Adobe Inc (ADBE) 2008 Q4 法說會逐字稿

Good day everyone.

Welcome to the Adobe Systems Q4 and 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.

John i joining me are Shantanu Narayen, as well as Mark Garrett, executive vice president and cfo.

In the call today we will discuss the Q4 and fiscal year 2008 financial results.

Now you should have a copy of the earnings press release which crossed the wire a hour ago.

Go to Adobe.com to find a copy.

I want to emphasize some of information discussed on this call, particularly our revenue and operating targets and our forward looking product plan is based on December 16th, 2008, contains forward-looking statements that involve risks and uncertainties.

Actual results may differ from those set forth in such states.

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

During this call we will discuss GAAP and non-GAAP financial measures, a reconciliation is available in the earnings release and on the investor relations web site.

Participants are advised that this call is broadcast live over the internet in Acrobat Connect Pro and recorded for play back purposes.

Archive will be made available in acrobat connect pro under the web site for approximately 45 days.

This call is the property of Adobe Systems, audio and archive may not be rerecorded or redistributed without prior written permission from Adobe Systems.

I will now turn the call over to Shantanu Narayen.

Good afternoon.

We are reporting Q4 revenue of $915.3 million.

Annual revenue of $3.58 billion.

Despite a difficult economic environment in 2008, we were able to achieve record revenue and double digit growth for the 6th consecutive year.

Looking at 2008 as a whole and knowing we were in the midst of recession that spanned our entire fiscal year we executed well and achieved not notable results.

Creative business had a solid year as we delivered the largest and most innovative product release in Adobe's history with CS4.

Grew the leadership position in the creative tools market and diversified by establishing growth businesses in the areas of dynamic media with flash based video and hosted services with our seen 7 business.

In business productivity solutions, Acrobat had a good year with double digit revenue growth and the launch of acrobat nine.

LiveCycle had a great year achieving more than a quarter of a billion dollars in revenue with 32%, annual growth.

We established the Adobe Flash platform as for a standard of how the world engages across platforms, devices and operating systems.

Line technologies including Flash Player, Air and Reader uniquely position Adobe as a technology leader in a world in which the explosion of rich digital content is accelerating.

These accomplishments helped us to meet our goal of 13%, revenue growth in fiscal 2008, and our operational focus allowed us to greatly exceed our profit targets for the year.

I will comment on the highlights in detail, but first I will turn it over to Mark for a review of the financial results.

Thanks.

I will first comment on the full year fiscal 2008 results.

Adobe achieved record revenue of $3.580 billion in the year, compared to $3.158 billion in fiscal 2007.

This represents 13% year-over-year revenue growth consistent with the target we provided a at the outset of the year.

GAAP operating income in fiscal 2008 was $1.028 billion compared to $858 million in fiscal 2007.

GAAP operating margin for the year was 28.7%.

Compared to 27.2% in fiscal 2007.

Operating income in fiscal 2008 was $1.435 billion compared to $1.209 billion in fiscal 2007 and representing 19% year-over-year growth.

Our non-GAAP operating margin was 40.1% in fiscal 2008, compared to 38.3% in fiscal 2007 and exceeding our original target for the year.

Adobe annual GAAP net income was $872 million in fiscal 2008, compared to $724 million in fiscal 2007.

Adobe's annual non-GAAP net income was $1.136 billion in fiscal 2008 compared to $966 million in fiscal 2007.

GAAP diluted earnings per share in fiscal 2008 were $1.59 compared to $1.21 in fiscal 2007.

Non-GAAP diluted earnings per share were $2.07 in fiscal 2008, compared to $1.61 in fiscal 2007.

Given the economic environment throughout the year, including the year long recession in the US, we are pleased that our execution and cost controls helped to deliver strong growth in profitability, and in expansion in our operating margin.

Looking at our businesses in fiscal 2008, we achieved revenue growth in every segment.

Our Creative Solutions business achieved revenue of $2.07 billion, which represents 9% growth when compared to fiscal 2007.

Revenue for our business productivity business grew to $1.06 billion, which represents 16% year-over-year growth.

Within our business productivity segment, knowledge worker revenue was $810.9 million, representing 11% year-over-year growth, and enterprise revenue was $253.1 million in fiscal '08, which represents 32% year-over-year growth.

Our mobile business achieved revenue of $113.1 million, which represents 115% year-over-year growth.

Other revenue was $329.8 million, which was 15% higher than last year.

Within other segment revenue, our platform business achieved $118.5 million in revenue, which was growth of 46%.

And print and publishing revenue was $211.3 million with growth of 3%.

Now I would like to discuss our quarterly results.

For the fourth quarter of fiscal 2008, Adobe achieved revenue of $915.3 million.

This compares to $911.2 million, reported for the fourth quarter of fiscal 2007, and $887.3 million reported last quarter.

GAAP operating expenses for the fourth quarter of fiscal 2008 were $555.7 million, compared to $556.9 million last quarter.

Non-GAAP operating expenses were $476.8 million, compared to $475.1 million last quarter.

GAAP operating income for the fourth quarter of fiscal 2008 was $273.2 million, or 29.8% of revenue.

This compares to GAAP operating income of $275.8 million, or 30.3% of revenue in the fourth quarter of fiscal 2007, and $219.5 million, or 24.7% of revenue last quarter.

Non-GAAP operating income in the fourth quarter of fiscal 2008 was $374.9 million or 41% of revenue.

This compares to operating income of $362.2 million, or 39.7% of revenue in the Q4 of fiscal 2007, and $351.9 million, or 39.7% of revenue last quarter.

Adobe's affective GAAP tax rate for the quarter was 11% and our non-GAAP tax rate was 16%.

Our fourth quarter GAAP and in tax rates benefited from two favorable items, a current quarter catch up related to the reinstatement of the uNited States Research and Development Credit and a favorable tax court settlement.

GAAP net income for the fourth quarter of fiscal 2008 was $245.9 million, compared to $222.2 million reported in the fourth quarter of fiscal 2007, and $191.6 million last quarter.

Non-GAAP net income was $320.9 million, compared to $289.6 million, reported in the fourth quarter of fiscal 2007, and $269.1 million last quarter.

GAAP diluted earnings per share for the fourth quarter of fiscal 2008 were $0.46 based on 534.9 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.38 reported in the Q4 fiscal 2007, based on 587.9 million weighted average shares and GAAP diluted earnings per share of $0.35 reported last quarter, based on 541.3 million weighted average shares.

Non-GAAP diluted earnings per share for the fourth quarter of fiscal 2008 were $0.60.

This compares with non-GAAP diluted earnings per share of $0.49 in the fourth quarter of fiscal 2007, and $0.50 reported last quarter.

I will now discuss Adobe's revenue in Q4 by business segment.

Creative Solutions segment revenue was $508.7 million compared to $570.5 million in Q4 of fiscal 2007, and $493.6 million last quarter.

On a year-over-year basis, this represents a decline of 11%, as demand for our new CS4 products was impacted by the global economic crisis.

Business productivity solutions segment revenue was $278 million, compared to $246.4 million, in Q4 of fiscal 2007, and $283.5 million last quarter.

On a year-over-year basis, this represents 13% growth.

Within business productivity solutions, our knowledge worker revenue was $199 million in Q4 of fiscal 2008, compared to $192.1 million in Q4 of fiscal 2007, and $218 million last quarter.

On a year-over-year basis, this represents 4% growth.

The other component of our business productivity segment is our enterprise business.

In Q4, enterprise revenue was a record $79 million, compared to $54.3 million in Q4 of fiscal 2007, and $65.5 million last quarter.

On a year-over-year basis, this represents 45% growth.

Mobile and device segment revenue was $48.2 million, compared to $13.5 million in Q4 of fiscal 2007 and $27.5 million last quarter.

Revenue in mobile and device was strong due to demand for FlashLight, and renewal of several agreements with major OEMs.

Finally, other segment revenue was $80.4 million compared to $80.8 million in Q4 of fiscal 2007 and $82.7 million last quarter.

Turning to our geographic segments, results on a percent of revenue basis were as follows: The Americas 46%, Europe 34%, and Asia 20%.

The global economic situation affected demand for our products in all geographies, particularly North America and Europe.

Employees at the end of the fourth quarter totaled 7,544, versus 7,623, at the end of the third quarter.

The reason for the decline was due to the departure of summer interns.

The recently announced reduction of approximately 600 employees or 8% of our global work force, occurring in fiscal 2009, will begin to affect our head count and operating expenses run rate in Q1.

Our trade DSO in the fourth quarter of fiscal 2008 was 46 days.

This compares to 32 days in Q4 of fiscal 2007, and 34 days last quarter.

DSO was higher in Q4 than in recent quarters due to the shipment of CS4 in the second half of the quarter.

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

During the quarter, cash flow from operations was $338 million.

Our ending cash and short-term investment position was $2 billion, the same as the end of last quarter.

In Q4, we repurchased a total of 6.2 million shares, at a total cost of $206.3 million.

During the fiscal year, we repurchased a total of 58.3 million shares, at a total cost of $2.14 billion.

We will continue to utilize this program to return excess cash to shareholders, and offset dilution from employee stock programs.

This concludes my discussion of our financial results.

I would now like to comment on our financial targets for the first quarter of fiscal 2009.

We are targeting a Q1 revenue range of 800 to $850 million.

Given the current economic climate and normal seasonality, we expect revenue in each of our business segments to decline sequentially.

In our mobile business, we expect revenue of approximately 10 to $12 million, due primarily to the transition to the open screen project.

In addition, we are targeting a GAAP operating margin range of 26 to 28%.

And a non-GAAP operating margin range of 37 to 38%.

These margin targets reflect the cost savings and impact of our restructuring activities as applicable.

We are targeting our Q1 share count to be 530 to 534 million shares.

For nonoperating income, we are targeting a range of 3 to $5 million on both a GAAP and non-GAAP basis.

For our GAAP and non-GAAP effective tax rates, with the reinstatement of the R&D tax credit, we are targeting approximately 24%.

These targets lead to a GAAP earnings per share range of $0.30 to $0.35 per share, and a non-GAAP earnings per share range of $0.43 to $0.47.

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

This concludes my section, I would now like to turn the call back over to Shantanu.

Thanks, Mark.

I will spend the next few minutes reviewing highlights from Q4.

During the quarter, we shipped the new Creative Suite 4 product family in English, French and German.

CS4 is a milestone release of our industry-leading design and development software, for virtually every creative work flow and represents our most comprehensive software release ever.

Industry and press response to CS4 has been excellent.

Design Premium and Master Collection Suites both received excellent ratings from C-Net and PhotoShop received a perfect five out of five rating, and an Editor's Choice Award from PC Magazine.

We believe CS4 is a stellar release, with new product innovations, time saving features, and work flow enhancements that will improve productivity.

These capabilities will generate opportunities for Adobe to upsell and cross sell in our existing customer base and expand our reach to new customer segments and markets.

While customer feedback has been positive, given the current economic climate, we believe CS4 adoption in the short-term will be muted when compared to prior cycles.

This is reflected in our earlier results, with CS4 revenue down more than 20% when compared to the equivalent CS3 period.

In Q1, we will be shipping the Japanese version as well as many of the other languages.

We will be focusing on enhanced demand generation programs to drive awareness and adoption in 2009.

Dynamic media continues to be a key growth focus for Adobe.

In November, we announced version 3.5 of Flash Media Server.

This new release, combined with the latest advancements in Flash Player and our CS4 offerings are helping to deliver breakthrough interactive content applications and video on the web.

Recent high profile wins include Disney.com, the number one ranked kids entertainment and family community destination on the web, which is leveraging Adobe Video Solutions to create and deliver rich interactive experiences.

Over the past several months, Disney.com has experienced record on line traffic levels, as viewers logged on to watch full length movies delivered via the Adobe Flash platform.

Telecom Italia, which has chosen the Cisco content delivery system with internet streaming platform, powered by Adobe Flash Streaming Technology to deliver live television channels and on-demand content through its web portal.

And MLB.com, the official web site of major league baseball, which has selected the Flash platform to deliver all of its live and on demand video offerings, for two years, beginning in 2009.

In addition, MLB.com, will provide a downloadable rich internet application built using Adobe Air, so baseball fans can access additional features outside the web browser.

In our hobbyist business, we shipped version 7 of PhotoShop Elements and Premiere Elements in Q4, updates to the world's best selling consumer photo editing and video editing software products.

In our business productivity solution segment, our year-over-year growth was driven by solid performance in both our knowledge worker business and our enterprise business.

LiveCycle achieved record revenue with 45% year-over-year growth.

Our engagement value proposition is resonating with our enterprise customers, even in this tough spending tough spending environment.

In our mobile business, we announced that Open TV, a leading provider of advanced television services will integrate Flash as an additional application environment, further enhancing web browsing capabilities in the living room, and strengthening the development of rich applications and user interfaces.

In our platform business, we released Flash player 10 in October.

Interactive designers and developers can leverage new expressive features and visual performance improvements to deliver the most compelling web applications, interactive content, and high quality video to users across multiple browsers in all major operating systems.

In November, we held our annual Max conference in San Francisco, followed by Max Europe in early December.

Max was an enormous success with record attendance.

We made several exciting announcements related to the Adobe Flash platform.

These include Adobe Flash Catalyst, and a technology collaboration to optimize and enable Flash player and Adobe Air for on-power devices.

As the breadth of our solutions increases, we are rapidly becoming a strategic partner to larger enterprise customers.

This is enabling Adobe to drive more revenue per customer across their organizations.

For example, BBC in the UK signed a broad agreement with Adobe that includes LiveCycle for finance and production process and rights management, Flash and Air, for its next generation on line video content, creative tools and services for content development and production, and Acrobat Connect integration for training, support and collaboration.

Our field organization will continue to drive these strategic enterprise level agreements as part of our go to market strategy.

In closing, as we enter fiscal 2009, we will continue to make strategic investments that will position us well for the future, while managing our business to ensure consistent profitability.

Our strategic priorities are advancing the Adobe Flash platform as the preferred solution for how the world engages with ideas and information.

Investing in our core businesses, including Creative Suite and Acrobat, to maintain our leadership position through innovation, and continue our expansion into new customer segments in geographical markets, and focusing on our growth businesses, which include LiveCycle, Connect Pro, Scene 7 and Dynamic Media as areas we believe have significant potential for future growth.

While 2009 will be a challenging year, because of the macroeconomic environment, we believe the key market trends driving our business remain intact.

By continuing to innovate and deliver through solid execution, we believe Adobe is well positioned for future growth.

Thank you for joining us today.

Now, I will turn the call back over to Mike.

Thanks, Shantanu.

Before we get to Q-And-A, we wanted to update you on some changes being made to the business segments as we enter fiscal year 2009.

We are breaking out our former Other segment, into two separate segments called Platform and Print and Publishing.

We are also combining our former mobile and device solutions segment with our newly named Platform segment.

These segment reporting changes reflect changes we have made internally in terms of how we manage these businesses.

We will continue to report our Creative Solutions business as we have in the past, and we will continue to report our business productivity solutions business into two distinct segments, knowledge worker and enterprise as we have done in the past.

Our investor data sheet will reflect these changes starting with our Q1 FY 2009 earnings report in March, and will show adjusted segment revenue for prior reported periods.

With regard to today's earnings report, we have posted several new documents on our investors relations web page today that include today's earnings release, and our updated investor data sheet, which also includes a listing of the new fiscal 2009 segment classifications by product area.

To access these documents, and other investor related information, you can go to our web site as www.Adobe.com/adbe.

For those who wish to listen to a play back 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 139-4828.

Again, the phone number is 888-203-1112.

With ID number 139-4828.

International callers should dial 719-457-0820.

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

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

Pacific time, on Friday, December 19th, 2008.

We would now be happy to take your questions, operator?

Thank you.

(Operator Instructions).

We are ready for the first question.

We'll take our first question from Mike Olsen with Piper Jaffrey.

Thanks a lot.

Good afternoon.

Could you clarify your mobile segment guidance, is it 10 to $12 million overall for the quarter and more details on what is the reason for that?

Hi, this is Mark.

It's 10 to $12 million for the first quarter, and the reason for the drop is, like we have been talking about for quite some time, the move to the Open Screen project will ultimately make the royalty revenue that we have for mobile go away.

And you're starting to see that in 2009 as we anticipated.

Okay.

Then, I know you're not giving quarterly guidance, is there any reason to expect anything other than normal seasonality as we go through '09?

This is Mark again, you're right, we are not providing '09 guidance, primarily because of the limited visibility that most companies have right now.

What you can expect is for revenue to track pretty similarly to what you have seen in 2008 with Q1 and Q2 being relatively similar, we typically have a Q3 seasonal dipdown.

Keep in mind that we don't have the Acrobat launch that we had in 2008 and then a spike back up in the fourth quarter.

So a typical pattern to 2008.

One last one, today and when you revised your guidance you talked about weaker than expected demand for CS4, do you believe that's really a result of the macroenvironment or is there any evidence to suggest there is just lower interest in product from creative pros following the bigger CS3 launch?

Thanks.

I will take that question, Mike.

When I have gone out and talked to a bunch of customers, and frankly the response to CS4, in terms of the innovation we done and the productivity features that we added in addition to the work flow, actually, demand is as strong as it's ever been.

CS4, as I said earlier, was our strongest product ever, there is a tremendous amount of innovation, but there's no question that the economic uncertainty is playing in to the adoption rate we seen.

We thought it would be muted in the short run.

It really puts more emphasis frankly on us as a company to continue to drive demand generation, and that's what we are going to be doing.

If you parse the business a little bit more, where we are seeing the impact is primarily on the shrink side, which is where we go through distribution.

What we are seeing on licensing and large deals and emerging markets, where we are driving more of the revenue, is where we continue to see good results.

In the shrink side, we are going to be doing a lot more, as it relates to demand generation programs to drive awareness all the way through purchase.

Licensing, we made sure that all of our partners and our resellers are trained on the product and understand what it takes to get people to move to CS4, and the large deals, like have we demonstrated with Acrobat over the last couple of years, we will continue to focus on selling in to both creative agencies and organizations, as well as marketing departments, and one interesting statistic, we just saw research that Omni had produced which stated that CS4 actually can save over 18% of the productivity versus CS3, so just another reflection and validation of the quality of the product we delivered.

We are definitely seeing some impact due to financial situation.

Thanks very much.

We will go next to Brent Thill with Citi.

Your Q1 guidance implies negative 7 to 12% growth, I guess just as you look at the whole fiscal year '09, are you looking at trying to get back to break even or do you think we are going to see the whole fiscal '09 as negative as implied by your Q1 guidance.

Brent, this is Mark, we gave the Q1 guidance which we obviously take seriously and try to be prudent about we are not prepared to talk about what the rest of the year would look like now, but again, you can model it out as I suggested which is Q1 and Q2 relatively similar with a dip in Q4, and a dip in Q3 and a spike back up in Q4.

I want to reiterate, when you think about how we are doing across each of our businesses, it's been clear from our 2008 results that we've been executing against each one of the initiatives we outlined, and so it's going to be how the economy progresses over 2009 rather than anything we are doing as it relates to execution.

LiveCycle had a great year, Acrobat continues to do well.

The adoption for our platform continues unabated.

Mark, the FX impact in the quarter and for what you are assuming for the guidance in Q1.

So in Q4, net of our hedging, so including the impact of our hedging which did give us a positive benefit this quarter, we had a $7 million gain year-over-year that was a $1 million loss from the euro and an $8 million gain from the yen.

And Q4 quarter over quarter, we actually had a $20 million loss, a $24 million negative impact from the euro and a $4 million gain from the yen.

We continue to hedge and we are actually in very good shape, if you look at our hedging for the beginning of 2009, relative to where rates are today.

And the the guidance that we provided has factored in both where we think rates will be as well as the benefit of the hedging that we expect.

Thanks.

We will go next to Sarah Friar with Goldman Sachs.

Great, thank you very much for taking my call.

Shantanu, you mentioned that the top line will be driven a lot by what goes on in the economy.

Which we all understand, where you do though have your own ability to change the direction of Adobe is on the bottom line, you made a swift move here with a 8% head count reduction, how much through the year will you continue to look to keep costs very tight and preserve the margins even if the demand continues to track worse than what we are seeing now?

Based on what we saw in the economic climate as you point out, we took fairly quick action, we already restructured and that was actually done on the day we announced it.

Rather than have that linger or there be uncertainty within the organization, we were able to get that behind us.

Clearly, the focus is going to continue to be on driving revenue and focusing on the top line, because we believe that that's really how we powered through this current economic climate, and based on what we saw we think we made the changes that we need to.

And we will just continue to monitor our business.

Right.

But it sounds like you're at least going to keep watching, this is not your done with all the cost cuts and the macro will be what it will be, you are thinking about the margins as well as growth.

That's absolutely true, Sarah, it's not just the restructuring that we have done, we have take an number of internal measures to make sure that there is a very significant scrutiny on expenses whether it's travel, where we are not doing really any travel that's not related to customers, we use Acrobat Connect, and so that's good use of travel, every single external expense as it relates to contractors is being scrutinized by Mark, we have also made some decisions as it relates to the salary structure for employees.

We will continue to monitor all of that, and balance investing in our strategic direction versus returning to shareholders.

Sure.

Then just maybe the second derivative of that.

You have been quite good at buying back your own shares, you still have a fair amount of cash on the balance sheet, how are you thinking about buybacks as you look forward given a generally credit constrained environment?

Hi, Sarah, it's Mark.

We are very pleased with our share repurchase program.

As we said, we bought back 58 million shares for over $2 billion in 2008.

Shantanu and I both continue to believe that that's the right way to return excess cash to shareholders.

We will continue buying back to offset dilution like we did in the fourth quarter, and as it relates to a larger program we are watching the capital structure of the company with this tight credit market.

When it makes sense to do it, we will let you know.

Perfect, thanks very much for taking my questions.

We will go next to Heather Bellini with UBS.

Yes, hi.

Thank you.

I had a question about mobile.

Two questions, in regard to the mobile business you said you renewed contracts in the quarter on the conference call last quarter, you guys actually thought that the segment would decline sequentially, so I'm wondering if these renewals happened earlier than you had thought and the second question, Shantanu, you talked about advance demand generation, which to me implies a bigger marketing budget than maybe what we saw with CS3, I was wondering one, am I thinking about it the right way and how might that factor in to your margin expectations for this year?

Heather it's Mark.

As it relates to mobile, you're right we did anticipate it starting to drop a little sooner, what happened is a lot of the OEMs burned through prepaids faster than thought.

FlashLight gone extremely well, they just couldn't wait for the OSP version for Flash to come out later in 2009.

So we did some renewals with them earlier and larger than we thought we would do.

Before we leave that topic, so the new level that you talked about for Q1, is that how we should think about it for the year since you think the revenue stream is going to burn away.

That's right.

For the whole year, not just for that quarter, so it will spike back up?

It will start to tail off through the year from 10 to $12 million we guided you to in Q1.

Demand, the advertising question, and then I just had one quick follow up.

Maybe I will add that it's really continued validation of the need for Flash on all of these devices, and we also clarified our strategic direction associated with making sure that we get great web browsing experience on smart phones as well as building an application environment that have Air applications that work across multiple screens, so the demand that we're seeing from all of our hand set manufacturer partners as well as operators is something that's actually very pleasing to us.

As it relates to the marketing budget, the real focus there has to be, we have built over the last couple of years a really great customer database and so it's going going to be far more targeted programs.

I wouldn't look at it from a margin perspective and say we're going to be reducing any of that to invest in these marketing programs, rather it's going to be a real focused effort to make sure we are targeting the right customers to get them moved over to the right versions of the Creative Suite and/or the Acrobat applications.

I would also say that the marketing strategy as it relates to the shrink customers versus the licensing customers, it's a lot more refinement, of what is critical for both of those segments, and are frankly we have been reducing in other areas, for example, events, which we feel has less limited usage now and more investment in search.

So I would say it's really more optimization of all of our marketing budgets, but also a reflection of the fact that's going to be a real focus for us to continue to drive revenue in 2009.

Can I ask one follow up, in regards to the price increases, scheduled for the February 28th time frame, I'm wondering if there is any chance given the macroenvironment we are in and given the set pricing and probably a different environment, if we could potentially see a roll back and not see those price increases go through, given what we seen from other vendors in particular into it last week.

Heather, the feedback that we are getting from our customers continues to be that the value associated with what we deliver in Creative Suite, whether it's the individual products or the Suites is very good.

So at this point the focus really is more on demand generation and driving people to the product, explaining why the ROI more than pays for itself.

And the rather than looking at price cutting.

So the price increase you would think would still go through on the February 28th time frame.

That's correct.

Remember it's staggered, so in other words, the customers have 90 to 120 days depending on which region the product was delivered in.

So it happens only for the upgrade pricing, in English at the end of February, then since the J version is actually shipping in Q1, that price promotional period for upgrades will stay beyond February 28th.

Thank you.

We will go next to Adam Holt with Morgan Stanley.

Good afternoon.

I recognize you only have a few weeks of CS4 data, it may be too early to draw any conclusions, but I thought I would ask about what the preliminary data tells you.

In particular, have you seen any trends on the upgrade side, most of the upgraders coming out of the CS3 base or some of the older customers you were hoping to get upgraded.

Any trends with respect to the Suites that might be different than what you saw in CS3 and anything with respect to some of the price increases that already went through in terms of what you think they might have done potentially to demand?

Adam as you pointed out correctly it's pretty early in the cycle we try to give some data as it relates to the overall macroeconomic impact.

We said that we seen a little over 20% decline cycle over cycle.

And we did normalize it for the fact that as you know, we ship Master Collection and the video products all simultaneously this time as opposed to CS3.

What we are pleased the the Master Collection revenue continues to do fairly well reflecting interest in the Suites and the entire work flow.

But as we see more data, we will certainly share more results.

But it's still a little early to draw any conclusions.

If I could turn then to the Acrobat business, that down sequentially in the quarter, was this in line with your plans for the quarter and how sensitive do you think that business is to the broader corporate CapEx spending declines we are seeing?

When we think about the Acrobat business, first, we continue to be pleased by the fact that we are actually driving revenue and driving more adoption of Acrobat.

I think it just speaks to the fact that people are exchanging more information and PDF is the best format to do that.

The Acrobat business is driven primarily by exchange of information, by collaboration and more so now by the specialized use cases that we have.

3D, in the manufacturing market, redaction for example in the legal market.

And also acrobat professional continues to do fairly well.

If you double click on the acrobat business as well, again, it's really licensing that's driving a big part of the revenue in our field organization, and the shrink business, which I think has more impact from the macroeconomic environment is getting impacted.

We had a couple of years of transferring from shrink to driving licensing and driving the larger deals and compliance and that's the kind of same focus you would expect to see us do not only in the Acrobat but the creative business, Adam.

If I could end at the risk of dragging you through the business segments, the enterprise business was again, one of the faster growing segments at plus 46%.

Could you maybe give us a little bit of insight as to why that continues to be so strong and how you expect that to fare as we head into slower part of the first half next year.

LiveCycle was really pleasing in terms of the results that we got.

I think it reflects a couple of things, Adam.

First it's a large available opportunity as we have been stating, I think the entire category of engagement applications and the consumerization of IT, that we have been talking about is taking stock, it demonstrates maturity frankly from Adobe in terms of the product as well as the go to market that we have been perfecting over the years.

In the the past, driving revenue growth was certainly the investment we made in sales and marketing, the leverage that we have with partners in the enterprise space.

Increasing the productivity of our existing resources.

So while the available opportunity we still continue to be excited about, strategically, what we are thinking about for 2009 is rather than invest way ahead of the curve, we want to make sure that we focus on both the partner leverage, and increasing the productivity of our existing sales and marketing resources, rather than investing too much ahead of the curve.

We would expect a little bit more muted growth in 2009.

But as we see the economy start to come out of its funk, we will start to again invest because we believe in the fundamental value proposition associated with that market.

The last thing I would say is that the business actually did well, both in financial services and manufacturing, as well as in government, I think moving people from inefficient paper based processes to automated processes is resonating with our customers.

Terrific, thank you.

We will go next to Ross MacMillan with Jefferies.

Thanks, three questions, firstly on backlog, Mark, do you have a backlog number?

Yes, so again, backlog is not indicative of future performance and it is factored in to our guidance, we ended Q4 with a minimal amount of shippable backlog, but deferred revenue you will see on the balance sheet did go up $43 million to $275 million.

Great.

Then on just on the cost cuts, just to be absolutely clear, the way these roll through the P&L, do we get partial impact on a non-GAAP basis on fiscal Q1 and then full impact in fiscal Q2, if that's correct, that partial impact, just broadly as a percentage of the total impact, what will that be?

Thanks.

So the operating margin guidance that we provided you for the first quarter reflects the anticipated savings in the first quarter that we are going to get from the restructuring and there is some future restructuring that will happen in the first two quarters of the year, there are people that transition over time, there are some facilities that were going to shut down that happens over time.

But again, what we are trying to just do is provide guidance for the first quarter, and that 37 to 38% reflects the savings that you are going to see from the restructuring activities that we took.

The head count reductions, have they started or did they start just really post the end of the calendar year?

The great majority of them happened at the end of the fourth quarter, or the beginning of December.

Perfect.

Beginning of the first quarter, the great majority of them happened.

The final was just on, back to the pricing et cetera, are you looking at, apart from demand, around March, are you looking at additional promotions or other ways to think about pricing maybe on the CS side specifically as part of that demand generation effort?

Again, Ross, given our belief that the results have more to do with the economic uncertainty than anything to do with either the product value proposition, or the fundamental premise.

our focus is primarily on making sure that there is people going through the awareness to trial to purchase cycle.

That's really where the bulk of our focus is.

Great, thank you.

We will go next to David Hilal with FBR.

Great, I wanted to switch focus to the Flash business, microsoft has been making some headway with Silverlight, I wanted to understand maybe on the MLB contract or contracts like that when you're competing with Microsoft because historically seems like it's been a monopoly, while you have dominant share, Silverlight is getting traction.

Does the competition come down to feature functionality, if so, can you talk about that or does it come down to pricing and maybe the ability to subsidize some of the streaming events that these customers end up doing?

Well I think it's combination frankly of making sure that the entire ecosystem is available to enable the media partners to provide the kind of engaging experience that they want.

What Adobe provides is first and foremost clearly a great ubiquitous run time.

Having that run time with the kind of market share that we have enables customers to really rely on Flash being available across multiple operating systems as well as across multiple devices and that's something that we will continue to have a lead over aggressive competitors like microsoft.

The second thing is the authoring tools, people want the ease of use in terms of authoring the experiences and getting them delivered.

The reality is, when we think about on line videos, Adobe actually came from behind.

It was Windows Media Player and Apple's Quick Time that were formats in the video space.

Now approximately 80% of the on line videos that are viewed worldwide are used using Flash technology, it's the ubiquity of that, it's the ease of employment, we have Flash Media Servers which allows you to stream it.

We will be aggressive to make sure we innovate in the entire media space to keep our lead.

Great, thank you.

We will go next to Steve Ashley with Robert W Baird.

Thank you.

My questions about the Creative Solutions business and the publishing market, we look at traditional maybe newspaper and magazine publishers how important of a market is that for you, and what kind of performance have you seen out of that group?

Well Steve, I think as you think about the publishing market increasingly the publishers who are focused primarily on print publishing have been moving from print to the web and so that's why the print to web features that we have have become more important.

They're also increasingly looking at video as a new means offer communication.

And so they have been also moving towards the video production suite.

The way I characterize that entire business frankly is that as you look at employment, if employment exists in those publishing markets, and they are spending, the Creative Suite tends to be the top of the list.

I met a number of customers who say if they are going to buy a piece of software to increase their productivity it's going to be Creative Suite Four, but I think the economic impact weighs on them as well.

So from our perspective, we have been focused on making sure that as they migrate from print to web to video to wireless, that Creative Suite is ahead of where they want to be.

Great.

Just maybe a quick comment on how Flex Builder might have performed within the platform business?

We are seeing good demand for Flex Builder.

In addition to the Flex Builder, We are also pretty excited about the possibilities associated with Flash Catalyst, Steve, that as you know we showed at our recent Mac conference, so clearly, the number of people who have been downloading the Air STK and who have been looking at Flex Builder and our other development tools to create these engaging applications is going up.

Great, thanks.

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

Hi, just two questions.

One, on the mobile side, there's been kind of a lot of press, maybe six or nine months ago about lack of Flash on the iPhone when it launched, and I noticed kind of on the new-category of these devices, kind of the original devices, you haven't been able to come up with a solution, or there hasn't been a business arrangement that gets negotiated between you and these parties.

I'm just wondering, I know you're not one to talk about it specifically, but in general, could you just address that topic and where that overall technology and business prospects stand for that market?

Smart phones continues to be a category that we are focused on.

We clearly streamlined our strategic intents to make sure that we have web browsing as well as Air support on these smart phones.

We delivered Flash for SmartPhones such as those powered by either the Series 60 from Nokia, running the Symbian operating system and/or running Windows Mobile.

As well as in Japan, we have a lot of support.

So I would say that already today we have a lot of smart phone category phones that are supported with Flash.

That's why we shipped over 800 million and we say we expect to reach our $1 billion mark sooner than anticipated.

The other ones are ones we are working on.

At Max, recently, we also showed a prototype of Flash running on the android operating system that's powered by Google.

We have also said that we're really going to focus on Flash Ten rather than FlashLight, which is why it's taking a little time, but we fully expect to see versions running for smart phones in the middle of next year.

Second question around the economy now and what you are seeing in the downturn, can you compare what you're seeing now, and I know it's early, but it sounds like everyone agrees we have been in a recession for a while here, how you compare the current downturn to what you saw in 2001 and 2002 and any insight into what that holds next year as a result.

It's similar in that it has had an impact on our business.

I would say it's more global than we saw in the 2001, 2002 time frame.

in talking to other people, in other companies, most people expect that it would be in effect until the end of 2009.

and hopefully we seen the bottom.

So that's sort of how I would look at it.

As it relates to Adobe itself, one of the things that we feel fortunate in that one we do have more of a product mix and a geographic mix than even what we had in the 2001, 2002 time frame, which should enable us to continue to drive revenue and afford better margin protection for our shareholders.

Thanks a lot.

Operator we are running close to end of time, maybe two more questions.

We'll go next to Brad Reback with Oppenheimer .

How are you?

Good.

Just looking forward talking about profitability, on the other side of this cycle, without getting too specific do you see this business as continuing to expand margins where they topped out in '08?

Or do they stay in sort of the current range with the upside reinvestment for demand?

Once we get out of this economic, we continue to see there are opportunities available for us as a company and at the rate which we exerted in 2008 we felt like we were at the high end of virtually every software company in the business.

So at that point you continue to see us balance investing in the future versus returning to shareholders.

Excellent, thank you.

We will take our last question from Blair Abernethy with Thomas Weisel Partners.

On the LiveCycle performance in the quarter, can you give us sense of the visibility you have in this business, and how much of the business in Q4 we are coming off of backlog?

Well we continue to monitor the pipeline that we have in our LiveCycle business, as you know given last quarter was our traditional fourth quarter, that tends to be the peak for most enterprise businesses.

To give you a lit bit more insight, the government was huge vertical for us in 2008, and we saw quite a bit of growth both at the federal and national level, as well as the US State and Local level.

Manufacturing continued to do well for us.

We actually turned in better than expected performance even in our financial services sector because of our availability to help firms protect revenue streams and drive costs, as Mark said in his prepared remarks, we expect to see that sequentially decline because that's what typically happens with the enterprise business in Q1.

Given the large available market opportunity, and the majority that we now have in the sales force, we would hope to see that continue to grow in the future.

Okay.

Have you seen any change in the length of the selling cycle or deal sizes in that segment?

Not particularly, not things that I would call out.

Frankly I think what we are seeing is more awareness of the fact that engagement applications and providing the kinds of user experiences that our technology allows people to produce is becoming more important and so we are seeing more awareness of the category and what LiveCycle produces offset by what is happening in the economy.

So I would say it's sort of been a net zero, clearly our sales force has been doing a better job given the tough economic environment.

Okay.

Great, thanks very much.

So thank you all again for joining us today.

In summary, when we look at 2008, we think that in a tough economic environment we achieved both our revenue as well as our profitability goals, and more important, we put the company in a very strong position as it relates to the focus on the Flash platform, the Creative Suite and Acrobat business.

As we said, we think 2009 will be a tough market, we have already taken the actions in place to help us through this tough economic climate.

And we continue to be really positive about the long-term prospects for the company, and we are confident that as we emerge from this economic climate that Adobe will be in a stronger position than ever before and look forward to sharing more at our next earnings call.

This concludes our call and thank you for joining us.

Thank you, everyone.

That does conclude today's conference.

You may now disconnect.