Adobe Inc (ADBE) 2009 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Adobe second quarter fiscal year 2009 earnings conference call.

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

At this time, I'd like to turn the call over to Mr.

Mike Saviage, Vice President of Investor Relations.

Please go ahead, sir.

Good afternoon, and thank you for joining us today.

Joining me on the call are Adobe's President an CEO, Shantanu Narayen; as well as Mark Garrett, Executive Vice President and CFO.

In the call today, we will discuss Adobe's second 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 the 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, June 16, 2009 and contains forward-looking statements that involve risk and uncertainty.

Actual results may differ materially from those set fourth 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 Website.

Call participants are advised that the audio of this conference call is being broadcast live over the Internet and Acrobat Connect Pro 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 distributed without prior written permission from Adobe Systems.

I will now turn the call over to Mark.

Thanks, Mike.

For the second quarter of fiscal 2009, Adobe achieved revenue of $704.7 million, this compares to $886.9 million reported Q2 fiscal 2008 and $786.4 million reported last quarter.

Q2 GAAP operating expenses were $471.3 million, compared to $543.8 million reported in Q4 fiscal 2008 and $501.1 million last quarter.

Non-GAAP operating expenses in Q2 were $410.6 million, compared to $479.5 million reported for Q2 fiscal 2008 and $428.6 million last quarter.

GAAP operating income in Q2 fiscal 2009 was $161.4 million or 22.9% of revenue.

This compares to GAAP operating income of $260.2 million or 29.3% of revenue in Q2 fiscal 2008 and $207.9 million or 26.4% of revenue last quarter.

Non-GAAP operating income in Q2 fiscal 2009 was $237.7 million or 33.7% of revenue.

This compares to non-GAAP operating income of $349.6 million or 39.4% of revenue in Q4 fiscal 2008 and $295 million or 37.5% of revenue last quarter.

Adobe's effective GAAP tax rate in Q2 was 23%.

And the non-GAAP tax rate was 23.5%.

Q2 GAAP net income was $126.1 million, compared to $214.9 million reported in Q2 fiscal 2008 and $156.4 million last quarter.

Non-GAAP net income was $185 million, compared to $272.7 million reported in Q2 fiscal 2008 and $236.8 million last quarter.

GAAP diluted earnings per share for Q2 fiscal 2009 were $0.24, based on 528 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.40 reported in Q2 fiscal 2008, based on $542.4 million weighted average shares.

And GAAP diluted earnings per share of $0.30 reported last quarter, based on $527.8 million weighted average shares.

Non-GAAP diluted earnings per share for Q2 fiscal 2009 were $0.35.

This compares with non-GAAP diluted earnings per share of $0.50 in Q2 fiscal 2008 and $0.45 reported last quarter.

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

Creative Solutions segment revenue was $411.7 million, compared to $527.2 million in Q2 fiscal 2008 and $460.7 million last quarter.

Business Productivity Solutions revenue was $209.7 million, compared to $252.8 million in Q2 fiscal 2008 and $227 million last quarter.

Within Business Productivity Solutions, Knowledge Worker revenue was $156 million, compared to $198.4 million in Q2 fiscal 2008 and $163.1 million last quarter.

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

In Q2, enterprise revenue was $53.7 million, compared to $54.4 million in Q2 fiscal 2008 and $63.9 million last quarter.

Platform revenue in Q2 was $36.8 million, compared to $52.6 million in Q2 fiscal 2008 and $52.3 million last quarter.

Finally, Print and Publishing segment revenue was $46.5 million, compared to $54.3 million in Q2 fiscal 2008 and $46.4 million last quarter.

Turning to our geographic segments.

Results on a percent of revenue basis were as follows.

The Americas 45%, Europe 31%, Asia 24%.

In North America, our business began to stabilize in February and that stability continued throughout the second quarter.

In Japan, we experienced normal seasonal trends, with a strong month of March, followed by the normal seasonal decline afterwards.

Our European business was weaker than expected.

Employees at the end of Q2 totaled 7,437 versus 7,173 at the end of the first quarter.

The majority of the new hires in the quarter were in research and development located in lower cost geographies.

Our trade DSO in Q2 fiscal 2009 was 34 days.

This compares to 33 days in Q2 fiscal 2008 and 35 days last quarter.

Our global channel inventory position at the end of the quarter was within Company policy.

During the quarter, cash flow from operations was $262 million.

Our ending cash and short-term investment position was $2.7 billion, compared to $2.4 billion at the end of last quarter.

In Q2, we repurchased approximately 900,000 shares at a total cost of $19.7 million.

This concludes my discussion of our financial results.

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

We are targeting a Q3 revenue range of $665 million to $715 million.

We expect North America will grow sequentially from Q2 to Q3, offset by normal seasonal declines in Europe and Asia.

From a business segment standpoint, we expect our Creative and Knowledge Worker businesses to be flat to slightly down sequentially in Q3.

We expect normal seasonal strength in our education business in Q3 and our life cycle enterprise business to increase sequentially.

For margins, we are targeting a Q3 GAAP operating margin range of 20.5% to 25.5%.

And a non-GAAP operating margin range of 31% to 35%.

We are targeting our Q3 share count to be 529 million to 531 million shares.

For non-operating income, we are targeting a range of 1 million to 3 million on both a GAAP and non-GAAP basis.

For our Q3 GAAP effective tax rate, we are targeting approximately 22.5%.

And for our non-GAAP effective tax rate, we are targeting 23.5%.

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 $0.30 to $0.37.

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 Q2.

In Creative Solutions, our customer research suggests awareness and consideration for CS4 remains high.

We continue to focus our marketing efforts on the ROI and productivity benefits of Creative Suites to upsell and cross-sell into our existing customer base, as well as expanded option of CS4 by new customers.

However, CS4 continues to track at more than 20% below the revenue achieved with CS3 at the same point in the cycle.

Dynamic Media continues to be a key focus for Adobe.

At the National Association of Broadcasters Conference in April, we announced a new software framework, code name Strobe, that offers production-ready software components to streamline the development of custom Flash-based media players.

We have since announced the support of more than 20 companies for Strobe including global media companies, content delivery networks, publishers and advertising networks.

Last week, we announced, Clear Channel radio has chosen the Adobe Flash Platform for its online digital audio and video solution.

Clear Channel will start rolling out online access to its radio station sites over the next few weeks.

In Business Productivity Solutions, we continue to focus on driving PDF standardization and adoption by large enterprises and the public sector.

In China, PDF/A has been selected as a Chinese National Standard by its key archiving committee.

We also continue to increase the awareness of our Web conferencing solution, Acrobat Connect Pro.

Earlier this month, the US State Department utilized Connect to host a live interactive meeting in conjunction with President Obama's recent speech in Cairo.

And the US Marine Corps will streamline its secure collaboration and technology training in the field with Connect as part of a multi-year contract.

In our enterprise business, life cycle revenue was essentially flat on a year-over-year basis and down sequentially in Q2.

However, we enter the second half of the year with a strong pipeline and we expect reported revenue to grow sequentially in Q3.

Yesterday, we announced a major update to Acrobat.com.

We now offer paid subscription services, which include capabilities such as PDF Creation, Web conferencing with Adobe Connect Now and increased storage capacity.

Since Acrobat.com first launched in June 2008, 5 million people have signed up to use the beta service, with over 100,000 people signing up each week.

In our platform business, we continue to strengthen the Flash presence on multiple screens, from PC's and Netbooks, to the digital living room, to mobile devices.

In April, we announced the extension of the Adobe Flash Platform to connect to digital living room devices with an optimized implementation of Flash technology that delivers hi-definition video and rich applications to Internet connected televisions, set-top boxes, Blu-ray players and other devices.

We expect OEM's to start shipping devices by early 2010.

We are bringing Flash Player 10 to smart phone class devices to enable the latest Web browsing experience.

Multiple partners have already received early versions of this release and we expect to release a beta version for developers at our MAX Conference in October.

Google's Android, Nokia's Symbian OS, Windows Mobile and the new Palm Web OS will be among the first devices to support Web browsing with the newest Flash Player.

Companies including ARM, NVidia, Broadcom, Intel, Texas Instruments and Qualcomm are optimizing Flash Player for their processors and platforms.

We continue to see momentum for the Open Stream project and now have 25 participants on board to use Flash as a consistent runtime across screens.

Earlier this month, we announced further advancements to the Adobe Flash Platform, with a beta availability of Adobe Flash Builder 4, Adobe Flash Catalyst and the open source Flex framework.

These tools reduce designers' and developers' time to market for creating compelling applications and content.

Overall, we are pleased we were able to deliver solid profit margins and earnings despite the weak macroeconomic environment.

We continue to invest in our key business initiatives, which will drive long term revenue growth once the economy improves.

Our areas of focus continue to be; Investing in our core Creative and Acrobat businesses to grow our market position and revenue.

Building out our life cycle, Dynamic Media, Acrobat Connect and seeing seven businesses, where we see substantial growth opportunities over the next several years.

And advancing the Flash Platform, which provides a basis for these and other Adobe businesses to thrive and grow and gives Adobe distinct competitive advantages in a cross-platform, cross-device, multiple screen, always connected world.

Thank you for joining us today.

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

Thanks, Shantanu.

Before we get to Q&A, I'd like to remind everyone of our plans for our next financial analysts meeting.

We will host this year's meeting in conjunction with our annual Adobe MAX Conference, which will be held in Los Angeles during the week of October 5.

Our plan is to have the analysts meeting in LA on Wednesday, October 7 and provide a special offer for the financial community to attend MAX on Monday and Tuesday of that week.

More information about Adobe MAX can be found on the Web at max.adobe.com.

Invitations to the analysts meeting will be sent out within the next couple of weeks.

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

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

To access these documents and other investor related information, you can go to our Website at www.adobe.com/adbe.

For those who wish to listen to a playback of today's conference call, a Web-based Acrobat Connect archive of the call will be available from the IR page on Adobe.com later today.

Alternatively, you can listen to a phone replay by calling 888-203-1112.

Use conference ID number 5185344.

Again, the phone number is 888-203-1112, with ID number 5185344.

International callers should dial 719-457-0820.

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

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

Pacific Time on Friday, June 19, 2009.

We would now be happy to take your questions.

Operator?

(Operator Instructions).

First go to Steve Ashley with Robert W.

Baird.

Thank you.

You mentioned that Europe was weaker than you had expected.

Could you give us maybe a little color around where that weakness was, was it by geography or product?

And maybe a little bit of what the outlook is in those markets?

Thanks.

Hi, Steve, thank you.

This is Mark.

Yes, we definitely saw some weakness in Europe.

You can see that in the total revenue number.

The stability that we clearly saw in North America, since the beginning of February, has not factored into Europe's results yet.

I'd say that it was pretty much across-the-board in terms of product performance.

And from a regional performance within Europe, it was maybe a little bit more impactful in central Europe.

But again, it was fairly well spread across Europe in general.

And the guidance that we provided for Q3 factors in what we know about Europe as of right now.

And that's one of the reasons that I said that Europe would decline sequentially.

It's both a factor of seasonality that you normally have in Europe, as well as what we're seeing from an economic standpoint.

And then, with respect to the enterprise business, revenue there a little bit below our expectation.

Can you provide a little color on what might have happened in that market?

I'll take that, Steve.

With respect to life cycle, we continue to have a pretty strong pipeline.

And we believe that when we look at the full year 2009, we are going to continue to grow that business, despite not adding sales capacity over 2008.

So while the revenue in Q2 was a little bit lower than what we thought, if you look at the number of transactions as well, the number of server transactions greater than $50,000 actually grew quarter over quarter.

Thank you.

We'll next go to Kash Rangan with Merrill Lynch.

Hi, thank you very much.

Just a couple questions.

Number one, Shantanu, I know you quantified suite revenues as a percentage of Creative Suite.

I was wondering if you could give us an update on that?

And secondly, you talked about how the Company is gearing to increase the awareness of CS4 with all of the productivity benefits.

The second quarter, I think you pointed out that the revenues are 20% below the comparable point in the prior cycle.

The question is, where is -- do you see an inflection point ahead where the awareness picks up to the point where CS4 revenues, absent the economic cycle, will start to do better?

And you can see that actually before a conversation starts about CS5 and whatnot?

That's it for me, thanks.

So Kash, in terms of CS4, the customer awareness and consideration actually remains very high for CS4.

And clearly, the feedback that we've got from people who have adopted CS4 continues to be extremely positive.

Clearly, I think the revenue is being impacted by the overall macroeconomic condition.

But as we dig into the numbers, the premium suites, Design Premium, Design Standard and Master Collection continue to be the three best selling suites.

In fact, Master Collection continues to do well.

So I think that reflects that the overall platform strategy is clearly working.

And if it weren't for the macro economic conditions, we think that CS4 adoption would certainly have been higher.

What we are focused on, because more people are thinking about ROI, is making sure that the messaging that we have reflects how people can very quickly recoup the costs by moving from CS3 to CS4.

So that's where really the variable marketing is focused.

But clearly, also in parallel, we're working on the multiple innovations that will be reflected in the next version of CS.

And so, that includes offering for multiple devices.

The new products that we've talked about, we have Flash Catalyst and Flash Builder.

New services like Browser Lab, as well as in-context editing and Acrobat.com in terms of services that we'll provide.

So two focus areas for us.

Continuing to drive CS4 revenue with respect to making sure the messaging is out there and continuing to drive innovation for the next release.

And the suite revenues, which were 68% of CS4 last quarter, any update on that?

It's relatively in line.

So we continue to have suite revenue as a percentage of the overall Creative revenue at that level.

Okay, thanks a lot.

We'll next go to Sarah Friar with Goldman Sachs.

Great.

Thanks a lot.

A couple of quick questions.

Just first, Mark, in terms of linearity you talked about next quarter normal seasonality.

Should we also extrapolate to think about the November quarter having normal linearity, which would be a sequential uptick then?

Is there anything right now that would have you backing off of that?

Hi, Sarah.

Yes, so we would expect, and I think I said this on last quarter's call, which would still hold true, that revenue in the fourth quarter would tic back up with normal seasonality.

Okay.

Good, and then Shantanu, on the product cycles, is there anything that's changed in how you think about the gap between your product cycles?

I know you don't want to get on to a discussion of CS5 just yet but I think historically, you've talked about an 18 to 24 month gap.

Given where you are with CS4 right now in terms of penetration, is there any changes to your thinking in terms of elongating the cycle or the flip side, maybe shortening to get back out again with a new kind of brand and new awareness as the economy starts to recover?

No, Sarah.

As it relates to the cadence of our product cycles, we have a machine within the Company in terms of how we drive innovation.

And so, the focus for those folks continues to be to drive to the cycle that we talked about, namely 18 to 24 months.

Much quicker than that and our customers have told us that it's harder for them to adopt every single cycle.

And much later than that, I think we allow other competitors to come into the particular marketplace.

Also as you know, later this year, we'll have new versions of both the Apple's operating system Snow Leopard, as well as Windows 7.

And so I think getting the next version of CS to support both those releases makes a lot of sense.

As people adopt new software, they tend to want to upgrade Creative or Acrobat products.

So, we're continuing to think that our current strategy is the right one there.

Okay, that's great.

Could I ask one other quick one, since you mentioned Apple and I get asked a lot about iPhone traction?

Any kind of update with the Flash Platform and so on, on iPhone?

And that's it for me, thank you.

Sure.

Let me give you an update first on the overall Flash Platform.

We are seeing just a tremendous adoption of the Flash Platform, not just on PC.s but across multiple devices.

And all the expressive features that we've put in the new version of Flash Player 10, as well as the usage of video, continues to accelerate.

And customers are clearly telling us that what they want is the ability for Flash, in all its expressiveness and with the video capabilities, to run not just on PC's and smart phones but also on devices such as TV.

So we're absolutely committed to working to it.

What we have done is we've bolted the current Flash Player 10 to smart phones and we've already provided this to multiple partners.

And as we said in the prepared remarks, Android, Windows Mobile, Symbian and the new Palm Web OS, we expect to see support for that.

We also expect to see a beta version of the Flash Player 10 for smart phones later this year at MAX.

We're also equally committed to bringing the Flash Player to the iPhone, so now we do have a Flash Player 10 version for smart phones.

We continue to work with Apple.

We need more API's and cooperation to bring the capabilities of Flash to the iPhone.

And we think it's in both of our best interests to make sure that 85% of the Top 100 Websites that use Flash, that that experience is available to the Apple customers.

All right, thank you very much.

We'll next go to Brent Thill with Citi.

Thanks, good afternoon.

Mark, on the operating margin, your Q3 guidance is slightly lower than the guidance range you gave for Q2 and understanding, relative to the seasonality you'll see in the summer.

But can you just walk through how you're thinking about trough levels in this cycle for margins?

Are we likely to see the low 30's as the trough in terms of your view on the margins?

Hi, Brent.

Yes, and one way to think about it is at the operating expense level.

So if you look at operating expenses, I said last quarter that we would come down a bit more this quarter and I'm really pleased that we did.

If you look at where we are relative to our peak, we've taken OpEx down from a peak of $480 million, to down to close to $410 million.

And that basically carries through into next quarter.

So OpEx really should be in this same ballpark next quarter.

And the revenue range is slightly lower, so that's why you see margins be slightly lower and earnings slightly lower in the third quarter.

I do think that's a good trough, assuming the economy doesn't get any worse.

And then as revenue picks back up, margin will follow.

One thing, while you bring this up, Brent, is I think it would be good to give you a little bit of perspective, as Shantanu and I think about operating expenses and going forward into even next year.

Next year, is going to be a strong product year for Adobe.

And it's pretty clear that it's difficult to predict GDP growth for next year or even Adobe's 2010 revenue right now.

But in a normal economy, I think we've shown that we can grow earnings at least with revenue.

Given the current environment this year, we clearly focused on cost reductions to preserve a given level of margin at these reduced revenue levels.

And as the revenue starts to return, earnings will grow.

I think you should remember that we're going to invest with revenue and we're going to have to bring back some variable costs given the economy.

We dramatically reduced some things this year like variable marketing and comp plans and some of that comes back next year.

But I do think you're looking at a trough right now, assuming the economy stays right where it is.

Okay.

Just a quick follow-up, Mark.

Just on your comment about the Americas stabilizing.

Can you just drop one more layer in and give us some color in terms of what you're seeing on the direct versus the indirect side?

And what are you specifically seeing that's giving you more confidence that that stability is ongoing?

Sure.

As we've talked about in the prior calls, Brent, we get sell-through data from the channel every single week and we can monitor that very closely.

And if you go all the way back to February, that sell-through data has been very consistent on a week to week basis.

So that gives us a lot of comfort that, so far, it feels like we've bottomed out, from a North America perspective.

And as well as on the direct side, the pipeline and the deal closures, it all feels very consistent from last quarter.

So that also gives us comfort that we've tended to bottom out, at least in the US.

Brent, one other color I might add is, even when you think about Creative revenue, as we know the larger enterprises tend to be a little bit later in the cycle in terms of adoption of CS4.

And actually, last quarter, the adoption of CS4 by larger customers in the US was greater than we expected.

So I think that also gives us some comfort.

Thank you.

From Morgan Stanley, let's move on to Adam Holt.

Good afternoon.

I just have to start off with a follow-up on the operating margin question.

Headcount grew about 4% in the quarter sequentially.

Now, you mentioned that that was mostly in lower cost geographies.

As we think about the balance between investing as the market returns and operating leverage, can you talk us through how you think about headcount growth going forward?

And do you think ultimately, as revenue comes back, you can see margins get back to fiscal '08 levels?

So on the headcount side, I don't really look at it from a total headcount perspective, as much as we've done in the past in software.

Because you've really got to look at operating expenses in total and not just focus on the headcount number.

So, when we did the restructuring that we did back in December of last year, we had planned as part of that to add back heads in low cost geographies.

So what you're seeing us do right now is very consistent with the plan that we laid out at the end of last year.

As it relates to how quickly margins return back to prior levels, honestly, it's just too early to answer that question, until we see what revenue does because it really is a factor of how quickly revenue comes back and whether it stays back.

And that's something that I just can't answer for you right now.

If I could just ask one follow-up on some of the CS metrics.

Now that you're a few quarters into the CS4 cycle, have you seen any shift in the mix between either new units or upgrade units?

And can you talk a little bit about the mix between Creative Pro's and non-professional Creative's in the quarter?

Thanks.

So Adam, as it relates to the CS4, I would say the mix has been relatively steady right through the cycle.

It's clearly been at a level lower than CS3, that we're not happy about.

But when you think about Creative Pro's versus non-Creative Pro's, when you think about upgrades versus full units, when you think about the revenue or suites as a percentage of the total Creative revenue; it's been relatively constant.

As I said the one area where I would say CS4 has changed is, the Master Collection adoption seems to be higher than it was in CS3.

But otherwise, the business has been relatively consistent and we take comfort in that.

We think the segmentation that we created is meeting the needs of the customers.

Terrific.

Thank you.

Let's go to Walter Pritchard with Cowen & Co.

Hi, Shantanu, just wondering if you could comment, at a high level, around your installed base.

I know there's been -- if you read just the newspaper around all of the print publishing business, there's been some segments of that market that have been pretty challenged.

And I know you don't sell into newspapers, specifically.

But just wondering, if you could talk about the health of, specifically, the print publishing base and how you expect that to impact the business going forward, if at all?

Well, you take the overall Creative market, Walter, we continue to believe that from our total available market, we still think it's about 6 million Creative professionals worldwide.

As you point out, the mix of what content those Creative professionals are creating is certainly changing.

And it's becoming more online, more Web, more video and a little less one data type, which was maybe print in the past.

But from an overall market perspective, we're actually seeing that the number is relatively the same.

The second thing I would point out is that, clearly, with new products like Flash builder and Flash Catalyst, we're trying to bridge the gap between designers and developers.

And we're increasingly trying to attract new developers who haven't traditionally been customers to our platform.

And we think that that's a revenue opportunity for us moving forward.

Flash Builder continues to do well.

The number of enterprise companies that are adopting Flex continues to grow, both in terms of the solutions that they use within their company, as well as part of their own enterprise offering.

And then, Mark, just a follow-up on -- or actually, a question on the guidance.

I was a little surprised to see the high end at $715 million and we haven't seen a quarter in August where it's been up from May, outside of 2007 when you had the product release.

I'm just wondering, under what conditions would you see that happen, where you'd actually see the business up sequentially from May to August?

Yes, one of the reasons we gave the range, which suggests that it could be up quarter on quarter, is we did end this quarter, as much as it's not indicative of future performance, with 4% of our revenue in backlog.

So we had, through the end of this quarter, 4% of this quarter's revenue in backlog.

And that gives us more comfort on that range for Q3.

And Mark, is that in a certain product area or is that just across-the-board?

It's all over the place and we haven't, in the past, disclosed where that is by product line.

Great.

Thanks a lot.

Let's move on to Ross MacMillan with Jefferies & Company.

Thank you.

Mark, just a quick one on that.

Can you remind me where the product backlog was coming out of 2Q?

Virtually zero.

Yes, okay, thank you.

And then on CS4, I'm curious, you describe it being less than 20% where you were in the CS3 cycle.

When you think about the larger customers and agencies, where do you think you are with those guys?

Is that consistent with that kind of down 20% plus or are they a little bit lagging or are they starting to adopt now?

I'm just curious about those guys in particular.

I would say it's generally in line with the overall results that we've seen, Ross, with the overall business.

There are clearly, a number of customers who have already adopted.

As I mentioned last quarter, we have seen adoption among larger customers for CS4.

But at the macro level, I would say it's in line with the overall business.

Great.

And as you think forward, assuming that Windows 7 could create a PC upgrade cycle, is that -- do you think that's a powerful driver for your Creative base, given about 50% are PC users, or do you not view that upgrade event as so material as an OS change in isolation?

Or is it really that your business is somewhat kind of insulated from that?

No, in the past, what we have seen is as people decide to upgrade, whether it's hardware purchases or software, it tends to drive new software purchases because people typically do not buy a new computer or upgrade their hardware and stick with older versions of software.

And so, whether it's Apple's Snow Leopard or Windows 7, while we are not predicting what that impact might be on our revenue, in the past, that has caused people to upgrade software as well.

And finally, just on the Dynamic business such as the Flash server product and the video product, do you break those out in terms of the revenue contribution?

No.

It's reported within the Creative Solutions segment but I can give you some color on that business as well.

We continue to clearly see accelerated adoption of Flash video on the Web.

We announced that Clear Channel was again one of the key marquee customers that we got last quarter, moving away from a Windows solution to a Flash Media solution.

And when we see this adoption, that typically translates into increased revenue for the tools.

And again, the Master Collection suite adoption or the Production Premium suite adoption tends to be more directly correlated with video.

And even if you look at the number of bytes that we are serving through the Flash Media server or the Flash video streaming server, that is clearly on the rise.

Another exciting area for us there, that we announced at the NAB Conference, was a number of our customers were actually building out the entire video client with Flash video embedded in it.

And so, the announcement of a project that we made, called Strobe, allows all of these customers to have a new toolkit that enables them to very quickly deliver this engaging video experience.

And what that also allows us to do now is to partner more effectively with, whether it's the content delivery networks, the advertising networks, the analytics companies, to provide new services and hence, increase our revenue.

So, video continues to be a huge area of growth for us.

The other area where we are seeing a lot of demand, frankly, is with IP connected TV's.

And everybody who wants to provide an engaging experience on the new generation of IP connected TV's also wants to make sure that Flash video is a first class citizen.

Thank you.

Next, we'll go to Sasa Zorovic with Janney Montgomery Scott.

Thank you.

So my first question would be, specifically, regarding the linearity in the quarter.

So you sort of mentioned that the US was sort of stable there.

And would that also mean that, basically, revenue was kind of coming at sort of a measured pace throughout the quarter?

And then, specifically, if that was also the case, was there some kind of a difference over in Europe and then in Asia?

Hi, Sasa, it's Mark.

No, there's no real difference in linearity, I would say overall, this quarter from prior quarters.

We're a pretty consistent revenue, week to week, kind of generator, given our channel business and that has not changed.

So how -- does it then give you sort of an indication maybe that the business might be also stabilizing over in Europe and then in Asia or was it also then solely for the Americas business?

Well, I'd say today, it's primarily Europe.

If you look at Europe, you've got two factors.

One, is it performed lower than our expectation this quarter, even though it maybe was relatively linear, it was still lower than we would like.

And then, you've got normal Europe seasonality in the third quarter.

So we do expect that Europe will be down sequentially.

Okay.

And then, my final question would be regarding your number of larger transactions that the number that has actually gone up, transactions that were over $50,000.

And has that been really primarily due to the Americas revenue sort of starting to do better?

Have you noticed there maybe sales cycles shortening or what has really been kind of a trend behind that, if you could elaborate a little bit?

I think to give you some more color on the enterprise business, Sasa.

As I said, yes, the number of transactions greater than $50,000 definitely grew quarter over quarter.

I think it's just a more mature business for us right now, life cycle.

The value proposition that we're talking about certainly plays well with both financial services, in terms of how they're trying to provide -- protect their revenue streams and drive cost cutting out of their customer facing processes and government.

We continue to see strong performance in government.

It dovetails really nicely with the new administration's priority of providing open, transparent and participative government solutions.

And so, I think it's more a reflection of that business becoming a more mature business for us.

Also, remember, we had talked about, we are in the process of moving that business from being where we get a lot of revenue through consulting, to really getting more and more of that through licensing, which we think is in our best interests.

And in developing an ecosystem of partners.

So when I look at the fundamental underlying aspects of that business, I'm pleased.

The pipeline is strong, products are gaining traction, the revenue is primarily through licensing, which is what we want.

Thank you.

Thank you.

And next, we'll go to David Hilal with FBR.

Great.

My first question is a follow-up to the headcount earlier question.

So, you've added about 250 this past quarter.

And Mark, you said this is kind of part of the plan, is to trim some of last year.

The plan for the balance of this year, is it to kind of hold steady at 7,400 or do you anticipate that picking up?

And if so, in what areas?

David, we'll continue to hire.

We're primarily focused in the R&D area, which is what the bulk of this 264 was.

And again, it will be primarily in lower cost geographies but there's a lot of opportunity for us on the R&D side of the business.

And to the extent that we can do it in the guidance that we're providing you guys, you'll see that number continue to go up, not a lot but it will go up the balance of the year.

Okay.

And then, Shantanu, maybe a bigger picture question but as we read and learn more and more about HTML 5, I wanted to understand, in your view, both the opportunity and threat that that may present to Adobe?

Sure.

So to the extent that an improved HTML standard accelerates innovation and consistent reach for Web content, we're very supportive.

And clearly, from the perspective of our tools, we will support the creation and management of HTML content to the level that they want.

I think it speaks, increasingly, to the realization that rich Internet applications and delivering engaging experiences is increasingly important to all of our customers.

I think the challenge for HTML 5 will continue to be; How do you get consistent display of HTML 5 across browsers?

And when you think about when the rollout plans that are currently being talked about, they feel like it might be a decade before HTML 5 sees standardization across the number of browsers that are going to be out there.

So clearly, supportive in terms of making sure, as HTML 5 is evolving, that we will support it in our Web offering tools.

But from the perspective of continuing to drive Flash and innovation around Flash and rich Internet applications, we still think that, actually, the fragmentation of browsers makes Flash even more important, rather than less important.

Great, thank you.

We'll move on to Dan Cummins with Lime Rock Research.

Mr.

Cummins, check your mute button, please.

Sorry, can you hear me?

Yes, please, go ahead.

So, sorry.

I wanted to follow-up on Sarah's question about Apple.

Since you may not be seeing adequate cooperation on the API, does that follow that they are -- Apple is developing their own Flash clone, Flash Player?

Or do you -- is your bet still that you're going have a single conclusion to your development efforts?

And then, I had a question about the educational market.

Again, we are excited about the fact that we now have a Flash Player 10 for smart phones that enables us to deliver Flash functionality across all smart phone devices.

We think it's in Apple and Adobe's best interests to make sure that Flash is a first class citizen.

And we will work with Apple.

In order to deliver it as a browser plug in, we need API's and support and cooperation from Apple and we will -- we are constantly reaching out to them.

Okay.

With regard to the education market, I wanted to ask about, well, we've seen some evidence of pretty wide distribution of the Creative Suites, Version 2 and Version 3, maybe even all the way down to the secondary classrooms in the Northeast.

Is this a growing market for you?

How significant is this, could this be over the near term?

Education, actually, is one of the largest verticals for us as a Company and has remained so for many, many years.

You're right in pointing out that, in terms of getting adoption by both K-12, as well as higher ed early on in the process, that's a good strategy for us.

Because then, when these people go into the workforce, they continue to use our products.

We also announced a great arrangement with New South Wales, the education department there.

Where they are providing all of their students with a notebook with our Creative products.

So the education market, frankly, has been a very large market, vertical market for us for many, many years.

That's part of the reason why Mark said, as we look at sequential Q2 versus Q3, we expect to see the educational back-to-season contributing to our revenue.

But we have a direct sales force that sells to them.

We have an enterprise licensing agreement for larger institutions who want to standardize, whether it's Creative or Acrobat, across their entire campus.

And we also have, actually, student programs that enable students to buy our software at a discount.

Next question?

We'll go to Blair Abernathy with Thomas Weisel Partners.

Thank you.

Shantanu, I wonder if you can just give us an update on AIR adoption rates and some positive data points you may have there for us of late?

Sure.

In terms of the AIR adoption, we have seen over 200 million downloads of the AIR client, which we're very pleased with.

We continue to see some really great applications.

There's a Twitter desktop client.

There's aggregation of multiple social networking sites like FriendFeed.

There's video sharing and discussion sites like Seesmic.

The New York Times Reader that was released, they've got over 100,000 downloads of the AIR application.

They're very pleased with that adoption.

I just think it's a great example of how publishing in the future can be done through technology that's provided by Adobe, with the brand that they have.

The BBC iPlayer continues to be one of the most heavily used applications in the UK.

I can go on and on.

So, we continue to think that AIR is on a track for success.

Getting it to smart phones, getting it to non-PC devices like TV's is going to be an important part.

Improving the tooling, which is where we make revenues, so what we have done with Flash Catalyst and Flash Builder is important to us.

But the Flash Platform continues to gain in adoption.

Okay, great.

And also, what's your feeling on the M&A environment today?

You haven't done too much of this so far this year.

You've got lots of cash.

How are you guys looking at it going forward here?

Well, we continue to look for acquisition opportunities.

We've said that the sweet spot for Adobe tends to be small technology companies that fill out holes in our portfolio, as well as gets us great D&A talent.

But we will continue to look for opportunities to capitalize on the multiple opportunities that we have.

Great.

Operator we'll take two more questions.

Okay.

The first will come from Mike Olson with Piper Jaffray.

All right, thanks a lot.

I got on late, so sorry if this question has already been asked.

But basically, I know you don't want to pre-release any product information when we look at kind of the next Creative products.

But is there tidbits you could offer, as far as what new features and functionality could be built into the next Creative products?

You talked about Dynamic Media and multi-platform development?

If there's anything else you can throw at us?

Thanks.

Sure, Mike.

We touched on the two focus areas for Creative, which is we continue to focus on driving CS4 revenue.

That's an important aspect of making sure we drive the business until the next version comes.

But in terms of giving you some color of what's on tap for the next version, I think offering for multiple devices continues to be a high area of priority for us.

Expressiveness with everything that we've put in the Flash Platform.

There's already a significant amount of functionality in Flash 10 for which we don't have authoring tools.

Flash Catalyst and Flash Builder, you can expect to see that as part of the next generation of our Creative Suite tools.

New services, we announce Browser Lab, which enables people, as they're creating content for Websites to be able to emulate it easily.

In-context editing, which allows collaborative editing on Websites.

So services, device authoring, video Dynamic Media, expressiveness.

Hopefully, that gives you some flavor.

As well as support for the new OS's that will come out between now and the time we ship the next version of Creative Suite.

Okay, thanks.

That's very helpful.

And it looks like our last question will come from Yun Kim with Broadpoint Amtech.

Thank you.

You may have said this but what was the currency impact for the quarter?

Actually, we did not get to that, so let me give you that.

From a year over year perspective, net to revenue was a $16 million loss, which was, for the most part, factored into our guidance.

It was a $20 million loss from the euro, offset by a $4 million gain from the yen.

Okay.

And then also, you talked about the business conditions in North America and Europe.

Can you just tell us what you're seeing in the Asian market in the near term?

Asia, we are keeping our eye on Asia.

Like we said on the call, we do expect Asia to be down sequentially, mainly due to seasonality.

In Japan, we had their end of their year-end in our second quarter.

So we do expect Asia to go down sequentially.

And we're clearly keeping our eye on both Europe and Asia as it relates to the economy.

Okay.

And then just, finally, with about $2.7 billion in cash, can you just give us an update on your current share buyback plan and perhaps accelerate that plan in the near term?

And then, also, going back on the acquisition strategy, are you primarily focused on making smaller technology focused acquisitions or are you not afraid to do a big one, given the right opportunity?

Thanks.

So on the stock question, we do continue to buy stock.

We've got room left in the authorization to buy back shares to offset dilution and we continue to believe that we should return excess cash to shareholders.

In these relatively uncertain times, we've erred on the side of conserving cash.

And to the extent that we continue to monitor that when the time is right, if things line up, we'll announce another opportunistic program.

But right now, we just continue to buy to offset dilution.

And with respect to your question on acquisitions, for the most part, we're focused on small companies, as I said, that provide great technology.

I think we've demonstrated with Macro Media that we do have both skill set and the people to be able to integrate larger deals if they make strategic sense.

So we're confident, if the right one comes along, that we would be able to manage it.

But I do want to thank everybody for joining us on the call today.

We really remain excited about the breadth of our opportunities across the customer segments, from enterprise, public sector, Knowledge workers, as well as Creative professionals.

It's clear that we're managing our expenses to deliver solid margins and earnings.

And at the same time, we feel good about the fact that we're investing in areas that will fuel our future growth.

And so, there are some really amazing things happening at Adobe.

We look forward to sharing more progress with you next quarter, as well as in October, at MAX and the financial analysts meeting.

Thank you.

Once again, this concludes today's conference call.

We do thank you for your participation.