Adobe Inc (ADBE) 2008 Q2 法說會逐字稿

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

As a reminder, today's conference is being recorded.

At this time for opening remarks, I would like to turn your conference to 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 Mark Garrett, Executive Vice President and CFO.

On the call today we will discuss Adobe's second 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 Company and Press Links, to find an electronic copy.

Before we get started I want to emphasize that some of the information discussed in this call, particularly our revenue and operating mile targets and our forward-looking product plans, is based on information as of today, June 16th, 2008, and contains forward-looking statements that involve risks and uncertainties.

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

For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe's SEC filings.

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

A reconciliation between the two are available at 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 Pro, and is also being recorded for playback purposes.

An archive of the call will be made available at Acrobat Connect Pro 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 the turn the call over to Shantanu.

Thanks Mike, and good afternoon.

I am pleased to announce that Adobe's business continues to perform well, with Q2 results exceeding the financial targets we provided at the outset of the quarter.

Revenue in the quarter was $886.9 million above the high end of our targeted range, and representing 19% year-over-year growth.

Non-GAAP earnings per share were $0.50, also above the high end of our targeted range.

It is clear that the product mix and geographic diversity of our business continue to drive our successful results.

In the second quarter, we had strong performance across all segments of our business, creative enterprise, knowledge worker, mobile, and platform.

In fact, we achieved record revenue in our Acrobat LiveCycle, mobile, and platform businesses.

In a few minutes I will comment on business highlights for the quarter, but first I will turn it over to Mark for a review of our financial results.

Thanks, Shantanu.

For the second quarter of fiscal 2008 Adobe achieved revenue of $886.9 million.

This compares to $745.6 million reported for the second quarter of fiscal 2007, and 890.4 million reported last quarter.

GAAP operating expenses for the second quarter of fiscal 2008 were $543.8 million, compared to $532.5 million last quarter.

Non-GAAP operating expenses were $479.5 million, compared to $471.8 million last quarter.

GAAP operating income in the second quarter of fiscal 2008 was $260.2 million, or 29.3% of revenue.

This compares to GAAP operating income of $180.4 million, or 24.2% of revenue in the second quarter of fiscal 2007, and $275.4 million, or 30.9% of revenue last quarter.

Non-GAAP operating income in the second quarter of fiscal 2008 was $349.6 million, or 39.4% of revenue.

This compares to non-GAAP operating income of $282.1 million, or 37.8% of revenue in the second quarter of fiscal 2007, and $359 million, or 40.3% of revenue last quarter.

Adobe's effective GAAP tax rate for the quarter was 22.7%, and our non-GAAP tax rate was 23.8%.

The lower than forecasted Q2 tax rates are primarily due to stronger forecasted international profits for fiscal 2008, and lower foreign taxes on those forecasted profits.

GAAP net income for the second quarter of fiscal 2008 was $214.9 million, compared to $152.5 million reported in the second quarter of fiscal 2007, and $219.4 million last quarter.

Non-GAAP net income was $272.7 million, compared to $223.2 million reported in the second quarter of fiscal 2007, and $273 million last quarter.

GAAP diluted earnings per share for the second quarter of fiscal 2008 were $0.40, based on 542.4 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.25 reported in the second quarter of fiscal 2007, based on 603.4 million weighted average shares, and GAAP diluted earnings per share of $0.38 reported last quarter, based on 571.3 million weighted average shares.

Non-GAAP diluted earnings per share for the second quarter of fiscal 2008 were $0.50.

This compares with non-GAAP diluted earnings per share of $0.37 in the second quarter of fiscal 2007, and $0.48 reported last quarter.

I will now discuss Adobe's revenue in Q2 by business segment.

Creative Solutions segment revenue was $527.2 million, compared to $436.6 million in Q2 of fiscal 2007, and $543.5 million last quarter.

On a year-over-year basis, this represents 21% growth.

Business productivity solutions segment revenue was $252.8 million, compared to $228.8 million Q2 of fiscal 2007, and $249.7 million last quarter.

On a year-over-year basis, this represents 10% growth.

Within Business Productivity Solutions, our knowledge worker revenue was a record $198.4 million in Q2 of fiscal 2008, compared to $184.8 million in Q2 of fiscal 2007, and $195.5 million last quarter.

On a year-over-year basis, this represents 7% growth.

The other component of our Business Productivity segment is our Enterprise business.

In Q2, Enterprise revenue was a record $54.4 million, compared to $44 million in Q2 of fiscal 2007, and $54.2 million last quarter.

On a year-over-year basis, this represents 24% growth.

Mobile and Device segment revenue was $22.2 million, compared to 12.3 million in Q2 fiscal 2007, and $15.2 million last quarter.

Year-over-year this represents 80% growth.

Finally, Other segment revenue was $84.7 million, compared to 67.9 million in Q2 of fiscal 2007, and $82 million last quarter.

Year-over-year, this represents an increase of 25%.

Turning to our geographic segments, results on a approximate percent of revenue basis was as follows, the Americas 43%, Europe 33%, Asia 24%.

In the Americas, revenue was flat year-over-year.

In Europe, our business remains solid, and we achieved record revenue in Japan.

Employees at the end of the second quarter totaled 7,317, versus 7,037 at the end of the first quarter.

Our trade DSO in the second quarter of fiscal 2008 was 33 days.

This compares to 39 days in Q2 of fiscal 2007, and 30 days last quarter.

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

During the quarter, cash flow from operations was $331.8 million.

Our ending cash and short-term investment position was $1.9 billion, compared to approximately 1.7 billion at the end of last quarter.

In Q2, we have repurchased a total of 15.1 million shares for a total cost of $543 million.

Of these shares repurchased in the quarter, 5.2 million shares were against our 50 million share stock repurchase program, and 9.9 million shares were against our on-going stock repurchase program to offset dilution from employee stock programs.

In total, we have repurchased 49.5 million shares, against the 50 million share stock repurchase program as of the end of Q2.

This concludes my discussion of our financial results.

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

We are targeting a Q3 revenue range of 855 to $885 million.

In addition, we are targeting a GAAP operating margin of approximately 29%, and a non-GAAP operating margin of approximately 38.5%.

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

We are targeting our Q3 share count to be 544 to 548 million shares.

For non-operating income we are targeting approximately $4 million on both a GAAP and non-GAAP basis.

For our GAAP effective tax rate, we are targeting approximately 25%, and for our non-GAAP effective tax rate, we are targeting approximately 26%.

These targets lead to a GAAP earnings per share range of $0.34 to $0.36 per share, and a non-GAAP earnings per share range of $0.45 to $0.47.

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

Thanks, Mark.

I will spend the next few minutes reviewing highlights from our performance in Q2.

Our Creative Solutions had another solid quarter of performance, CS3 penetration into our creative professional customer base, continues to meter the adoption curve we experienced with CS2, with the majority of revenue continuing to be suite space.

At our Analyst Meeting on May 1st we highlighted how well CS3 has performed, yet showed there remains a significant opportunity to move users from point products to suites, and from older versions of Creative Suite to CS3.

In the second half of the year as we prepare for the next major release of the Creative Suite family of products, we will continue to drive customer upgrades to CS3.

To that end, we are releasing an update to CS3 in Q3, which includes the new Acrobat 9 product.

We believe this will provide a boost to Creative Suite adoption before the next release ships.

Looking forward to our next release of the Creative Suite product family, we delivered new public betas of Dreamweaver, Fireworks, and Soundbooth in Q2.

Reaction to these new updates has been positive.

PC Magazine stated "if all the apps are as impressive as the Dreamweaver beta, then Adobe is working it's way to one of it's best releases in many years."

We have identified our dynamic media business as a key area of growth for Adobe.

In Q2, we achieved 79% year-over-year growth with our digital and web video products, and continue to see strong growth in our Flash Media streaming business.

In March we announced the availability of Adobe Flash Media rights management server, a new scalable content protection solution, targeted at broadcast and media company that use Adobe Flash technology.

At the NAB Conference, we launched Adobe Media Player.

Based on Adobe AIR, our cross platform media player provides new ways for viewers to discover and interact with their favorite contact, while offering revenue and brand building opportunities for content publishers.

Adobe Media Player continues to gain momentum in the industry, with new content appearing regularly, from scripts to Food Network, to Comedy Central's The Daily Show with Jon Stewart, and the Colbert Report, and new CBS shows like Million Dollar Password and Flash Point.

During Q2, we also announced the Adobe Photo Shop Express public beta, a free imaging-rich internet application, Photo Shop Express is another milestone in our move into hosted services, and extends the reach of our brand and our imaging technology to millions of new users.

Walt Mossberg, of The Wall Street Journal, said Photo Shop Express offers "the nicest set of web-based editing tools I have seen.

They are sophisticated for a consumer application, yet easy to use."

In our Scene7 business, we achieved our fourth consecutive quarter of sequential revenue growth since the acquisition last year, and continue to believe this hosted services opportunity, represents significant growth potential for Adobe in the coming years.

Our Business Productivity solutions segment had a solid quarter, in our knowledge work of business we once again achieved record quarterly revenue.

This was driven by solid Adobe demand, leading up to the official launch of Acrobat 9 and Acrobat.com.

Acrobat 9 is a major upgrade that transforms the process of creating and sharing electronic documents.

It delivers native support for Adobe Flash, the ability to unify a wide range of content in PDF portfolios, and access to realtime capabilities for full navigating of a PDF document with ease.

We also introduced Acrobat.com, a set of hosted services that includes file sharing and storage, PDF conversion, an innovative on-line word processor called Buzzword, and easy to use web conferencing capabilities based on Acrobat Connect.

Acrobat.com targets individuals and professionals in small and medium size businesses, and departments within larger organizations, who need tools to work together.

Acrobat.com is a complimentary service for Acrobat 9 users, giving them access to a personal workspace in the clouds, that can be accessed from virtually anywhere online.

In Q2, we also released a new version of Acrobat Connect Pro, our comprehensive web conferencing and E-learning solution.

The new version includes functionality that enriches online communication and collaboration, enabling organizations and schools to offer more engaging rapid training, interactive virtual classes, and dynamic online meetings.

In our Enterprise business, LiveCycle achieved record revenue with 24% year-over-year growth.

Customer wins in the Government sector during the quarter included the Australian Government Information Management Office, which has standardized on Adobe's forms technology for it's citizen information and transactional services.

The Ohio Department of Jobs and Family Services, which is using Adobe LiveCycle to enable applicants to apply for state services and update their records online, and the Belgium Social Security Department, which is utilizing LiveCycle to create a long term digital archive of records in PDF-A, for people who have disabilities.

In the commercial sector, wins in is second quarter includes Orange France Telecom, France's largest telecommunications service provider, which is using LiveCycle to automate it's processes for setting up mobile contracts at it's distribution centers, and Allied Irish Banks, which is using an Adobe Forms solution, to improve it's customer correspondence processes, and address global treasury requirements.

In total, transactions greater than $50,000 in Q2 were 131, up from 123 last quarter.

In our Mobile business, we achieved record revenue based on strong Flash Lite OEM shipments, and a large transaction with a gaming console manufacturer.

On May 1st, we announced the Open Screen Project, an initiative with strong industry participation, dedicated to driving rich internet experiences across televisions, personal computers, and mobile and consumer electronics devices.

At the recent BREW conference, Adobe and Qualcomm announced the BREW mobile platform will integrate Adobe technology.

This greatly expands the capabilities for BREW developers, and enables them to create rich applications and web content, using Adobe Flash and new platform features.

In our Platform business, we achieved record revenue for our FlexBuilder product, which is used to build rich internet applications using Adobe Flash and Adobe AIR.

Highlights in the quarter also included the pre-releases of Adobe Flash Player Version 10, and Adobe AIR for LINUX.

Flash Player 10 includes new expressive features for interactive designers and developers, to build richer and more immersive web experiences.

Adobe AIR for LINUX allows developers to extend the use of their desktop applications from Windows and Mac to the LINUX platform.

All of these Q2 accomplishments reinforce the fact that we continue to execute well against our strategy, and that global demand for Adobe solutions is strong.

Our performance in the first half of the year was driven by the combination of solid execution, product mix, geographic diversity, and market trends that continue to provide a tailwind.

These factors combined with major product releases, position us well for a strong second half of fiscal 2008, and accelerated growth into fiscal 2009.

Thank you for joining us today.

Now I will turn the call back over to Mike.

Thanks Shantanu.

We have posted several new documents on our Investor Relations webpage today.

They include today's earnings release, and our updated investor data sheet.

To access these documents and other investor-related information, 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 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 2627245.

Again the phone number is 888-203-1112, with ID number 2627245.

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 Friday, June 20th, 2008.

We will now be happy to take your questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS).

We will pause a moment to assemble our queue.

We will go first to Jay Vleeschhouwer with Merrill Lynch.

Thanks.

Good afternoon.

Shantanu, we have seen I think good evidence of the long tail effect, both Creative Suite and especially now for Acrobat.

The question is to what extent do you think the long tail effect is managed or manageable, versus the fortuitous outcome in market conditions say over the last few quarters?

Secondly, over the last number of quarters, Adobe views the term services substantially from your history before.

Can you talk about the kind of investments you are making in creating the infrastructure you have in place, to have services based business, such as Photo Shop Express, and Connect, and other new businesses you have talked about?

Sure.

There were two questions.

The first was about the fact that both the Creative business and the Acrobat business have continued to perform many quarters after the release.

I think it is a reflection frankly of what we have been saying, namely the available market opportunity for those products are fairly large.

In the case of Acrobat, for example, we continue to see adoption against the over 100 million that we have outlined as the available market opportunity for Acrobat, and as we have said, we have only sold 30 million to date.

The second thing we are seeing is more adoption of Acrobat within enterprises that is being driven by our field organization.

Those two factors are certainly contributing to the long tail in Acrobat, and we have announced Acrobat 9, and said that we had record revenue in the previous quarter, which we think is a really good accomplishment.

On the creative side as well, as we talk about the available market available for us, and the number of creative people who are trying to create content for print, Web, video, and wireless, we continue to think that is a large opportunity.

So like with all other product cycles, you see the early adopters move to it quickly, you see larger enterprises take a little bit more time, in terms of how they move, maybe one section of a magazine, before moving the entire industry over.

So we are pleased with the CS performance, especially as we also come up on a new version that includes Acrobat 9, and as you see we have also announced a new beta, which have been very positively received.

So to net it out I would say it is a combination of what we have been doing in the field organization, as well as frankly the large available demand for both of those sets of products.

On the services side, as you say, we are investing more in services, we have Scene7 that has been a successful business for us.

We have seen a fourth sequential quarter of increase in revenue, and Connect Pro on the web conferencing side.

In the grand scheme of things, it is not a material investment, it is fairly small.

It is all factored into the margins that we give, but we also believe that our ability to deliver those services, both standalone and as a compliment to our desktop applications, makes it more attractive to a broader set of customers, which is important for us.

One last question, I think it is fairly clear that with the next release of CS you will likely introduce the version skipping pricing that we talked about at the Analyst Meeting.

So does your outlook for the fourth quarter, or your comments with respect to an accelerated growth encompass any specific expectation for the incremental effects of version skipping for upgrades, and for that matter are you also considering any other new pricing models, perhaps based around time based or user--based pricing?

Well, first I want to reiterate that we continue to be excited about CS3, we continue to think that CS3 is performing well.

We have not yet announced the next version of the Creative Suite product.

As you point out, we have said that one of the available opportunities for us, is the fact that we do not have tiered pricing for people who are not on the current version, and we think it is important to provide an incentive for people to stay on the current version.

That is something we are definitely exploring for the next version of the Creative Suite.

It is in the whole area of continuing to tune the business, so that we deliver great value to our customers, but we optimize the revenue.

So on that one, you will have to stay tuned for our launch announcements.

Next question, operator.

We will take your next question from Heather Bellini with UBS.

Hi.

Thank you, guys.

Shantanu, I was just wondering if you could give us an idea, you had given us an update at the Analyst Day, the percentage of revenue cycle to date coming from Suites versus a la carte, I was wondering is there is an update to that stat, and also as you look ahead to CS4, and your ability to migrate people to Suites even moreso than you have, where do you think that number could get to, and then my follow-up question is, what was the foreign exchange impact in the quarter on the revenue line?

Thank you.

So, Heather I will take the first two.

The reason we did not update all of the suites that we gave at the Analyst Meeting, was that they were substantially the same.

Whether it was the CS3 versus CS2 uplift that we have seen in revenue to date, the percentage of revenue that was Suites based, CS3 versus CS2, the adoption curve that we have seen, they are all substantially the same, which is why we didn't give an update to any of those numbers.

Okay.

We are clearly very excited about CS4.

When you think about CS4 and everything that we have done, relative to the performance features, the workflow features, and what I believe are some incredible features that are going into the individual point products, we are super excited.

So in terms of getting people to A) adopt CS4, and then widely adopt CS4, to continue to make sure that they adopt the higher value of Suite features is clearly part of our strategy.

Video represents a huge opportunity, and at the Analyst Meeting, we had talked about the fact that with CS3 we didn't have a full cycle, in order to deliver the kind of value that we can.

So when the next version of Creative Suite comes out, since it will be a full cycle, we expect to see significant innovation, which we think will lead to good adoption.

Is Design Premium still the most popular suite, out of the suite offerings?

When you look at the suite offerings, the Standard Premium, Web Collection, Web Premium, and Master Collection are still the top four.

Web Premium and Master Collection are still, can you just repeat those again?

The Design Standard, Design Premium.

Yes.

I got them now.

Okay.

Then just the FX impact in the quarter, on the sale.

This is Mark.

It is Mark.

For Q2, the year-over-year net benefit to revenue was approximately $44 million, most of which would have been factored into our guidance when we provided it.

Great.

Thank you.

We will go next to Tom Ernst with Deutsche Bank.

Good afternoon.

Thanks for taking my question.

So the version 3.3, I believe shipped at the end of June for English, French, and the end of August for Spanish, if I have heard right.

Two questions on version 3.3.

First do you expect it to be a significant revenue driver here in this quarter, and then looking forward, would upgraders to the 3.3 on any of the versions, receive some sort of upgrade protection to any future versions with the Creative Suite?

On the first question as it related to the Acrobat shipments, we certainly expect the major languages to ship this quarter, which are English, French, German, and Japanese.

The suites that contain those will probably be updated.

With respect to the price protection, which I think was your second question, what we do is when we announce a new product, until we ship the new product we provide price protection, and then in terms of moving from that particular product to the next generation, that is what the upgrade pricing is for frankly.

That is how we distinguish between price protection, which is primarily after we announce a product until the time we ship, versus upgrade pricing, which is movement from a prior version to a new version.

Okay.

That is what I thought.

Just too be clear then, if you buy Version 3.3 you don't have a free upgrade rider or any sort of price protection for the next version you have

That is correct.

You are in the same boat as anybody else who bought Version 3 off the Creative Suite, when you consider the next version of the Creative Suite.

Okay.

Then just to follow-up on the first part of my question again.

Any idea how significant this might be for you here in this Q3, and then next quarter?

The 3.3 upgrades?

Let me talk about that, as it relates to a little bit of color on the quarter for both Q2 and Q3.

First I would say the year is playing out exactly as we had outlined all the way back to December.

We had a good quarter.

We obviously exceeded our targets, and we are really pleased with our performance, especially given the North American economy, and we are fortunate that we have a really diversify model from a product, geographic, and channel perspective.

North America was relatively flat year-over-year, but we expect with the Acrobat 9 launch and the CS3 dot release and the education market, that we could grow North America sequentially, and Europe sequentially in the third quarter.

Then we would expect Asia in the third quarter to decline sequentially, based on the seasonality that we had this quarter.

So we do expect a bit of an uplift from the dot release next quarter.

Okay.

Thank you again.

Next to Brent Thill with Citi.

Mark, just on North America, in Q2 you mentioned it was flat.

Was there anything that was unusual that stuck out?

It looks like Europe and Asia were high 30s.

No, really nothing unusual.

It was flat.

So obviously that was a little less than we would prefer, but given the diversity of our model, having a strong international presence, Europe did well, Asia did exceptionally well.

And again, with the dot release and Acrobat 9, we expect North America to increase next quarter.

Okay.

Shantanu, I know you are not giving to give timing on CS next, but just from the way you think about it internally, are you thinking about a fixed timetable, or still on a floating date, based on the feedback from the beta?

No, we are pretty much on a fixed timetable.

We have a pretty good sense.

The public betas are frankly past the private betas, where we have a very select group of customers giving us feedback.

We have done this for many releases right now, and have a pretty good sense.

The feedback from the early betas has been really positive.

So with respect to the strength of the product cycle we feel comfortable.

It is now just a matter of making sure that we get the products ready to go.

Thanks.

We will go next to Philip Rueppel with Wachovia Securities.

Yes.

Thanks.

An Acrobat 9, can you give us an early perspective on what you have been hearing from the channel and beta customers, and any change to your commentary both in the Analyst Meeting and last quarter, about just sort of a normal cycle slight uplift, or do you think we could see something better than that?

First from the customers, in terms of the feedback, I think they really view this as one of the transformational releases frankly of Acrobat, and in particular, the positive feedback that we have been receiving is all about the interactivity that is now possible in PDF, by virtue of the fact that we have this native support of Adobe Flash.

This new PDF portfolio feature that we have introduced, has also been receiving quite a bit of positive feedback, and the collaborative light, in terms of helping people really collaborate in a nice way.

In addition to that, the fact we have now have both Acrobat working in conjunction with Acrobat.com, where you can have storage of files, and do more collaboration from a Lite perspective, has also been receiving some great feedback.

So at this point in the cycle, before we release the product frankly, it is the beta feedback that I pay more attention to the channel.

We will make sure that we have enough product in the channel, and manage the inventory.

But it is really the early customer feedback which is very positive, that we pay attention to this at point.

Great.

Thanks.

On the mobile, you saw some nice strength there.

Is that something that is likely to continue, or was that game console manufacture more of a one-time shot, and you expect it to go back to it's traditional levels?

It is exactly the latter.

So there was a large transaction in the second quarter that is not likely repeatable, and we would expect mobile to sequentially decline next quarter.

Great.

Thanks very much.

What I will say is that even though we announced the Open Screen Project, it is really nice to see that the adoption of Flash Lite on devices continues, it is accelerating very much in-line with the strategic intent that we had outlined at the Analyst Meeting.

We will go next to Robert Breza, RBC Capital.

Hi.

Mark, as a follow up quick to Phil's call, as you look at the other segments, outside of mobile, any qualitative guidance you could provide would be helpful, and Shantanu, I was wondering if you could give us an update on the downloads for AIR, and what you are watching there as well?

Thank you.

Sure.

So in addition to the geographic color that I provided like I just said, we would expect a sequential decline in mobile.

We would expect a slight decline next quarter in Creative, which is more of a seasonal decline, but we do get some benefit from the dot release that we just spole about.

Creative is continuing to perform exactly as we expect.

It is continuing to mirror prior releases.

So we are really pleased with how the tail is performing.

On the enterprise side it will likely be similar to Q2 due to normal Q3 seasonality, and then we would expect another Acrobat increase in the third quarter with the release of 9.

And Robert, on AIR we continue to be really pleased with what we have seen in terms of the adoption of AIR.

As we said we track applications at this point, and we are seeing a broad segment of application from ISPs like Business Objects, the E-commerce, BMW has done something.

There is a new Cricket application for those who like Cricket as a sport, as well as enterprise applications from companies that are beginning to emerge.

We have seen nearly 0.5 million downloads of the tools, which are our tools that I use to create the applications and content that run on AIR.

You can also imagine that it is really impossible to track all of the market activity around AIR, because these are people who are creating applications.

We have seen over 300 applications.

We are quite pleased with both the adoption of the run time, and starting to see good adoption associated with the tools that are required to create these AIR applications.

Great.

Thank you very much.

Gene Munster, Piper Jaffray.

Good afternoon.

Could you talk a little bit about the point upgrade with CS3.

Does that impact the timing of CS4?

No, Gene.

The upgrade to CS3 is primarily focused on making sure that our customers get the most current versions of the products that are shipping, and in this particular case as you know, it is with Acrobat 9.

Okay.

Then just quickly on the backlog side, as a percentage of revenue, what was it this quarter?

This is Mark.

Backlog was a healthy 4% this quarter.

That is from 5% last quarter, and again backlog is not indicative of future performance, and it is factored into our guidance, but we were pleased with the 4%.

One last question.

You talked about the tiered price in the passes, the details on that, I guess probably won't come out until you actually announce CS4.

Is that safe to say?

That is safe to say, Gene, when we announce the next version of the Creative Suites.

Thank you.

Go next to Adam Holt with [Morgan Stanley].

Good afternoon.

A couple of questions about Acrobat 9.

With 8 you started to see a little bit of a shift toward the Pro SKUs.

I was wondering what you expect to see, with mix with Acrobat 9, how meaningful do you think the Pro Extended version can actually be, and how should we be thinking about the opportunity for average selling prices there?

I think it is a little early to talk about what adoption of Pro Extended might be.

The reason for Pro Extender, frankly was that we have actually put in futures that we think will appeal to a wider audience beyond just the design manufacturers.

So some of the new things we have put in Pro Extended, like the GIS geospatial mapping, the video conversion capabilities, the ability for rich media presentations, we think makes it a better targeted product, for a more horizontal set of customers.

But frankly, we have seen with Pro, that that was really driving a lot of the revenue and the ASP.

It is still a little early for us to really give guidance around how we expect the mix between Standard, Pro, and Pro Extended.

Okay.

If I could just ask a quick follow-up on the platform business, obviously it continues to be quite strong, but are you starting to see a little pull through from AIR, or is there something else that is driving that business?

Well, FlexBuilder did well, Adam, and I think FlexBuilder is certainly one of the key applications that we have, that is used to create these AIR applications.

But we continue to believe that as you see these next generation rich internet applications, that will drive demand for Creative and our developer tools.

Terrific.

Thank you.

We go next to Steve Ashley with Robert W.

Baird.

Hi.

I would just like to ask a couple of questions on the Creative Solutions business.

The U.S., I think Mark you said maybe a tick below plan.

Was there any segment of that business, maybe you could comment on the traditional print and publishing segment within that business?

Hey Steve.

It is Mark, no, there is really nothing I can point to in the U.S.

by business that was any different.

It was pretty much consistent across the board.

And in terms of the underlying kind of desktop platform, we have seen strong Mac demand, have you seen any change in the mix of your Creative Solutions, Mac versus PC?

Both the Mac and Windows continue to be strong drivers of performance in our Creative business, Steve.

Okay.

Great.

Thank you.

We will go next to Sasa Zorovic, Goldman Sachs.

Thank you.

My first question is regarding have you noticed any changes in terms of demand for the products as the quarter progressed, starting in March, and how we ended, and maybe even how it extended into June?

Hey Sasa.

It is Mark.

No, we were very consistent across the quarter in terms of demand.

Okay.

And then my second question would be, how are we to think about if we look sort of the overall macro picture and the overall advertising environment, and granted you are a lot more tied to the employment advertising, and the advertising budgets per se, but there are several cost currents there, on one hand the web is going fairly well, not so well on the publishing side, and so forth.

So how are you sort of specifically seeing that and project that for the growth of CS next and CS3.3 at this point?

I think the fundamental trends towards the need to create more digital content, I think that remains unabated.

So I think at the highest level we are pleased with the trends associated with more digital content, as well as video.

If you look at the amount of video that is being created, and I think that is independent of the trends that you were alluding to.

So I think when you look at it as it relates to mobile content that is being created, web content that is being created, video and increasingly rich internet applications, that plays to the [speed] part of our particular business.

Next question?

We will go next Ross MacMillan with Jefferies.

Yes, thanks.

Just a quick one on Acrobat 9.

I noticed that at least some of the foreign language versions were shipping about eight days after English.

Can you remind us, is that typical with an Acrobat release, that we see let's say major foreign language versions ship pretty quickly after the English version, and then just to follow-up on the Apple iPhone 3G, any update on Flash support within that device?

Thanks.

On the first question, we don't typically give date by dates of when we are shipping different language versions of our products.

Clearly depending on when in the quarter we ship English, you see might see some of the major foreign languages also ship in the quarter.

As I said earlier in my remarks, we do expect to see English, French, German and Japanese for Acrobat ship in this quarter.

That depends more on quarter boundaries that anything else.

With respect to the iPhone, we are working on it, we have a version that is working on the emulation, this is still on the computer, and we have to continue to move it from a test environment on to the device, and continue to make it work.

So we are pleased with the internal progress that we have made to date.

Great.

Thank you.

We will go next to Walter Pritchard with Cowen and Company.

Great.

Just one question, most of mine have been answered.

Shantanu, you mentioned accelerated growth in fiscal '09, I know you are not providing fiscal '09 guidance.

But should we take those comments literally to mean that you expect fiscal '09 revenue growth to be above what fiscal '08 revenue growth is?

Yes, Walter.

Okay.

Thank you very much.

Operator, we will take one more question.

Okay.

Our last question from Andy [Medler] with Edward Jones.

Thank you.

I have two quick questions.

One relating to if there is any change in the dollar going forward that is a detriment to you guys, how can you prepare your business to compensate for that, so it doesn't directly impact the bottom line as much?

And second I assume it is implicit given your strong quarter, but can you just give us an update on what you were thinking for the full year '08?

I will take the second one first.

In terms of all of '08, we are not updating our guidance right now, because we don't typically want to give two quarters worth of guidance at once, and obviously by default, giving you '08 guidance would give you Q3 and Q4.

But obviously, in terms of what we are tracking, like I said exactly on the path that we laid out all the way back to December of last year.

So we are really pleased about that.

In terms of the dollar, we do hedge our anticipated cash flow usually as much as 90% of our net cash flow revenue minus expenses going into a quarter.

So we are somewhat protected on the downside, should the dollar strengthen dramatically.

So thank you for joining us, given that was the last question.

I am really pleased with the strong Q2 that we had, which exceeded the financial targets we provided in March.

We continue to believe we have a strong market tailwind, and that the demand for digital content continues to explode.

It is also clear that we are well-positioned both from a product mix perspective, as well as geographic diversity, and clearly very excited about the upcoming product launches, which should accelerate our growth into 2009.

So thank you.

Thanks everyone.

Ladies and gentlemen, this concludes today's teleconference.

We appreciate your participation.

You may disconnect at this time.