliver engaging experiences that we believe represent the future of the web.

In a few minutes, I will comment on business highlights for the quarter.

But first, I'll turn it over to Mark for a review of our financial results.

Thanks, Shantanu.

For the first quarter of fiscal 2008, Adobe achieved revenue of $890.4 million.

This compares to $649.4 million reported for the first quarter of fiscal 2007, and $911.2 million reported last quarter.

GAAP operating expenses for the first quarter of fiscal 2008 were $532.5 million, compared to $536.8 million last quarter.

Non-GAAP operating expenses were $471.8 million, compared to $480.3 million last quarter.

GAAP operating income in the first quarter of fiscal 2008 was $275.4 million, or 30.9% of revenue.

This compares to GAAP operating income of $146.3 million, or 22.5% of revenue in the first quarter of fiscal 2007, and $275.8 million or 30.3% of revenue last quarter.

Non-GAAP operating income in the first quarter of fiscal 2008 was $359 million, or 40.3% of revenue.

This compares to non-GAAP operating income of $223.8 million, or 34.5% of revenue in the first quarter of fiscal 2007, and $362.2 million or 39.7% of revenue last quarter.

Adobe's effective GAAP tax rate for the quarter was 25.8%, and our non-GAAP tax rate was 26.3%.

GAAP net income for the first quarter of fiscal 2008 was $219.4 million, compared to $143.9 million reported in the first quarter of fiscal 2007, and $222.2 million last quarter.

Non-GAAP net income was $273 million, compared to $183.6 million reported in the first quarter of fiscal 2007, and $289.6 million last quarter.

GAAP diluted earnings per share for the first quarter of fiscal 2008 were $0.38 based on 571.3 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.24 reported in the first quarter of fiscal 2007, based on 604.2 million weighted average shares and GAAP diluted earnings per share of $0.38 reported last quarter, based on 587.9 million weighted average shares.

Non-GAAP diluted earnings per share for the first quarter of fiscal 2008 were $0.48.

This compares with non-GAAP diluted earnings per share of $0.30 in the first quarter of fiscal 2007, and $0.49 reported last quarter.

I will now discuss Adobe's revenue in Q1 by business segment.

As a reminder, we have modified our business segments for fiscal year 2008.

Our 2007 10-K provides information about our new segments and our updated Investor Relations' data sheet provides product classifications and revenue results for prior period comparison purposes.

Both the 10-K and our IR data sheet can be found on the Investor Relations' page of Adobe.com.

The Creative Solutions' segment revenue was $543.5 million, compared to $346.4 million in Q1 of fiscal 2007, and $570.5 million last quarter.

On a year-over-year basis, this represents 57% growth.

Business Productivity Solution's segment revenue was $249.7 million, compared to $217.3 million in Q1 of fiscal 2007, and $246.4 million last quarter.

On a year-over-year basis, this represents 15% growth.

Within business productivity solutions, our Knowledge Worker revenue was a record $195.5 million in Q1 of fiscal 2008, compared to $174.8 million in Q1 of fiscal 2007, and $192.1 million last quarter.

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

The other components of our business productivity segment is our enterprise revenue.

Effective this quarter, ColdFusion revenue is reported as part of our platform business within our other segment.

In Q1, enterprise revenue was $54.2 million, compared to $42.5 million in Q1 of fiscal 2007, and 54.3 million last quarter.

On a year-over-year basis, this represents 28% growth.

Mobile and device segment revenue was $15.2 million, compared to $13.7 million in Q1 of fiscal 2007, and $13.5 million last quarter.

Year-over-year, this represents 11% growth.

Finally, the other segment revenue was $82 million, compared to $72 million in Q1 of fiscal 2007, and $80.8 million last quarter.

Year-over-year, this represents an increase of 14%.

Our IR data sheet now reflects platform and print and publishing as part of the other segment.

Turning to our geographic segments, results on a percent of revenue were as follows.

The Americas, 45%, Europe, 36%, Asia, 19%.

Europe had a strong quarter and Asia performed well, driven by normal seasonality.

The sequential decline in revenue in North America was in the creative business and was consistent with historical Q4 to Q1 trends.

Regular employees at the end of the first quarter totaled 7,037, versus 6,794 at the end of the fourth quarter of fiscal 2007.

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

Our trade DSO in the first quarter of fiscal 2008 was 30 days.

This compares to 43 days in Q1 of fiscal 2007, and 32 days last quarter.

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

In Q1, we repurchased a total of 33.3 million shares for a total cost of $1.25 billion.

Of these shares repurchased in the quarter, 26.6 million shares were against our 50 million share stock repurchase program, and 6.7 million shares were against our ongoing stock repurchase program to offset dilution from employee stock programs.

In total, we have repurchased 44.3 million shares against the 50 million share stock repurchase program as of the end of Q1.

To facilitate the stock repurchases in Q1, we drew down $450 million against our $1 billion credit line.

During the quarter, cash flow from operations was $399.3 million.

Our ending cash and short term investment position was $1.7 billion, compared to approximately $2 billion at the end of last quarter.

This concludes my discussion of our financial results.

I would now like to comment on our financial targets for the second quarter of fiscal 2008.

Like everyone, we are closely monitoring the economic environment in the U.S.

to understand the potential impact to our business.

While we are not immune to an economic downturn in any of our major markets, we are fortunate in that we have a global, diversified business.

Based on Q1 results, and the latest data we have, we are targeting a Q2 revenue range of 855 to $885 million.

In addition, we are targeting a GAAP operating margin of 29 to 30% and a non-GAAP operating margin of approximately 39%.

These second quarter targets are consistent with the comments we provided in December when we shared our 2008 targets.

We are targeting our Q2 share count to be 546 the to 550 million shares.

For GAAP non operating income, which includes an expected investment gain of approximately $9 million, we are targeting 14 to $16 million.

For non-GAAP, non-operating income, we are targeting 5 to 7 million.

For our GAAP and non-GAAP effective tax rate, we are targeting approximately 27%.

This tax rate target does not include a potential one point benefit if there is a reinstatement of the R&D tax credit in 2008.

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 $0.45 to $0.47.

We are reaffirming our annual revenue growth target of approximately 13% in fiscal year 2008.

We are also reaffirming our full year GAAP operating margin target in fiscal year 2008 of approximately 30%, and our non-GAAP operating margin target of approximately 39%.

We are also providing full year earnings per share targets.

On a GAAP basis, we are targeting a range of $1.45 to $1.51, and on a non-GAAP basis, we are targeting a range of $1.86 to $1.92.

Our financial targets are based on the same quarterly assumptions we stated in December.

We expect revenue in Q3 to be approximately the same as revenue in Q2.

New product releases in the second half of the year will offset normal seasonal weakness in Q3, and will also help to make Q4 the highest revenue quarter of the year, which we believe will set us up for a successful fiscal 2009.

As a reminder, all of our targets assume a baseline of current economic conditions in our major markets.

If the economy were to weaken in any of our markets, this could impact our ability to achieve these targets.

This concludes my section.

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

Thanks, Mark.

I'll spend the next few minutes reviewing highlights from our performance in Q1.

Our creative solutions business had another solid quarter of performance, led by strong results in Europe.

Based on total Creative Suite 3 results to date, version over version, we have achieved a 40% increase in revenue, with our CS3 family of products for the comparable CS2 time period.

CS3 penetration into our creative professional customer base continues to mirror the adoption curve we experienced with CS2.

Approximately 68% of the CS3 revenue is suites revenue.

Mac revenue for our CS3 products continues to be solid.

And as expected, the design standard and design professional suites continue to be the leading suites in terms of mix.

We continue to be excited about the long-term market dynamics that drove the CS3 performance and we remain confident our creative products will continue to perform well into the second half of fiscal 2008.

In our video business, we achieved 20% year-over-year growth and continue to view the dynamic media market as a key strategic growth opportunity for Adobe.

Since we announced the new Flash Media Server 3 with revised pricing, and the updated Flash player with HD support, we've seen an acceleration of our Flash streaming business.

The monthly volume of videos streamed and viewed in Flash through our content development partners, increased over 300% between August 2007 and January 2008.

In addition, just last week, Operation MySpace marked the first music concert ever to be broadcast live over the web in high definition.

The concert held for U.S.

troops in Kuwait was broadcast using the Flash media server and Flash player, with an estimated audience of 5 million viewers.

Our professional digital imaging business performed well in Q1.

In fact, the professional digital imaging segment, which includes PhotoShop, PhotoShop Extended, and PhotoShop Lightroom achieved its highest revenue quarter since CS3 shipped.

Our hobbyist product revenue has benefited from customers increasingly purchasing the PhotoShop Elements Premiere Elements Bundle, which has a higher average ASP.

As expected, revenue for these products declined in Q1, when compared to Q4.

In Q1, we achieved 15% year-over-year growth in our business productivity solutions segment, which includes our Knowledge Worker and enterprise businesses.

Our Knowledge Worker business, which includes Acrobat and Acrobat Connect, achieved record revenue and 12% year-over-year growth.

This was driven by solid Acrobat demand throughout the quarter.

In the enterprise business, LiveCycle achieved 28% year-over-year growth.

Enterprise wins during the quarter included the United States Marine Corps, which is utilizing LiveCycle reader extensions to convert their forms to PDF and enable digital signatures.

Iberia Airlines in Spain, which is you utilizing a LiveCycle form solution to develop a maintenance order management system that is integrated with SAP and EMC applications.

And the New York State Insurance Fund, the state's largest workers' compensation and disability benefits carrier, which is implementing an Adobe form solution to support payroll services and improve internal business work flows.

In total, transactions greater than $50,000 in Q1 were 123.

In our mobile business we achieved record OEM shipments in Q1.

In fact, we had our first 100 million unit quarter, over 100 million devices with Flash Lite shipped last quarter.

This is a major milestone and we've already passed a total of 500 million devices shipped cumulatively with Flash Lite since inception.

At the Mobile World Congress in Barcelona, we announced that many major content providers are using Flash Player compatible mobile products and solutions to extend their brands to the hand held market.

They include MTV Networks, the NASDAQ stock market, eBay, Reuters, Dolce and Gabbana, among others.

Yesterday we announced Microsoft has licensed Adobe Flash Lite software to enable web browsing of Flash content within the Internet Explorer mobile browser in future versions of Windows Mobile devices.

As part of the agreement, Microsoft licensed Adobe Reader LE software for viewing Adobe PDF documents, including e-mail attachments and web content.

Both Flash Lite and Reader LE will be made available to OEMs worldwide who license Microsoft Windows Mobile software.

February 25th marked the official launch of Adobe Air, which signals the next wave of rich Internet application innovation.

Companies demonstrating applications built on Adobe Air included AOL, eBay, SalesForce.com, the NASDAQ Stock Market, the New York Times Company, Nickelodeon, MTV, and Sharp Corporation.

Response to Adobe Air from the press has been extremely positive.

MIT Technology Review highlighted Air as one of the ten most exciting world changing technologies of the year in its Emerging Technologies of 2008 issue.

Given the strong start to the year and new product launches in the second half, we are reiterating our target of approximately 13% revenue growth in fiscal 2008.

Adobe's performing exceptionally well against our strategy, and the fundamental market forces driving our long-term outlook are as strong as ever.

As the proliferation of digital content accelerates, customers worldwide are looking to Adobe for solutions that enable the creation of rich, engaging experiences across a variety of media and devices.

This trend will continue to drive our diverse business.

We look forward to seeing you on May 1st at our financial analyst meeting in San Francisco, where we will provide more details about our long-term strategy.

Now I'll turn the call back over to Mike.

Thanks, Shantanu.

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

At Shantanu mentioned, our financial analyst meeting will be held on Thursday, May 1st in downtown San Francisco.

Invitations for the all-day meeting will be sent out later this week.

We have posted several new documents on our Investor Relations' web page today.

They include today's earnings release, and our updated investor data sheet, which includes restated data related to the new business segment classifications for 2008, as well as GAAP to non-GAAP reconciliation information.

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.

Use conference ID number 469-8403.

Again, the phone number is 888-203-1112, with ID number 469-8403.

International callers should dial 719-457-0820.

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

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

Pacific time on Friday, March 21, 2008.

We would now be happy to take your questions.

Operator?

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS).

We'll go first with Steve Ashley with Robert W.

Baird.

Hi.

In the Creative Solutions business, are you able to tell whether there is any difference in the demand between the enterprise customers and maybe the hobbyist customers.

Steve, this is Shantanu.

Overall as it relates to our creative performance, we did have a solid performance.

At this time in the cycle, it tends to be that licensing is one of the drivers of our business.

And whether it's marketing departments within the enterprise or large publishing houses, as they start to test out the Creative Suite, we are seeing adoptions.

No, we're not really seeing a difference in customer adoption across those two segments.

Great.

And respect to the Air client, any kind of qualitative comment on what kind of distribution penetration you would hope to see after a year?

Well, Steve, with respect to Air, it's very, very early in the process.

What's very exciting is even a month after the launch of Air we have about 45 applications.

These are shipping applications that are already available on the Adobe website.

Which reflects, great customer developer adoption.

Clearly getting Air run time out there is one of our key priorities but we have the ability to piggyback off both the reader as well as the Flash distributions and like the penetration that we've got in the past for reader and Flash.

We're confident that we will get the Air run time also out, not just on PCs but also on alternate devices.

Great.

Thanks so much.

We'll go next to Jay Vleeschhouwer, Merrill Lynch.

Thanks, good afternoon.

Shantanu, in the last three or four months, have there been any sort of changes behind the scenes in terms of expense or resource commitments at the company, even perhaps just subtle ones, or subtle changes of focus at all in terms of things like marketing programs, programs out in the field, even any changes with respect to any particular product commitments, products you may want to spend less time developing perhaps, or anything along those lines.

Then a follow-up.

Well, Jay, I think every year as part of our annual process, we clearly have a strategic planning process where we talk about the key priorities of the company.

And the key priorities as related to this year are continued investment in our Creative business, as well as our Acrobat and enterprise business.

But in addition to that, I would say a particular focus on making sure that we are leveraging the opportunity that we have in video and the opportunity in Air and getting our platform out there as well as in the hands of developers.

So from a product perspective, those are the key initiatives.

We also continue to invest in software as a service, which is clearly one of the key trends moving forward and I think what we've always done is look at other products which maybe we're overinvested in and rearrange priorities accordingly.

From a field perspective, we continue to make sure we're focused on providing a great experience for our direct customers.

I think the LiveCycle success is a reflection of what we've done with Mac Thompson and the field organization, and in addition, we tend to focus on the mid-market.

But I think in conjunction with Mark, we're constantly looking at revenue and expenses and making sure that we invest in the long-term while returning to shareholders right throughout.

With respect to the Creative business, is it fair to assume that with CS4, you'll keep the segmentation as it is with 3, that is to say, you won't go any further with respect to configurations, this is about the right number in terms of complexity of product.

And secondly, would this be the right time to change your pricing model for upgrades in particular, the CS3 ASPs of course generally moved higher with the configurations.

Would it now also make sense to have some kind of a stepped or tiered pricing mechanism for upgrades?

Well, of to answer your first question, Jay, I mean, certainly every time we release a new version of the Creative Suite, we do look at the segmentation and try and make sure that we're meeting our customer demands.

Having said that, the overall segmentation that we put in with respect to CS3, which is having a master collection for people who want to standardize on the entire platform the design web and production, has clearly resonated with customers.

So I would imagine if anything there's a little tweaking rather than any significant changes because I think we got it right.

With respect to your second question, again, we look at that with every cycle.

We do believe there's an opportunity for people who are doing version skipping, for example, to have a disincentive for version skipping and to enable people to constantly upgrade with new versions of our products, but it's a little early to be sharing details.

CS3 still continues to deliver great performance.

We're focused on marketing it and getting penetration among our existing customers.

Okay.

Then lastly, at Max by my count you had eight new product and service initiatives like the Media Player, Astro, DoCoMo and others, might want to save this for the analyst meeting, but any quick update on any of those that might convert to revenue to this year or where you think you're furthest along in terms of development?

We talked about Air a fair amount at max and it's good to see Air in the market and customer adoption of it.

The second one that I would highlight is the Media Player.

We're clearly seeing a lot of customer adoption from media companies who want to have their video content work both online and offline.

The bid has been a successful data, I would encourage all of you to download it.

You can see the amount of content that people already providing in Flash over the Internet is increasing quite dramatically.

So we're excited about that.

Revenue from the Media Player is probably not going to be material this year but I think it reflects an adoption of Flash and the Flash platform.

Great.

Thanks, Shantanu.

Next to Philip Rueppel with Wachovia Securities.

Building on that last comment on Flash, you talked about the strategy to make it the de facto standard for video streaming on the web.

How important is it to you to get greater Apple Flash support on its mobile devices?

Well, we really believe that Flash is synonymous with the Internet.

Frankly anybody who wants to browse the web and experience the web in all its glory really needs Flash support.

We are very excited about the announcement from Windows Mobile, adoption of Flash on their devices, and the fact that we've shipped 0.5 billion device, non PC devices, so we're also committed to bringing the Flash experience to the iPhone and we'll work with Apple.

We've evaluated the SDK.

We can now start to develop the Flash player ourselves and we think it benefits our joint customers so we want to work with Apple to bring that capability to the device.

Great.

Thanks.

For you, Mark, could you give us a little update on sort of the strategy behind stock repurchases, given the guidance for Q2?

Does that assume an additional stock repurchase ability and also do you think you'll continue to fund that with debt and sort of now that debt is part of the balance sheet, how do you view that from a strategic perspective?

Sure.

So we continue to believe that returning excess cash to the shareholders in the form of stock repurchases is the right methodology.

We made great progress against the 50 million share authorization.

We only have a little over 5 million shares to go.

The guidance that we gave you for the next quarter in terms of share count factors in what's already been done.

It does not factor in anything over and above what we've already accomplished and we will continue to look at it.

Yes, I did draw down debt off the balance sheet.

I thought given where the stock was, and given where interest rates are, that was the right capital mix and capital structure for us and we'll continue to evaluate that every single quarter.

Great.

Thanks very much.

Go next to Heather Bellini with UBS.

Hi, good afternoon.

I had two quick questions for you.

The first is, you know, I see you were able to hit I think 68% of your sales came from Suites this quarter on the Creative side.

I was wondering, Shantanu if you could give us a sense of where can you see, what's your goal for where that penetration can ultimately get to?

Then I was also wondering if you could just comment a little bit as Silver Light gets ready to go into its second rev of the product, if you could highlight your competitive differentiators.

Heather, first on the CS penetration, we're pleased with 68 penetration of the suites, this being the first release between Adobe and Macromedia.

We're pleased.

But we continue to see adoption of the point products which also represents an opportunity for us to move the point product users, whether they're illustrator, whether they're imaging users, or whether they're premier, et cetera, to the platform.

Within the Suites as well, we have an opportunity to continuously move the Design Suite customers, or the Production Suite customers to the master collection.

So overall, I would say we are pleased.

We certainly think there's room for improvement in getting more people to standardize on the suites but also within the suites to move up as they use more products.

With respect to Silver Light, it's clear that Microsoft also views the same opportunity that we have been spearheading with respect to video on the web.

And among the key differentiators for Adobe is first our offering suite.

It's clear that our offering suite, the video business for Creative grew over 50% CS3 over CS2, so people are adopting our video products in order to output Flash video for the web.

The adoption of the Flash client, we have virtually 98% of all PCs that are connected with Flash.

The new etched high definition Flash Player that we have delivered is also seeing just tremendous adoption.

I talked about Operation MySpace using it.

We have the Flash Media streaming server.

We were able to deliver a great version that allows a lot more streams, and finally, the fact that we're now delivering a media player as well as the ability to have DRM, we're really the only company that provides an end-to-end solution that's cross-platform.

We delivered Flash Lite to all of our mobile partners as well.

So that's one key competitive differentiation.

The other one that I would say is that our media partners have been using Adobe products for decades and creative people who are creating this content are very, very familiar with Adobe products, which also I think enables us to be a differentiator.

But none of those preclude us from continuing to innovate, which is what we're focused on.

Thank you very much.

Next to Gene Munster, Piper Jaffray.

Your line is open.

Please check your mute button.

No response.

We'll move on to Robert Breza, RBC Capital Markets.

Sir, your line is open.

Please go ahead.

Hi.

Can you hear me now?

Yes, sir.

Great.

Thank you.

Shantanu, was wondering if you could talk a little bit about the growth in Europe.

Surprisingly strong.

Obviously the foreign currency probably helped a little bit but is there anything beyond from us looking at the outside and seeing the foreign currency and the falling dollar, anything else you'd point to that's really driving that really strong growth there?

Well, I'll let Mark reflect on the currency.

I think it's clear that a number of the emerging markets as well as the overall European market continue to be a large market opportunity for us.

So we are seeing quite a bit of traction of our products in eastern Europe as those countries enter the European union and given that the release of Creative was a quarter behind typically in those other foreign markets, it tends to continue to be strong through the cycle.

So those are the two things that I would point to, which reflect our European strength.

And then on the currency benefit from a year-over-year perspective, we got a $25 million favorable uplift from the Euro and a $7 million favorable uplift from the yen.

From a year-over-year perspective.

That's helpful.

Maybe as a follow-up, Shantanu, do you see more newer customers in those emerging areas really gravitating more towards the web, or is it kind of more product cycle from your perspective?

No, I clearly think we are attracting new customers to the Adobe products and platform.

There's no question that as the number of media companies or the number of publishers are increasing, the Adobe products in many cases are the gold standard for what those publishers use.

I think the other thing that's clearly happening in some of those markets, both in Asia and in Europe, is frankly, as the value of intellectual property is increasing, we're clearly finding that the piracy rate is also reduced somewhat in those countries.

Great.

Thank you.

Nice quarter.

Go next to Brent Thill with Citi.

Thanks.

If you could just characterize your visibility in the second half of this year.

There's growing concern that this environment maybe gets worse before it gets better and just in terms of your ability to preserve your margins, if we do see a broader slowdown that hits?

Hey, Brent.

Sure, this is Mark.

The beauty of Adobe is we get real time data from the channel virtually -- well, every single week.

And it allows us to react to any changes to that sell-through data on a real time basis.

So we do have the ability to react quickly to any significant changes in any region in the world by virtue of this data that we get weekly.

Okay, Mark.

So you feel that your ability to preserve the margins, even if we saw something coming, you'd be able to act quick enough on the expense side.

We can act quickly on the expense side.

Obviously, Brent, to the extent that it was big, it's much tougher to react to offset any full amount of revenue.

But we believe that we can manage the expenses very prudently, given any changes in regional economics.

And Brent I think -- this is Shantanu.

I think we have reflected over the many years how -- we know how to balance between investing for the long-term, as well as dealing with any short-term hiccups that might happen.

As Mark said, we get all this data both on our revenue and expenses perspective, but frankly in many cases, these are the times when the strong companies like Adobe actually get stronger and given the opportunities that we see, we want to continue to invest in Research and Development because we know we'll come out stronger as a result of that.

The other thing to keep in mind, Brent, is in the second half of the year, we have the product launches that we talked about so that gives us more confidence in the second half.

You laid the foundation for the next question.

You alluded to these new launches.

Certainly I know you're not going to say specifics, but should we count that they'll cut across all categories or more of a narrow focus?

Well, as you know, Brent, I think last year when we talked about our product launches way early, we think that that actually both gave our competitors information as well as potentially impacted sales.

What we've also said is you can look at our IR data sheet, which shows some of the historical releases and based on that, I think you can see across both the business productivity, business unit, as well as the creative business unit, you can expect to see products coming out.

And we're really excited about the new products that are on tap for the second half of the year.

Thanks.

Go next to John Jars, Boston Company.

My question's been asked and answered.

Thank you.

Thank you.

Yun Kim, Pacific Growth Equity.

Thank you.

Saw that your mobile business jumped up sequentially, which as you mentioned was largely driven by the increasing in the handset OEM business.

Can you give us any update on how Flash Cast business is doing and where do you expect that business tracking this year and also what is your plan for your headcount growth in the mobile group this year?

Well, we don't break out headcount growth by each of the business units, so that one is not some information that we'll share.

I think with respect to the mobile business, we continue as I said to be excited about the adoption, and I think this year and next year will continue to be how we make sure that our client platform is available on our devices.

The revenue that we get right now is primarily the royalty business.

We get some revenue for Flash cast from the DoCoMo relationship that we've talked about and we also talked about the fact that later this year we expect to see Verizon launch their Flash cast services with us.

Remember, for mobile, the revenue model continues to be not just the royalty but Flash Cast.

But in addition to that, the fact is that people are using our authoring tools to create content for mobile.

So we still are pretty excited about the opportunity for us in that space.

And then also quickly, with some of your recent efforts into the online advertising like dynamic placements of advertisements in online PDF documents and similar announcements coming up for your video products, can we expect some ad serving technology to be some of your areas you may be looking into in '08?

Well, as you mentioned, there are at least two initiatives that we talked about, PDF based ads that we are having Yahoo!

provide the ads as well as the Adobe Media Player where any of the media companies can actually provide their own ads that represent forays for us into the advertising environment.

The other big opportunity for us continues to be to make sure that Flash for rich media advertising is the format of choice.

When you look at rich ads right now, and the CPMs of that rich media will increase, we want to make sure that the ability to author those ads as well as place those ads continues to be the best format available.

So that's really our initiatives as it relates to advertising right now.

Okay.

Thank you very much.

Next to Walter Pritchard, Cowen & Co.

I actually just had one question.

Mark, I'm wondering if you could -- I think you guys talked about over a year ago that the master collection might end up being the number three selling bundle and you did say that Design Standard and Design Premium were the top two.

I'm wondering if master collection had reached the top three in terms of popular bundles?

Walter, this is Shantanu.

I mean, as it relates, the top two selling continue to be the Design Standard and the Design Premium.

Then there are a bunch of other collections that are pretty close.

And that's how I would describe what we are seeing today for the various products.

Long-term clearly we continue to believe that getting people adopting the master collection represents upside opportunity for us.

Could you remind us where that 68% that suite's right now, where was that a year ago.

Not a year ago but the last cycle at this point?

It has been going up cycle over cycle at the financial analyst meeting we had talked about approximately 60%.

So I think we are seeing it move up.

Great.

Thank you very much.

We'll go back to Gene Munster, Piper Jaffray.

Good afternoon.

Shantanu, if you could talk -- I know the kind of macro question's been asked before, but what your expectations are for kind of the macro environment over the next six months, is it stable?

Are you expecting a little bit of a decline?

Improvement?

Just some generic thoughts on that front.

Well, Gene, we're clearly monitoring the economic environment in the U.S., like every other company does.

And I think we have always said that while we're not immune, we're fortunate in that we do have a global as well as a diversified business.

From an assumption perspective, we're assuming that basically the economy stays in the current situation.

So it's stable.

We've said if there's a significant change, then we will reassess the impact.

But at this point, we're assuming the economy stays the same.

Excellent.

And then just a question on Acrobat, the next Acrobat cycle, should we just assume kind of a typical trajectory after the launch of the upgrade or is Acrobat getting to a point where we shouldn't expect those as dramatic spikes earlier on in the cycle?

Well, first, again, I'll reiterate, we just had a record quarter for that part of the business.

So the business continues to be very healthy.

The upgrade business tends to come in a little bit in the first quarter, but you're right, I mean, we tend not to see a huge spike.

Again, that business is primarily new unit business.

We are adopting and getting new customers to that platform.

So when the next version of Acrobat comes out, yes, we would expect to see a slight uplift but not huge.

Great.

Thank you.

Next to Sasa Zorovic with Goldman Sachs.

Thank you.

My first question would be you mentioned what the currency impact was on a year-over-year basis, 25 million versus 7 million Euro and yen.

Could you provide us with the information you have on a quarter versus quarter basis?

Yes, Sasa, in terms of this quarter relative to Q4, it's about an $11 million favorable impact, 8 from the Euro, 3 from the yen, and that has been factored into our guidance.

It was factored into our guidance based on what we knew at the end of last year and we factored in that into our guidance going into Q2 as well.

So specifically did you factor going into Q2.

Based on where rates are today.

So specifically they would kind of stay where they are?

Correct.

Okay.

Now, my second question would be regarding the linearity in the quarter.

Have you noticed anything sort of changes from where the quarter started to where it ended or pretty much in line how the February quarter tends to usually be?

Pretty much the way quarters tend to be.

Great.

Thank you very much.

Go next to Ross MacMillan with Jefferies & Company.

Yes, thanks.

Most of mine have been answered.

One for Mark.

Do you have a backlog number?

I think you've given that out historically.

I do.

The ending backlog is approximately 5% of revenue, keep in mind, it's not indicative of future performance and it is factored into our guidance.

Great.

Thank you.

(OPERATOR INSTRUCTIONS).

We'll go next to Walter Pritchard, Cowen and Company.

Actually, he just asked the question I was going to ask so I'm set.

Operator, we'll take one more question then.

Looks like our last question will be from Sasa Zorovic.

Exactly.

So my question would be a follow-up regarding -- sort of as we look into the next version of sort of the products that are going to be coming out in the second half as you mentioned, so specifically if we were to look at the next version of Acrobat and CS4, could you indicate to us sort of in what direction could we see sort of -- what sort of -- can't comment specifically on the features.

In the past it was integration with Macromedia products or focus on video.

What should we focus on in those next products, in generalities if you could provide us with a direction.

Given we haven't talked about which products, I'm not sure how I can give you insight into the features that are available for the new products.

The reality is there is no shortage of ideas that we have.

We are innovating as well as this company has ever innovated.

When you look at some of our major products as it relates to the Creative business, we clearly have the ability to continue to innovate, both in terms of point features as well as in terms of work flow.

The reality is when we put together Adobe and Macromedia, we only had had a year to do that integration.

So the quality and quantity of ideas for the next version of those products greatly outpaced that of the previous version.

When we think about Acrobat and business productivity, we look at what we can do with collaboration and there are tremendous ideas available there.

For LiveCycle there's the opportunity to continue to provide great work flow.

With mobile, as I said, support for devices.

On video there's the ability to go high definition, provide digital rights management.

Finally, with Air, the ability to really deliver a brand-new environment that I think can define how experiences happen on the web which is what we're incredibly excited about.

And so given this is the last question, I mean, what I'd like to say is we are really pleased with our Q1 performance.

It's clear we have a global presence and we have a very diverse business.

We were pleased that we affirmed our growth targets for the year and provided strong targets moving forward.

We're excited about our product launches in the second half and the fact that we're really attracting new customers to the Adobe products and platform and the fundamental trends and strategy that we talked about continue to help us move forward.

And we're excited about meeting a number of you at our financial analyst meeting so I look forward to that.

With that, that concludes our call today.

Thanks for joining us.