Adobe Inc (ADBE) 2009 Q1 法說會逐字稿

Welcome to the Adobe first quarter fiscal year 2009 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 are Adobe's President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO.

In the call today, we will discuss Adobe's first-quarter fiscal year 2009 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 of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans is based on information as of today, March 17, 2009, 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.

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

A reconciliation between the two is available in our earnings release and on our investor relations web site.

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 in 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 redistributed without prior written permission from Adobe Systems.

I will now turn the call over to Mark.

Thanks, Mike.

For the first quarter of fiscal 2009, Adobe achieved revenue of $786.4 million.

This compares to $890.4 million reported for the first quarter of fiscal 2008, and $915.3 million reported last quarter.

GAAP operating expenses for the first quarter of fiscal 2009 were $501.1 million, compared to $532.5 million reported for the first quarter of fiscal 2008, and $555.7 million last quarter.

Non-GAAP operating expenses were $428.6 million, compared to $471.8 million reported for the first quarter of fiscal 2008, and $476.8 million last quarter.

While the economy had a clear impact on overall product demand, we were able to proactively align our expenses with our revenue.

This allowed Adobe to deliver earnings and profit margin results within the target ranges we provided at the outset of the quarter.

GAAP operating income in the first quarter of fiscal 2009 was $207.9 million, or 26.4% of revenue.

This compares to GAAP operating income of $275.4 million or 30.9% of revenue in the first quarter of fiscal 2008, and $273.2 million or 29.8% of revenue last quarter.

Non-GAAP operating income in the first quarter of fiscal 2009 was $295 million or 37.5% of revenue.

This compares to non-GAAP operating income of $359 million or 40.3% of revenue in the first quarter of fiscal 2008 and $374.9 million or 41% of revenue last quarter.

Adobe's effective GAAP and non-GAAP tax rate for the first quarter was 23%.

The tax rate in Q1 was lower than our targeted rate of 24% due to favorable settlements of several global tax audits.

GAAP net income for the first quarter of fiscal 2009 was $156.4 million compared to $219.4 million reported in the first quarter of fiscal 2008 and $245.9 million last quarter.

Non-GAAP net income was $236.8 million compared to $273 million reported in the first quarter of fiscal 2008, and $320.9 million last quarter.

GAAP diluted earnings per share for the first quarter of fiscal 2009 were $0.30 based on 527.8 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.38 reported in the first quarter of fiscal 2008 based on $571.3 million weighted average shares and GAAP diluted earnings per share of $0.46 reported last quarter based on 534.9 million weighted average shares.

Non-GAAP diluted earnings per share for the first quarter of fiscal 2009 were $0.45.

This compares with non-GAAP diluted earnings per share of $0.48 in the first quarter of fiscal 2008 and $0.60 reported last quarter.

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

As we discussed last quarter, we have adjusted our segment reporting for fiscal year 2009.

Our 10-K for fiscal 2008 as well as our updated investor data sheet on Adobe.com reflect the changes we have made.

The data sheet also includes adjusted segment information for prior reported periods.

Creative Solutions segment revenue was $460.7 million compared to $543.5 million in Q1 of fiscal 2008, and $508.7 million last quarter.

Business Productivity Solutions revenue was $227 million compared to $249.7 million in Q1 of fiscal 2008, and $278 million last quarter.

Within Business Productivity Solutions, knowledge worker revenue was $163.1 million in Q1 of fiscal 2009, compared to $195.5 million in Q1 of fiscal 2008 and $199 million last quarter.

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

In Q1, Enterprise revenue was $63.9 million compared to $54.2 million in Q1 of fiscal 2008.

And $79 million last quarter.

Platform segment revenue was $52.3 million compared to $43.3 million in Q1 of fiscal 2008 and $76.6 million last quarter.

Revenue from our previously reported Mobile and Device Segment which is now included in our Platform segment revenue was $26.1 million in Q1.

Mobile Revenue exceeded the target range we provided in December due to the renewal of OEM contracts to provide a distribution bridge for the OEMs until the open screen project enables free distribution.

In Q2, we expect mobile revenue to decline to a range of $4 million to $6 million.

Finally, print and publishing segment revenue was $46.4 million, compared to $53.9 million in Q1 of fiscal 2008, and $52 million last quarter.

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

The Americas, 41%, Europe, 35%, Asia, 24%.

We experienced normal seasonal strength in Japan.

However, the global economic situation continued to affect demand for our products in the rest of our geographies.

Employees at the end of the first quarter totaled 7,173 versus 7,544 at the end of the fourth quarter.

Our trade DSO in the first quarter of fiscal 2009 was 35 days.

This compares to 30 days in Q1 of fiscal 2008 and 46 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 $365.7 million.

Our ending cash and short-term investment position was $2.4 billion compared to $2 billion at the end of last quarter.

In Q1, we repurchased a total of five million shares at a total cost of $115 million.

There concludes my discussion of our financial results.

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

As we indicated in our preliminary results on March 4, we are targeting a Q2 revenue range of $675 million to $725 million.

We continue to target a Q2 GAAP operating margin range of 21% to 26%, and a non-GAAP operating margin range of 32% to 36%.

We are targeting our Q2 share count to be 528 million to 530 million shares.

For nonoperating income, we are targeting a range of $1 million to $2 million on both a GAAP and non-GAAP basis.

For our GAAP and our non-GAAP effective tax rates, we are targeting approximately 24%.

These targets lead to a GAAP earnings per share range of $0.20 to $0.27 per share, and a non-GAAP earnings per share range of $0.31 to $0.38.

Looking to our third quarter, we expect typical Q3 seasonality to affect our business on a sequential basis in Europe and Japan.

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

Thanks, Mark.

I'll spend the next few minutes reviewing business results from Q1.

In our Creative Solutions business unit, demand for the Creative Suite 4 family of products continues to be weaker than expected, due to the global macroeconomic environment and revenues more than 27% below that which CS3 achieved at the same point in the cycle.

We are pleased we continue to make progress, moving our customers to the entire Adobe platform.

Suites revenue is approximately 68% of total CS4 product family revenue.

The top three suites in terms of revenue are design premium and standard followed by master collection.

Our research suggests awareness and consideration for CS4 is high and we are focusing our marketing efforts on the ROI and cost-savings capabilities of creative suites to upsell and cross sell into our existing customer base as well as expand the option of CS4 by new customers.

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

In January, we shipped new versions of Flash Media Interactive Server and Flash Media streaming server.

These new releases include additional media delivery options such as dynamic streaming, enhanced H.264 video and high efficiency AAC audio support and the ability to pause and seek within a live stream.

We expect these innovations to improve the quality of video delivered over the web and off rich, interactive experiences for users.

Earlier this month we announced a strategic alliance with three Time-Warner companies -- Turner Broadcasting, Warner Brothers, and HBO.

These companies intend to utilize the Adobe Flash platform and our video solutions to provide differentiated experiences for consumers of their content across multiple distribution platforms.

In January, Adobe introduced the Scene 7 e-video streaming solution, a new addition to the Scene 7 hosted rich media publishing platform.

The new offering leverages ubiquitous Flash platform technologies, enabling e-commerce and multichannel marketing companies to easily upload, transcode, edit, manage, and stream content on the web.

In our Business Productivity business unit, we continue to focus on driving innovation for knowledge workers who wish to collaborate and CIOs who wish to automate inefficient business processes using our PDF platform.

Although our Acrobat business was impacted by the macroeconomic situation nearing Q1, there are positives to point out when we look at the trend of adoption of Acrobat and our newer Acrobat.com offering.

Total cumulative Acrobat licenses has grown to 36 million, up from 30 million one year ago.

In addition, more than three million people have signed up to use the beta version of Acrobat.com in its first nine months of availability.

Demonstrating that our engagement value proposition continues to resonate with customers, Lifecycle achieved 18% year over year revenue growth in Q1.

Even in this challenging purchasing environment, we see opportunity and are achieving success in this growing business.

Lifecycle is benefiting from the maturation of our field organization as well as the buildout of our systems integrator, go to market partners which now include Accenture, Cap Gemini, Cognizant, Deloitte and TCS.

Our key ISV partner, SAP also helped contribute to the solid Q1 performance we achieved.

In our platform and mobile business we continued to advance the adoption of the Adobe Flash platform across multiple screens from PCs to mobile devices to the digital living room.

In January we announced Adobe Air and Flash Player 10 soft player are being installed in record numbers.

In less than one year, there have been more than 100 million installations of Air and more than one million downloads of our developer tunes.

Additionally, Flash Player 10 was installed on more than 55% of computers worldwide in the first two months of its release, and is expected to surpass 80% this quarter, far outpacing fast installation rates.

We also expect to soon pass the one billion mark of mobile devices that are shipped with Flashlight.

This rapid adoption advances the reception of our latest innovations providing an incentive for customers to migrate to the latest versions of our desktop tools, service software, and developer tools.

To address the digital home market, at the CES show in January, we made announcements with companies such as Broadcom and Intel.

Our collaboration with them focuses on integration of Flash technologies and paves the way for rich, Flash-based entertainment experiences on televisions that offer viewers new options for accessing video and web content on their TVs.

Although the current economic environment has had a negative impacts on our revenue growth, we will continue to focus on our long-term strategic priorities while maintaining an appropriate level of profitability.

On the expense side, we will continue to focus on controlling costs as we did in Q1 by closely managing variable marketing, discretionary spending, and headcount growth.

At the same time, we will continue to make strategic investments that we believe will position us well for the future.

Our areas of focus include advancing the flash platform which provides everything needed to create and deliver the most compelling applications, content, and video to the widest possible audience.

Investing in our core businesses, including Creative Suite and Acrobat to increase market share and our leadership position in the markets these products target, and focusing our newer opportunities, which include Lifecycle for automating legacy document processes, Dynamic Media, where we provide an end-to-end, cross-platform solution that helps our customers create, distribute, and monetize their content across screens of all sizes, Acrobat Connect Pro for web conferencing, and Scene 7, which augments our creative product line to allow customers to deliver rich media assets for any channel of distribution.

Finally, we will ton make Adobe a great place to work and invest in the development of our employees so they continue to have the necessary skills for Adobe to be successful.

We believe this approach will position Adobe to continue to deliver value to our customers and shareholders and enable us to take advantage of economic recovery when it happens.

Thank you for joining us today.

Now I'll turn the call over to Mike.

Thanks, Shantanu.

Before we get to Q&A, we'd like to announce plans for our next financial analysts meeting.

We have decided to host this year's meeting in conjunction with our annual Adobe Max conference.

This year's Adobe Max event will be held in Los Angeles during the week of October 5, and our plan is to have the analysts' meeting in L.A.

on Wednesday, October 7.

More information about Adobe Max and the analysts meeting will be provided later this summer.

In regard to today's earnings report, we have posted several documents on our investor relations web page today.

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

To access these documents and other investor-related information, you can go to our web site 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 4375992.

Again, the phone number is 888-203-1112 with ID number 4375992.

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 20, 2009.

We'd now be happy to take your questions.

Operator?

Thank you.

(Operator Instructions).

We'll pause for just a moment to assemble the queue.

We'll take our first question from Brent Thill with Citi.

Thanks, good afternoon.

Can you just comment about the tradeoff and the cost cuts to preserve operating margins versus investing for the recovery?

If you could just bring us back to '01 to '02 timeframe, where you saw the margins drop about 500 basis points, how do you compare and contrast this cycle versus when you saw that last downturn?

Thank you.

Brent, as you saw in Q1 when we saw this there was going to be some impact to our revenue, we proactively managed our expenses.

But we are very careful even in this environment to make sure we don't do anything that is going to impact our long-term strategic business when the recovery happens.

And the way we looked at it was really focusing on what we considered a number of discretionary expenses.

In particular, as we look at what happened in Q1, we were able to look at discretionary expenses such as travel.

We did look at variable marketing, and we are very judicious about where we are hiring back in terms of new headcount growth that happens.

We've also realigned actually the company internally against the strategic priorities that I outlined.

So when we look at the Flash platform, we were able to combine our mobile and platform business units to make sure that we were able to deliver one version of Flash across multiple screens.

We were able to reduce some of our consulting headcount because now we frankly have a very vibrant systems integrator channel that's enabling us to go ahead and enable the Lifecycle business.

So we don't think we've done anything that's going to impact our long-term strategic direction for the company.

But we will continue to be ruthless about looking at every expense that we have to make sure that we balance the long-term strategic direction with short-term profitability.

Next question?

The next question comes from Heather Bellini with UBS.

We're having trouble hearing you --

I'm sorry, can you hear me now?

Yes, go ahead.

I'm sorry about that.

My question is this -- Mark, you made a comment about seasonality for next quarter.

And I believe you commented that we should expect normal seasonality -- I want to make sure I heard this -- in Europe and in Asia.

You didn't comment on the US.

And I'm wondering since we're all trying to model out going forward, I know you don't want to give guidance, but if we look back in the third quarter of '08, you guys were flat sequentially in revenues, the third quarter of '07 you were plus 14%.

Obviously that had CS3.

Third quarter of '06 you were down five.

There's a wide variety there, but I'm wondering, but can you give us, is it just Europe and Japan that you're expecting normal seasonality?

Then what should we expect for the US?

Sure, Heather.

So let me back up a little bit.

And I'll get to your question, as well.

Okay.

You know, we're fortunate that we have a really diversified business.

And if you look at what has been performing well for us, the enterprise side or the high touch side of the business has been doing very well.

Adobe.com has been doing well.

Where we're feeling the economy a little bit more has been on the channel side of the business.

And since we gave targets back in December, clearly the economic conditions and the product demand particularly on the channel side have worsened.

But since the beginning of February we've started to see stability in the business.

So for the past six weeks or so, on the channel side, we've seen more stability in the business.

And this stable February run rate for the channel side of the business is the basis for this Q2 revenue range that we provided.

And that revenue range if you look out over kind of Q3 and Q4 would basically follow the same similar patterns we've seen from a seasonal perspective in the past.

So Q1 obviously we have the Japan launch and strong seasonality there.

So we would expect going into Q2, for the most part all geographies would decline.

And we'd also expect the Creative business and the Platform business because of Mobile to decline going into Q2.

But then when you get down to Q3, we would expect our normal seasonal dip a little bit and a And then a seasonal uptick in the fourth quarter like we've seen in the prior quarter years.

Hopefully that gives you more color over the course of the year from a geographic and product line perspective.

Okay, just so we can be clear so you don't get a lot of follow up questions on this, you're saying wherever you come in for the second quarter, expect more seasonality.

Like you guys had talked back in, I believe it was the December call, and then the normal uptick in the -- in the November quarter?

Correct.

Okay.

Great.

Thank you.

We'll take our next question from Adam Holt, Morgan Stanley.

Good afternoon.

I had a couple of questions about what you're seeing thus far on CS4.

First of all, can you talk a little bit about what kind of upgrade activity you're seeing?

Is it primarily coming out of the CS3 base, or are you seeing some of the pricing incentives drive CS1 and CS2 folks to migrate to CS4?

I'll give you more color as it relates to Creative Suite.

First, overall the consideration that we are getting for the product continues to be fairly high.

Even in this economic climate, we're pleased that people are definitely putting CS4 through the consideration cycle.

The penetration that we have seen so far I think in March we had given you a number of approximately 2.6 million of the six million or so, creative professionals who had moved to creative suite.

An update of that number which we've also -- we also will share is 2.9 million.

We're continuing to see creative professionals definitely move through the suite.

And frankly, we're seeing them move to the higher valley suites.

So as I said in the prepared remarks, we're seeing more Master Collection adoption as well as we've seen adoption of the design suites which we have traditionally expected to be the best-selling suites.

In terms of the upgrades versus full units, while we're not going to share a lot of the information, the pricing incentives we have said that we will give another month to allow people.

What we found when we did our survey was that people were actually not familiar with the tiered pricing schemes that we had introduced when we introduced CS4.

So awareness of that was not as high as we had expected.

Awareness of the product was high, but awareness of the tiered pricing was not as high as we expected.

So we want that to be an incentive for people to move to Creative Suite 4 rather than a disincentive.

But we continue to believe that the tiered pricing is the right strategy, and we really haven't got much pushback on the tiered pricing.

Hopefully that gives you some flavor.

Enterprises continue to put it through its paces.

As you know, traditionally Enterprises will try our Creative Suite maybe in one section of a magazine and then move it to the entire magazine.

So that continues in good stead.

And you know when we look at revenue, the revenue falloff has been definitely more on, as Mark pointed out, the channel business or the end user demand, less so in the enterprise business.

Enterprise is where people are employed, they continue to see the value for Creative.

And in addition to the first report that we had, which said that, there's approximately an 18% improvement in productivity, we just got another report from a -- Pfeffer Consulting, one of the more respected consulting groups which pointed to the productivity improvement that CS4 has.

That's very helpful.

I guess the obvious question, sound like you've seen increased traction on the Creative Pro side.

There's been no question -- at least I've gotten questions as to how the nonprofessional users will lag in this environment.

So if maybe you could touch on that.

And lastly, Mark, what was the impact of currency in the quarter, and what are your assumptions in the next quarter?

Thanks.

Adam, again, I -- the impact of the economy is being seen in the noncreative more than it has on the channel business, more than it is in the creative professionals because for the creative professionals, this is a mission-critical product.

If you're employed gainfully, you know the product more than pays for itself.

So we have seen more of a falloff in the channel business.

What's interesting, though, is it's clear that customers want more of a direct relationship with us, and they want software downloads.

So we are seeing more activity on Adobe.com which we like because it means that people want a direct relationship with Adobe.

And Adam, on an FX perspective in Q1, on a year-over-year basis, we had a net gain to revenue of approximately $12.4 million, most of which again was factored into our guidance.

We had a $2.5 million loss from the Euro offset by a $15 million gain from the yen.

Probably the more interesting piece of that is that netted in that $2.5 million loss from the Euro was a hedging gain of $20 million from the Euro.

Which made the loss only $2.5 million verse us what would have been $22 million.

So our hedging program has really helped us out in the first quarter.

We're very well hedged through the rest of 2009.

So I expect that we're in fairly good shape from an FX perspective going forward.

Thanks for the help.

Next will come Steve Ashley with Robert W Baird.

Just had a question on the product mix within the Creative Solutions business.

Looks like the master selection moved up ahead of what the web premium or web standard.

I was wondering if you could give us color around the mix shift, what's going on there, the different products.

So Steve, I think what we are hearing is that usage of rich media by our customers is clearly increasing the movement on line as something that people are clearly seeing.

And if you look at the amount of video usage in particular that people are now starting to have on our web sites, that's increasing.

As you know, the difference between the web suites and the master collection is the availability of the video products, as well.

And so the fact that the video products are part of the master collection and, frankly, as people want to adopt the entire platform, that is the best offering that we have.

We think those two factors are driving the shift that we talked about.

Within the Acrobat business, did you see any variation in demand by vertical market?

Thanks.

When we look at Acrobat, Steve, the overall mix that we have which is Pro has the highest revenue continues, and in terms of the vertical markets, when we look at it from our direct business, we actually continued to do well in financial services, as well as governments.

So those remain two interesting markets for us.

Education is also an importance market for the Acrobat and Creative business.

And again, as I said, whenever we have a higher touch, and we have a direct relationship with our customers, we're clearly doing better than the end user demand generator part of the business.

Thanks.

Moving along, we'll hear from Sarah Friar with Goldman Sachs.

Great.

Thank you very much for taking my question.

Now in trying to understand that we're groping for a bottom here, it's always helpful for us to understand the progression through the quarter.

And particularly any commentary you would give even as we came into March of how actual sales came in versus your estimates.

And has the pace of declines begun to slow?

Like you said second derivative, given you any inclination wherever we are in the down tick?

Sarah, it's Mark.

I'll start and see if Shantanu wants to add on.

Clearly we're not giving 2009 guidance because we still feel that visibility is very difficult.

But like I did say, since the time we gave the targets back in December, as we went through the quarter, the economy got worse.

And the stability in our business got worse.

But whether we got to February, so for the past six weeks, on the channel side of the business we feel that the business has stabilized.

So we have started to see more stability on sell-through on a week-to-week basis since the beginning of February.

And the only other thing I would add is that you also have to then factor in some of the geographic performance during the quarter because clearly we did do the launch of the Creative Suite products in Japan in Q1.

And so that's why Q1 to Q2 we expect that revenue to decline.

And again as Mark said, December was stronger clearly than February.

And just one follow young people that because I feel like a lot of that color, though, is probably -- maybe I'm mistaken, when you look at the knowledge worker part of the business.

The results came in at below what we would have expected.

Is there any difference between those two chunks of --

Not really, Sarah.

When you look at the business, again, I would categorize the business as wherever there of a high-touch, enterprise-driven, greater than 50,000 deals which we track, the Creative and Acrobat business had similar trends.

We were closer to our forecast.

Whatever it was -- whether it was end-user driven, it fell off again, as I said, from December through February.

Okay.

That's helpful.

Thank you very much.

Thanks.

Our next question comes from Tom Ernst with Deutsche Bank.

Thanks for taking my question.

I wonder if you noticed the difference now that we're two quarters behind you now between upgrades and new purchases.

Any shift there and then a followup to that.

Are you -- are you seeing any changes in customer diligence on trying to maintain and extend licenses relative to what you've seen in recent years?

The feedback we have and I've certainly been spending a lot of time with the Creative customers is that first, they continue to really look at Adobe even more so now as a strategic partner, helping them navigate what is for them also pretty uncertain times.

They're all trying to figure out how they move from print to the web to video to wireless.

So, the first thing which is I think a huge positive is they are continuing to actually work with Adobe to say how can you help u move from the silo work flows to a more integrated work flow.

In terms of looking at the business itself, it's just hard to parse what is as a result of the macro economic environment right now between the CS3 and CS4 cycles.

So overall business is in decline, as we said, little over 20%.

Move toward the Suites is higher.

But more than that, it's hard to really draw any conclusions yet.

I will continue to monitor that.

No noticeable difference between upgrades or new purchases in the business?

No.

We continue to see full units.

We continue to get new customers to the platform.

We continue to see enterprises expand on their offering.

And we continue to see upgrades which traditionally are stronger in the months after launch start to taper off.

So we haven't seen anything very significantly different in those trends.

All right.

Thank you again.

We'll move along to Phil Winslow with Credit Suisse.

Hi, guys.

Just wanted to focus on expenses for a minute.

Obviously, strong cost control Q1, and then your guidance for Q2.

Sort of along with your revenue commentary for Q3, obviously if you look at your headcount, it's down 371, you talk about down 600 so is there sort of more to come when we think about Q2 and Q3 or how should we think about headcount expenses?

Sure, this is Mark.

Yes, we're really pleased with what we've done from an operating expense standpoint.

It's as low as it's been in quite some time.

If you look out the rest of the year, particularly starting with Q2, you will see a little bit more of a drop and when you go to do your model and you factor revenue and the margin range that we gave you, you'll see that there is a little bit more of a drop in Q2.

So there's a little bit more to come as some of the headcount reductions are still rolling off.

And some of the -- the discretionary spending cuts are still rolling off.

And then we frankly kind of stabilize in Q3, and then we usually get a little bit of a bump up in the fourth quarter as things like our Max conference and year-end commissions give us a little bit of a bump in the fourth quarter.

But for the most part, as we roll into Q2, all of our spending reductions are now in place.

Got it.

Thanks, guys.

Next question will come from Walter Pritchard with Cowen.

I just -- most of the questions have been answered.

One question.

The platform business being down $20 million or so sequentially, what was the driver of that?

Yes.

That's because we combined Platform and Mobile.

It's completely due to the fact that mobile declined from $48 million last quarter to $26 million this quarter.

And like I said, will drop down between $4 million to $6 million for a total in the next quarter.

And then just as it relates to the headcount and looking out to future product development efforts, I'm just wondering where you are at the point right now with development activity and would you say right now you're at a low point with development activity as that ramps up over the next six to 12 months, or does it still come down further as you're still waiting for the new product cycle on the Creative side.

Walter, I'll take that.

In terms of the changes that we made and whether we did the restructuring, we looked very hard at our priorities.

But for the key priorities that we have, we have made sure that we have the appropriate headcount to be able to continue to drive innovation in those particular areas.

So when you think about either our platform, the Creative Suite product line, the Acrobat product line, Lifecycle, Scene 7, Connect Pro, which is our web conferencing product and dynamic media, those R&D efforts are staffed, and they are underway driving the next generation of innovation.

So when we start those cycles, we continue to make sure that we have all the appropriate headcounts in those particular projects.

The way we made impacts, as I said earlier, was some of the combination as a result of the Platform and Mobile business unit, consulting headcount, as well as in some of the projects.

Where in better economic times, you might have a couple of C projects or investigations.

We clearly had much harder lens when we had projects that we were undertaking.

We will not starve projects that we believe in because we want to continue to drive innovation in those projects.

Great, thanks.

Next question will come from Ross MacMillan with Jefferies.

Yes, thanks.

Shantanu, you made a comment I think on 68% of the CS revenues coming from suites.

I wonder if you could help us understand maybe the unit number that we're seeing from Suites so that we can understand how far we are in that progression of point products to suite conversion as we go to the CS cycle.

Sure, Ross.

What we like to do is share a couple of data points with you.

The data point that we shared was as we look at Creative Suite penetration, we're approximately 2.9 when you consider the 6 million that we believe exists as a market.

And, you know, we wanted to give you some flavor of how people are moving from point products to the suites.

So, you know, we've got about 300,000 new users who are moving over to the Creative Suite from the March timeframe to the October timeframe.

The individual point products continue to drive revenue, but frankly, more and more of our customers are moving to the suites.

But, because so much of it also goes through licensing and goes through education, we're not going to provide unit numbers by individual point product or by suite.

Okay, thank you.

Our next question will come from Chad Bartley from Pacific Crest.

Thank you.

Just a followup on headcount.

Mark, I think you made the comment -- what's your headcount look like for Q2, and then should there be stability in Q3 and increase in Q4?

It would be helpful.

Then a followup.

I encourage you not to focus too much on the headcount number but look at the OpEx number.

Because as we have shifted where our work force is, the headcount number becomes less and less significant.

But I mean, if you really want to know, headcounts does slowly increase -- headcounts does slowly increase through the year because we are still hiring people.

When we did the restructuring, we talked about the fact that we were shifting resources from some areas into other areas.

And as a result of that, we were going to still be hiring.

Okay.

That-- that is helpful.

Then a quick question on the enterprise solutions.

Clearly the strongest growth in a year over year basis, but it did decline sequentially more than the rest of the business in aggregate.

Can you talk about that from a sequential basis, is that in line with expectations, or was there some weakness there?

I think your pre-announcement led us to believe that maybe that business was a little bit stronger.

Chad, I think it was very much in line with our expectations.

As you know, the enterprise business has a fair amount of seasonality associated with it because what happens is in Q4, there's a big push toward, trying to close all the deals.

Then you get the entire field organization ready with their new quotas for the year, and they're building up their pipeline that you continue to expect to see growth during the fiscal year.

When we look at that business, whether it was in financial services, which continued to do well, in government, I was in DC recently and we continued to think there's a huge opportunity with the new administration really focusing on both openness and transparency for the Lifecycle business in government.

And even in manufacturing, where we are working with our partners like SAP to have Lifecycle be a product that enables people to automate the business processes, we're seeing traction.

So, 18% growth was very much in line with our expectations.

We continue to expect to see that sequentially grow.

And we're really pleased because the awareness of Lifecycle right now with our customers is fairly high, clearly pays to watch what people have as a pain point which is an issue of how they can save cost and hear cycle plays very well to that, as does the Acrobat and Connect product offerings.

That's helpful.

And did you see that they need to expect that to grow sequentially in this point?

Very slightly in Q2.

But clearly building up to Q3 and Q4 because that's how the enterprise business typically plays out.

Excellent.

Thank you very much.

Our next question comes from Mike Olson from Piper Jaffrey.

Two quick ones.

What are you seeing from customers for their Creative Pro headcount, and do you have any sense from a high level how Creative Pro headcount trended since previous downturn?

Well, we've been speck a -- spending a lot of time with the Creative Pro customers.

The kinds of questions we get asked by them increasingly is help us, A, make the current people more productive and start to figure out new business models and how they can move from print only to print and web.

The appetite for digital content that they are seeing from their customers hasn't actually diminished.

They want to do more with the employee base that they have.

That's really the insight we're getting from those customers.

They're also looking increasingly at Air to build online experiences that are more engaging.

One of the interesting applications that we recently saw was that "The New York Times" company is working on a new news reader built on there for one of their brands.

And they're committing to launching that by the end of the second quarter.

So we clearly see more usage of video.

More usage of online advertising, and they're all looking at how they deal with this current economic climate.

And experiment with new business models.

Okay.

And then I realize we're a long ways away from the next launches, but is there any reason to expect that your product cycle timing in the future is going to change at all from typical spacing between products?

When we look at our businesses, let me give you a little insight as to how we look at each of our different businesses.

Clearly the Lifecycle business and the Acrobat business have less of a sort of launch-year impact because what we have we see there is there's more headroom available in terms of penetration.

And especially in the enterprise business, it's all about moving from a product-driven sale to a solution-driven sale, and we're doing more and more of that, working through partners.

So in those two businesses, we look at it and want to make sure that we continue to have a great value proposition for the customers.

Clearly in the hobbyist business we look and say we want to be ready in terms of getting the product ready for the holiday season.

So that doesn't change in terms of strategy.

And when we look at the Creative business or the Creative Suite revenue, we are not looking at this current climate and saying we should either accelerate or decelerate.

We have a cadence associated with our product cycle.

We have optimized that and made that very, very efficient.

And so the team's hard at work on the next Creative version.

And, you know, the amount of innovation that we could put in there actually increases.

So we've been seeing some early demos of the kind of stuff people are working on.

And it's very exciting.

So no change in how we look at launching the next version of the creative suite from a timing perspective.

Thank you.

The next question will come from Brad Reback with Oppenheimer.

Hey, guys, how are you?

Good.

As you look forward to the recovery if and when that ever happens, how fast can you guys turn the spending back on and how fast do you intend to turn spending back on?

We can obviously ramp up spending very quickly if we wanted to.

I think we would be very judicious about doing that and making sure that it was being put in the right places and focused on the right investment categories.

So we'll clearly ramp up if revenue ramps back up.

But not irresponsibly, obviously.

Okay.

So Mark, just to be clear, it's likely that spending would follow revenue ramps as opposed to anticipating revenue ramp?

Precisely.

Perfect.

Thank you.

And an example of that, if I might add, is also what we've done in the enterprise business.

Whether we look at the enterprise business and the opportunity today, we clearly think that's our $1 billion plus opportunity for us.

But we made a very conscious decision of saying we want to see productivity improvements for the existing field organization, and that's how we're going to drive Lifecycle revenue for 2009 rather than invest way ahead of the curve.

And so as Mark said, we're going to be judicious, and as the revenue starts coming in, then we will open up expense rather than the other way around.

Great.

Thanks a lot.

Our next question will come from Yun Kim with Pacific Growth Equities.

Thank you.

Can just talk about the overall health of your channel partner equisystem for CS and Acrobat and whether you have to make incremental investment and offset some of the weaker spending to offset some of the weakest systems by your partners and the number of sales within your channel partners or are you guys comfortable with the overall health of your channel network given the ability that you've had over the past six weeks?

Let me address that in two ways.

First let's look about what we have from the customer perspective, then Mark can answer the channel partner health question.

From a customer segmentation perspective, we've been doing a lot more to really understand the customer behaviors.

And we clearly see that individuals are increasingly looking for a direct relationship with Adobe through Adobe.com.

Where we see the channel partners add increasing value is either in the group setting, where there's reduction of friction associated with procuring our products.

That can happen through the channel partners, value-added partners who are providing more training as well as sales into either mid-level departments within enterprises or larger enterprises where they are providing a tax in conjunction other software performances.

So what we have a better idea of is of working with customers to Adobe and understanding what they're looking for as it relates to information, training, and procurement vehicles.

So we feel very good about that.

And as it relates to the financial viability if you will of the channel partners, the treasury team here does a very good job of diligently looking at all of our channel partners on a regular basis to check their financial health.

And I, frankly, meets with the CFOs of many of the channel partners just to make sure that they're stable, and we're not at this point concerned but we're clearly monitoring that situation.

Okay.

Great.

That's very helpful.

And Mark, CapEx was very light in the quarter, is that a new level going forward, or can we expect the same to get back to the lower level?

It's probably a new level for the time being.

That's obviously part of our spending constraints in addition to things that Shantanu had mentioned before.

Okay, great.

Thank you.

Next question will come from [Cash Rankin with Merrill Lynch].

Hi, thank you very much.

It looks like, you know, enterprise business has got good visibility and channel business seems to be getting better in the month of February.

So by default it looks like the end-user business as they currently priced it is for the variabilities.

I'm wondering if you can derisk forecast if you will for the end-users side as you book constructed guidance for the upcoming quarter.

And also, Mark, as it relates to you, should you need this end-user business to cycle back up for the company to regain its peak offering margins, or at some point you're actually going to be working the cost structure down, not depending upon that business to come back up so you can hit your peak margins anyway?

The first answer is, I mean, when we talk about end-user visibility, what we are really referring to is Adobe.com, where given the Adobe.com store in North America continues to be a meaningful part of the retail business that we do in North America.

We have weekly sell-through data so we understand what's happening there as well as to service our customers.

We have some insight into buying behaviors.

But realize that a lot of the revenue even for those individual users does go through channel partners because they are then procuring that software either from a software retailer or from a hardware store.

So, when we talk about end user, you have to again put that through both what happens at Adobe.com as well as the significant portion that still happens through the channel partners.

And then, Cash, to the -- to that point, I think we would clearly want the end user revenue to come back before you would see margins back to where they were at a peak of 40%.

Great, thank you very much.

Operator, we'll take one more question.

Thank you.

The question will come from [Hank Owens] with [Winerock].

Thank you.

To go back to your statement about confidence in the stabilization you're seeing in the channel business, is that a statement you can make in equal force with respect for the US versus Europe versus Asia, and then I have a followup to that.

Yes.

If we look at the past six weeks, February and the first couple weeks here, we do see it stable from a channel perspective around the world, again offset a little bit by the fact that there's some seasonality with Japan.

But that's to be expected.

But why wouldn't Europe in particular be lagging the recession that we've seen here in the US?

I'm curious that you'd have the same level of confidence around Europe as you would for the US.

Well, what we are trying to do is provide both of you on the call with transparency relative to the business that we are seeing right now.

I mean, Mark also did say that we have limited visibility.

And this is for six weeks.

So we're not economists, neither one of us is professing to be an economist.

But what we're trying to do is give you some visibility into what we are seeing so that you can then draw conclusions, as well.

So whether Europe is going to get much worse, whether North America has seen the bottom, we're less into predicting that than to give you some color into what we've seen so far.

All right.

Thank you.

So what I'd like to do is give you a quick assessment overall.

As a management team when you looked at Q1, while revenue was clearly a little bit below our expectations, we thought that we did a really good job managing expenses.

And we were pleased with the cost controls that we put in place.

We also see that the macro trends that we've talked about for our business actually continue to be in place.

When you think about the explosion of content, the proliferation of devices, the consumerization of IT where people want more engaging experiences in terms of how they use the transaction systems behind the firewall, in collaboration as a key theme.

None of those have changed when we talked to our customers.

So we continue to be excited as we look to the future that when the economy turns, that Adobe will certainly number a better position to capitalize on all of those trends through the investments that we're making.

Our priorities as a company actually remain the same.

They are the Flash platform and focus around making sure that we provide that as a great platform for people to deliver engaging experiences across multiple screens.

And for us to monetize that through the tools that we provide as well as new servers and services that we've been offering.

The Acrobat and Creative Suite business will continue to be the primary generators of revenue for us.

And we believe that as the economy turns, we'll be in position to capitalize on more of that revenue.

And the growth themes that we've outlined continue to be growth themes that we're excited about as a company.

The Lifecycle business, the Connect business, dynamic media as an overall opportunity for us to provide everything from plan to playback as people look at video.

And, finally the Connect business.

So we think we have a great employee base that's motivated and we look forward to sharing with you more at our next earnings call.

Thank you.

This concludes our call.

We thank you for joining us today.