Adobe Inc (ADBE) 0 Q0 法說會逐字稿

Ladies and gentlemen, good day and thank you for your patience.

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

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

And now 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 to discuss Adobe's Q3 earnings report as well as our planned acquisition significance of Omniture.

Joining me on the call from Adobe are Shantanu Narayen, our President and CEO; and Mark Garrett, Executive Vice President and CFO.

Also joining us on the call from Omniture is their CEO, Josh James.

In a moment I will turn the call over to Shantanu for some opening comments.

Following that Mark will walk you through our Q3 results as well as discuss our Q4 financial targets and financial information related to the Omniture transaction.

Shantanu will then discuss the strategic rationale for Adobe's planned acquisition of Omniture.

Josh will follow with his perspective on the advantages of a combination with Adobe.

Later we'll host a Q&A session where we will answer your questions.

By now you should have a copy of the two press releases we issued today.

Our Q3 earnings press release, as well as a press release which discusses the acquisition of Omniture.

Both crossed the wire approximately one hour ago.

If you need a copy of these press releases, you can go to Adobe.com under the Company and press links to find them.

Before we get started I want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, our forward-looking product plans and a discussion on the acquisition of Omniture is based on information as of today, September 15, 2009.

And contains forward-looking statements that involve risk and uncertainty.

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

For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure and the press releases issued today.

We also encourage you to review Adobe's and Omniture's SEC filings including our respective Form 10-Q and Form 10-K filings as well as other documents that will be filed today in conjunction with today's announcements.

During this call we will discuss non-GAAP financial measures and our third quarter earnings results and fourth quarter financial targets.

GAAP financial measures that correspond to these non-GAAP financial measures as well as reconciliation between the two are available on our website.

I would also like to stress that information we discuss in this conference call related to our intent to acquire Omniture is for informational purposes only.

This information is not an offer to buy or the solicitation of an offer to sell any securities.

The solicitation and the offer to buy shares of Omniture's common stock will only be made pursuant to a tender offer statement on schedule TO including an offer to purchase, and other related materials that Snowbird Acquisition Corporation, a wholly owned subsidiary of Adobe Systems Incorporated intends to file with the SEC.

Once filed, Omniture stockholders will be able to obtain the tender statement on schedule TO, the offer to purchase and related materials with respect to the offer, free of charge, at the website of the SEC, at www.SEC.gov from the information agent and dealer manager named in the tender offer materials or from Snowbird Acquisition Corporation.

Omniture stockholders should read these materials carefully prior to making any decisions with respect to the offer.

Because they contain important information including the terms and conditions of the offer.

We have also set up a web page for easy access to acquisition related documents including an FAQ document.

The link for this page is in the acquisition press release we issued today.

Finally, call participants are advised that the audio of this conference call is being webcast live over the Internet in Acrobat Connect Pro.

It is also being recorded for playback purposes.

The webcast will be archived on Adobe's Investor Relations website until the closure of the acquisition and is the property of Adobe Systems.

The audio and archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe Systems.

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

Thanks, Mike, and good afternoon.

We achieved Q3 results which were solidly within the targets we provided at the outset of the quarter.

Revenue was $697.5 million in Q3, with non-GAAP earnings of $0.35 and a non-GAAP operating margin of 34%.

More importantly, I am excited to announce we have signed a definitive agreement to acquire Omniture, the industry leader in web analytics and online business optimization.

This acquisition not only aligns two highly innovative and successful companies, it positions Adobe to provide an end-to-end platform with the power to transform digital media and advertising.

Later in the call, I will discuss the strategic rationale for the acquisition but before that, we'll start with Mark walking us through our Q3 results.

Mark?

Thanks, Shantanu.

For the third quarter of fiscal 2009, Adobe achieved revenue of $697.5 million.

This compares to $887.3 million reported Q3 fiscal 2008, and $704.7 million reported last quarter.

Q3 GAAP operating expenses were $464.9 million, compared to $556.9 million reported in Q3 fiscal 2008, and $471.3 million last quarter.

Non-GAAP operating expenses in Q3 were $409.9 million, compared to $475.1 million reported for Q3 fiscal 2008, and $410.6 million last quarter.

GAAP operating income in Q3 fiscal 2009 was $167.6 million, or 24% of revenue.

This compares to GAAP operating income of $219.5 million or 24.7% of revenue in Q3 fiscal 2008, and $161.4 million or 22.9% of revenue last quarter.

Non-GAAP operating income in Q3 fiscal 2009 was $237.1 million or 34% of revenue.

This compares to non-GAAP operating income of $351.9 million or 39.7% of revenue in Q3 fiscal 2008, and $237.7 million or 33.7% of revenue last quarter.

Adobe's effective GAAP tax rate in Q3 was 22%, and the non-GAAP tax rate was 23.5%.

Q3 GAAP net income was $136 million compared to $191.6 million reported in Q3 fiscal 2008 and $126.1 million last quarter.

Non-GAAP net income was $186.1 million compared to $269.1 million reported in Q3 fiscal 2008 and $185 million last quarter.

GAAP diluted earnings per share for Q3 fiscal 2009 were $0.26, based on 531.8 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.35 reported in Q3 fiscal 2008 based on 541.3 million weighted average shares and GAAP diluted earnings per share of $0.24 reported last quarter based on 528 million weighted average shares.

Non-GAAP diluted earnings per share for Q3 fiscal 2009 were $0.35.

This compares with non-GAAP diluted earnings per share of $0.50 in Q3 fiscal 2008, and $0.35 reported last quarter.

I will now discuss Adobe's revenue in Q3 by business segment.

Creative solutions segment revenue was $400.4 million, compared to $493.6 million in Q3 fiscal 2008 and $411.7 million last quarter.

Our overall CS business remains stable with European weakness offset by strength in the education market.

Business productivity solutions revenue was $210 million, compared to $283.5 million in Q3 fiscal 2008 and $209.7 million last quarter.

Within business productivity solutions, Knowledge Worker revenue was $154.5 million, compared to $218 million in Q3 fiscal 2008, and $156 million last quarter.

Our Acrobat business continues to be impacted by the economy while our web conferencing solution Connect Pro had a strong quarter.

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

In Q3, enterprise revenue was $55.5 million, compared to $65.5 million in Q3 fiscal 2008, and $53.7 million last quarter.

LiveCycle revenue grew sequentially in Q3 but the business declined year-over-year due to the weaker economy.

Print and publishing segment revenue was $42.2 million compared to $51.1 million in Q3 fiscal 2008, and $46.5 million last quarter.

Finally, platform revenue in Q3 was $44.9 million, compared to $59.1 million in Q3 fiscal 2008 and $36.8 million last quarter.

The sequential increase in platform revenue was due to increased volume of third party tool bar distribution associated with our runtime client downloads.

Mobile revenue was flat quarter-over-quarter and down year-over-year due to the impact of the Open Screen project.

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

The Americas, 51%.

Europe, 28%.

Asia, 21%.

In North America, our underlying business remains stable and we achieved strong results in the education market.

Asia performed better than we expected, which helped to offset some of the continuing weakness in Europe.

Employees at the end of Q3 totaled 7,564, versus 7,437 at the end of the second quarter.

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

Our trade DSO in Q3 fiscal 2009 was 37 days.

This compares to 34 days in Q3 fiscal 2008, and 34 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 $237 million.

Our ending cash and short-term investment position was $2.6 billion, compared to $2.7 billion at the end of last quarter.

In Q3, we repurchased approximately four million shares at a total cost of $116.1 million.

This concludes my discussion of our financial results.

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

These targets do not include any financial impact from the proposed acquisition of Omniture.

We are targeting a Q4 revenue range of $690 million to $740 million.

We expect normal seasonal trends to affect our Q4 revenue.

In the Americas, we expect revenue to be flat to slightly up on a sequential basis.

In Europe, we expect revenue to grow sequentially and in Asia we expect revenue to be down slightly quarter-over-quarter due to seasonality in Japan.

From a business segment standpoint we expect our Creative, Knowledge Worker and enterprise businesses to grow sew sequentially in Q4.

We also expect our platform business to decline modestly in Q4.

For margins, we are targeting a Q4 GAAP operating margin range of 23 to 27% and non-GAAP operating margin range of 33 to 36%.

We are targeting our Q4 share count to be 530 million to 532 million shares.

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

For our Q4 GAAP effective tax rate we are targeting approximately 23% and for our non-GAAP effective tax rate we are targeting 23.5%.

These targets lead to a GAAP earnings per share range of $0.23 to $0.29 per share and a non-GAAP earnings per share range of $0.33 to $0.39.

Finally, I will cover the financial aspects of the transaction we announced today.

Under the terms of the agreement, we expect to acquire all of the outstanding Omniture common stock for $21.50 per share in cash or approximately $1.8 billion on a diluted equity value basis including options or approximately $1.7 billion net of cash.

This represents a 45% premium over their 30 trading day average through yesterday's close.

We expect to finance the transaction through a combination of cash on hand and our existing line of credit.

The acquisition will be structured as a tender offer for all of the outstanding shares of Omniture common stock, followed by a second step merger to acquire any remaining shares not acquired in the tender offer.

The transaction is expected to close in our fiscal fourth quarter, subject to customary regulatory approvals and other customary closing conditions.

Over time, we expect the addition of Omniture to positively impact revenue growth and earnings growth.

While we expect limited expense synergies, the strategic rationale for the combination is the kinder term revenue benefits we expect from both existing products and services and new jointly developed solutions.

Omniture will further diversify Adobe's revenue, given its broad-based subscription and usage based recurring revenue model.

Although Omniture's gross and operating margins are lower than ours, given the infrastructure investments required of their SaaS delivery model, we do anticipate improvement in their margins over time as their business continues to scale.

The transaction is expected to be accretive to earnings on a non-GAAP basis in fiscal 2010, based on projected Omniture non-GAAP revenue performance.

Non-GAAP excludes certain purchase accounting related items including a deferred revenue write-down.

We plan to integrate Omniture as a new business unit and we will report the results of this business unit within a new business reporting segment in our SEC filings.

This concludes my section.

I'll now turn the call back over to Shantanu.

Thanks, Mark.

Adobe's mission has been to revolutionize how the world engages with ideas and information.

Increasingly, our customers have been asking us to help them deliver more effective solutions for assembling and delivering targeted web content and applications that can be measured and optimized.

Effectively creating an end-to-end solution.

In addition, the inability to effectively monetize media on the web is a pain point we hear about frequently from customers, especially in the advertising, media and entertainment industries.

That's why we are excited today to announce our intent to acquire Omniture.

Omniture is the largest provider of web analytics and online business optimization solutions.

Their online marketing suite is a critical tool for today's online marketers and chief marketing officers.

Based in Orem, Utah, Omniture has trailing four quarter GAAP revenue of $335 million with 1,200 employees in 20 locations.

More than 5,000 enterprise class customers use Omniture's SaaS solutions worldwide.

With their infrastructure, they process over a trillion user transactions quarterly.

By combining Adobe's powerful creative tools and broad client reach with Omniture's analytics and optimization technologies we are positioned to deliver a platform that transforms the future of engaging experiences and eCommerce across all digital content, platforms and devices.

Together, Adobe plus Omniture will complete the loop of content creation, delivery and optimization, enabling our customers to extract more value from their digital content and applications.

More specifically, Adobe's Creative suite products and Flash platform help customers create and deliver engaging experiences, the addition of Omniture's online marketing suite will help customers measure, analyze and optimize the impact and value of those experiences.

Creating a continuous feedback loop to maximize business results.

We see opportunities to enhance the measurement, analysis and optimization capabilities of content and media created with the Adobe creative suite, a applications developed on the Adobe Flash platform and rich media delivered by Adobe Scene 7 and the Flash Media server.

This acquisition will expand Adobe's addressable market and growth potential, broadening the solutions Adobe provides to the rapidly growing Internet advertising, eCommerce and digital media markets.

From a go-to-market standpoint, adding Omniture will expand Adobe's offering of mission critical solutions to the enterprise customer.

From a business standpoint, the addition of Omniture's SaaS model with recurring revenue, diversifies Adobe's overall business model and revenue profile.

Omniture brings recognized expertise in SaaS delivery and go-to-market capabilities.

Most importantly, from an employee standpoint, we share a culture of delivering innovative solutions to solve real customer problems.

I would now like to introduce Josh James from Omniture.

I'm pleased to announce that upon successful closure of the deal, he will be joining Adobe as a Senior Vice President reporting to me.

Josh?

Thank you, Shantanu.

The mission of Omniture has been to enable our customers to optimize every digital interaction.

By joining forces with Adobe, we will accelerate that vision by improving our ability to integrate measurement into the front end of the content creation process and optimize the user experience for websites, applications, advertising, mobile, video, and other emerging digital media.

Bottom line, this improves content engagement, advertising effectiveness and the overall user experience driving acceleration of ad dollars from offline to online.

We set out to change the market for web analytics and online business optimization.

We believe we've accomplished that.

And as we built out our solution and ecosystem of partners, we realize there's an opportunity to be a foundational platform upon which companies build their online businesses.

Through this combination with Adobe we can move well with our customers and be their trusted partner for decades to come.

Adobe has the global operational scale and reach that will enable us to more quickly penetrate new geographies and new markets like the government and mobile segments to name a few.

The most critical IP in any technology company is the people.

Adobe has been our partner for several years and we are excited that we share similar values, culture and vision.

As CEO and co-founder of Omniture, that was extremely important to me.

Net-net, this combination is a huge win for Omniture's customers, partners, employees, and shareholders.

We are truly excited to become a part of Adobe.

Thank you.

Shantanu?

Thanks, Josh.

Adobe has a history of successfully acquiring other companies.

Most recently, with Macro Media, we set out to create a powerful set of solutions for creating, managing and delivering compelling content and experiences and we delivered on that vision.

Through this combination with Omniture, we will enhance that offering to enable advertisers, media companies and e-tailers to realize the full value of their digital assets.

We look forward to sharing .more details about the opportunity of Omniture being a part of Adobe at our upcoming financial analyst meeting.

The meeting will coincide with Adobe MAX.

It will be an exciting week for Adobe customers, Adobe partners, and certainly the financial community that follows Adobe.

We hope to see you there.

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

Thanks, Shantanu.

Before we get to Q&A, I would like to remind you about the details of our upcoming financial analyst meeting.

As Shantanu indicated, we are hosting 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.

The Adobe analyst meeting will be in LA on Wednesday, October 7, and we've already sent out invitations.

As part of the analyst meeting invitation we provided a special offer for the financial community to attend MAX on Monday and Tuesday of that week.

If you have not received this invitation and would like to attend or if you follow Omniture on the buy side or sell side and would like to attend, please send and e-Mail to IR@adobe.com to receive more information.

Additional details about Adobe MAX can be found on the web at MAX.Adobe.com.

In regard to today's earnings report and acquisition announcement, we have posted several documents on our Investor Relations web page today.

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 Pro 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 3412311.

Again, the number is 888-203-1112 with ID number 3412311.

International callers should dial 719-457-0820.

The phone product service will be available beginning at 4:00 PM Pacific time today and ending at 8:00 Pacific time on Wednesday September 23, 2009.

We will now be happy to take your questions.

Operator?

(Operator Instructions) Sarah Friar with Goldman Sachs has our first question.

Good afternoon, folks.

Congratulations on your deal.

Two questions for you on the Omniture side.

Could you just elaborate a little bit more on your first thoughts on the product synergies and in particular, I guess some of the questions I'm being asked is are these products really sold to the same buyer in the organization because I would think of them as different so how do you imagine that coming together?

And then Mark, can you just confirm did you say the deal would be accretive in fiscal year 2010 overall?

Why don't I do that one first to get it out of the way.

Yes, I did say the deal would be non-GAAP accretive, Sarah, in 2010 overall.

Got it.

Okay.

And that's, but without a whole lot of cost synergies, you're assuming that's coming more from the top line, correct?

We are not assuming a lot of cost synergies in this, correct.

It's accretive without that.

Maybe Shantanu on the broader product synergy thought?

Sure, Sarah, I think it will be useful for me to maybe just take a little bit of step back and talk about why Omniture and why now.

As you know, we've been sharing with you our vision of where technology is headed for quite a while now.

Richer media, more video, mobile access to information as well as rich Internet applications and we believe that we've really delivered against that vision of creating absolutely the best tools in the world so that creative professionals and app developers can create those engaging experiences.

What we found is that as we've been talking to our customers in the conversation with them, it's clear that they would like us to do a lot more.

For example, the chief digital officer that we talked to at media companies have been telling us that they want to understand which video content was performing the best so that they could feature it more prominently and increase their ad revenue.

Advertisers and agencies were using Flash to produce rich ads but they were telling us they really wanted to understand what the click through rate of those ads were in real time to be able to take more advantage of it.

Web developers, web developers who have been using Adobe technologies to create these RIAs have said that they want to build intelligence so the site can automatically recommend the best products to drive higher conversion rates.

And so it clearly dawned on us that all of them want us to complete the loop between the offering part, the delivery part and consumption and they wanted Adobe to play this bigger role which really for us was a natural extension of what we were trying to do to transform these experiences.

And what was interesting was that a number of these customers actually wanted us to integrate with solutions like Omniture.

And we found ironically that we were having exactly that same experience with our own website and our own eCommerce site which was Adobe.com.

As we started to embark on this, we realized in conversations with Josh that they actually had the same vision and they were equally focused on delivering greater value for their customers.

In terms of the actual buyers of these products and what we find, with the creative suite we are finding that increasingly it's the mission critical solution that the chief digital officers are deciding in terms of the entire platform.

The Chief Marketing Officers are thinking about what the experience is and so as it relates to the go-to-market synergies as well, both companies have actually built direct enterprises that are serving these customers.

So we think that there's natural synergy between both the creative professionals who create this content and the Chief Marketing Officers who are increasingly making the decisions on how to optimize their business.

Got it.

Okay.

That actually is very helpful.

And then just a final one.

Was it a competitive bid or can you talk to that at all?

I think what I can say is we're excited about the prospect of what we can do together and we'll file all the necessary documents.

Terrific.

Thanks a lot.

Our next question comes from Piper Jaffray's, Mike Olson.

Thanks.

Good afternoon.

A similar line of questioning as far as the customer overlap.

I would imagine nearly all Omniture customers are Adobe customers but not necessarily the other way around.

Would you agree with that and I guess is the cross-sell opportunity really more bringing Omniture to existing Adobe customers?

I think there are both opportunities around cross-sell right now with both customers.

But even when you take life cycle for example which is an area that Josh and I have talked about there's an opportunity even for the enterprise customers to be able to embed analytics in that.

So I would say the universe of the customers that we can jointly serve actually expands for both companies with this.

This is Josh.

I'd say that as we -- over the last few years especially, we've seen that the customers we talked to has increasingly become more and more the CMOs and other executives in the marketing organization and so certainly from our perspective, this relationship increases the opportunity because first of all, because of the brand, and the fact that there's more relationships that we can go in and have very meaningful business opportunities because these executive officers in the marketing organization are now going to be able to look at us and say this is who we should be partnering with.

Interestingly enough, when you look at the landscape, in most industries and most departments inside a Company, there's big technology companies that are very focused on that particular department.

When you look at marketers, that's not necessarily the case.

There's not really large technology companies that are focused on those executives and so as we've seen over the last few years in particular, the fact that we can get in there and bring them a solution that at a high level helps them understand the analytics, the optimization, then they go and they say okay these folks that are creating it, they need to be able to get the tracking code in there.

They need to be able to get the analytics in there and that's one of the additional items that it really brings to us is the fact that it all becomes integrated potentially with the ability to embed analytics and optimization into the creation process and that's something that's a very big challenge for our customers today.

Okay.

And then just one question on the core business.

When you look out over the next couple quarters, how do you think about and kind of weigh the balance between an improving environment for Creative Pros and the potential for CS4 slowdown ahead of the CS5 launch?

What we've seen with the CS4 business thus far is from a slope of the cycle, it's actually been fairly consistent with previous cycles, so in other words, you initially see a fairly significant amount of upgrade revenue and then you have fairly steady revenue right through to the end.

All the way to the release of the next Creative product and it seems like CS4 has thus far experienced exactly the same patterns.

So on the positive side as Windows 7 is released and as we see Snow Leopard adoption, we continue to think that there's potential associated with CS4.

One other fact I will throw out is that as it relates to Q3, we actually saw a fairly significant number of deals within our enterprise segment for Creative.

So our assumption, it's going to play out similarly to the CS3 and CS2 cycles.

Thanks a lot.

Let's take a question from Heather Bellini with ISI.

Hi.

Great.

Good afternoon to you both.

I was just wondering, I don't know, Shantanu or Mark, which one of you want to tackle this, but what percentage of the costs of your operating expenses have you taken out so far this year would you say have been taken out for good versus the percentage that you think you need to start flowing back in in 2010 to account for things such as salary increases and bonus accruals?

Heather, this is Mark.

So we haven't broken down the expenses at that level of granularity but there's a healthy percentage that's related to variable compensation, things like bonuses, profit sharing, the fact that we didn't do salary increases this year.

That all went away completely.

So that has to start to come back at some point, likely in 2010, and that's a fairly sizable piece of the restructuring that we did but we also did take a fair number of people, if you remember, out of the organization.

So we did a restructuring back in December of last year of about 600 people, so it was -- I'd call it a healthy mix of both.

Is the variable part then more than 50%?

I'm not at a point to break that down at that level for you, Heather.

Okay.

Thank you.

Our next question comes from Sasa Zorovic, Janney Montgomery Scott.

My first question would be in terms of integrating the process you're going to be selling, so are you planning to sell Omniture to existing Adobe channel?

Are you planning on keeping the sales forces separate for the time being?

How do you plan sort of to implement and augment really this cross-selling that's going on, that would be going on?

Well, Sasa, today's announce day.

The integration process starts right after this call is ending.

So from the perspective of how far along we are in determining what the entire channels are, it's early.

Clearly, as part of the conversations that we've had, we recognize that both companies have a fairly healthy enterprise sales force that is targeted at the chief marketing officers and the most senior people in the creative enterprise companies that we target.

In addition to that, as you know, Adobe has a very effective two tier distribution channel and as we think about the products, both new and existing products that we're going to put through it, we actually have a very comprehensive offering now of routes to market from the channel, from inside sales, from the mid-market, all the way out to the enterprise customers.

So we're confident that as we integrate these products and deliver value, we have the right routes to market to accelerate growth.

Thank you.

And my second question would be regarding your core business at this point.

So when you look at sort of the strengths in Asia and weaknesses you mentioned in Europe, how do you -- would you attribute that just to the differences in the two end markets?

Is there any kind of execution issues that you would point to there or is it in essence just basically Asia kind of recovering or growing faster than Europe would be?

Sasa, it's Mark.

In this quarter, what we saw was continued stability in the US.

We said that in the second quarter and that continued through the third quarter.

In fact, the US did very well as we got our seasonal bump for education also.

Europe continues to be a little slower on the recovery side and we saw that in the second quarter.

We also have of course normal Europe seasonality in the third quarter that was even more compounded by the economy over in Europe.

And Asia and Japan have actually held up through this pretty well.

So I think that's kind of the high level story throughout Q2 and Q3.

Thank you very much.

Moving on now to Credit Suisse's, Phil Winslow.

Just one quick question about the cash on the balance sheet.

Just how much of that is based in the US versus international and then also last quarter I think you gave us sort after what CS4 was, call it cycle to date versus CS3, wondering if you could give an update for this quarter as well?

Thanks.

I can cover the second question which was CS cycle to date, if we look at the data that that we provided in Q2, I would say Q3 experienced approximately the same trends.

So whether it's version over version, the revenue decline, the mix of suites as a percentage of the entire creative services revenue continued to be approximately 68% in terms of the products that we're selling, it continued to be the design premium, design standard and master collections.

So when you think about the business quarter-over-quarter, very similar to the business results that we shared in Q2.

And this is Mark.

On the cash side, as you can see we have $2.6 billion of cash on hand.

We have not disclosed how much of that is off-shore but like we've said, a good portion of our business is overseas and not as high a percentage of our expenses are overseas so we do end up with a significant portion of cash off-shore which is why we'll also be financing the transaction through not only the cash on hand, but also the credit facility and I think this is a great strategic use of our cash after we evaluated a lot of different funding options, with our cash position and our strong ongoing cash generation and the overall interest rate environment, this was just the best financing solution for us.

Thanks, guys.

Let's move on to Adam Holt with Morgan Stanley.

Good afternoon.

Thank you.

Mark, if you gave the backlog number heading into the fourth quarter I missed it so was hoping maybe you could give that to us again?

Secondly, as we get a little bit closer to potentially pretty significant corporate PC upgrade cycle could you talk a little bit about on the core Adobe side what you think your exposure is there and what the implications are?

Sure, Adam.

so on the backlog side, again, it's not indicative of future performance and it is factored into all our guidance.

That said, we were pretty pleased with the fact that we did end the quarter with 2% of revenue in backlog.

And Adam, on your first question as it related to the potentially significant upgrade cycle, we've traditionally said that we do see when people upgrade their hardware, that they do tend to buy new software associated with it.

We're certainly going through two cycles with both Windows 7 and Snow Leopard an the MacIntosh side.

I mean, if we are any indication, we have also held off on hardware purchases like I think most companies so one could assume that there's pent-up demand for software as well when the hardware refresh happens.

Could I ask a quick follow-up on the Omniture side.

You all talked about a lot of interesting potential product synergies down the road.

As we think about CS5 upcoming with the deal closing in the fourth quarter would seem that we'd probably miss any CS5 integration.

Should we be thinking about the product road map really coming together around CS6 or am I jumping the gun on that?

Well, we'll be pretty ruthlessly focused on how we can integrate just as effectively just like we did with MacroMedia, Adam, and I think we recognized with MacroMedia, that this is a multi-cycle road map as it relates to the potential product synergies that we can but once the deal closes, we will be aggressive about trying to find the low hanging fruit that we can, much like we did with the earlier version of CS, to try and provide some functionality within the creative product as well as within the Flash platform.

Part of the benefits for us associated with this deal is we have a lot of our customers telling us that they really want us to take advantage of the Flash platform and find new ways to monetize it.

But make no mistake, we are also very focused on keeping our existing product road maps as they are.

Thank you.

This is Josh.

I just want to add one thing to that also.

As it pertains to Flash, we already have an integration with Flash and I think that's an important component here.

We've been working with Adobe for several years.

Our customers come to us and we know from our side that Flash is extremely important to them and especially as their business evolves, not only on the web but also in mobile.

And we have a lot of customers overseas in Europe and in Japan and as that mobile space evolves, it's been really fun to have our customers come to us and really demand that we figure out how to integrate and analyze and track Flash in the Flash platform so that they can continue to leverage that as an investment going forward so that will be a continued opportunity and I think the fact that not only will we be able to have an integration but an integration that has the stamp of approval on it is going to be something that really motivates our customers to invest even more in that platform.

Thank you.

I'll add another piece as well which is at NAV earlier this year we announced Strobe which was an open framework that allowed people to integrate and provide analytic support directly within the Flash player and as we all know, Omniture has a tremendous SaaS infrastructure, they're second largest SaaS software company in the world so one of the beauties of the potential integration is we don't have to wait just for the traditional desktop product cycle to be able to provide functionality to our joint customers.

Terrific.

Thank you.

Let's move to Kash Rangan with Merrill Lynch.

Thank you very much.

Shantanu, I was just wondering if you could elaborate a little bit more on the strategic rationale.

Are you seeing evidence that the web analytics market and the design markets are actually starting to come together so as to converge and also how you plan to address what could be more complicated sales cycles.

Obviously there is rewards if you can get this thing right but it also raises some execution hurdles and I was wondering what your thought process is on both those counts?

And also, Mark, maybe if you could address this.

Maybe you've already addressed this in prior quarters but typically we've gotten a fourth quarter bump, probably 8 to 10% sequential during normal economic times.

I'm sure these are different economic times.

Just wondering looking at the guidance, we're not seeing the typical bump.

Any thought process behind that guide as you approach November quarter?

That's it from me.

Thanks.

So Kash, as it relates to again the strategic rationale, clearly the goal is to combine the Creative tools and the broad client reach with Omniture's analytic and optimization technologies to deliver this platform that we talked about which really can provide great, engaging experiences and eCommerce across all content.

We didn't talk about devices yet.

A number of our customers are also telling us that they want to be able to track how this content is used on mobile devices, for example.

So clearly, we believe that this enables us to participate in a large growing market opportunity and become even more mission critical to our customers.

That's really the goal of being able to accelerate both revenue as well as non-GAAP earnings growth.

And also from my perspective, it actually diversifies our portfolio of our business.

We already have a number of SaaS offerings, we offer Scene 7 that we talked about for rich media, we offer Flash media server for video streaming and we can integrate that as well in conjunction with the Omniture infrastructure.

And Kash, this is Mark.

As you know, we take the guidance pretty seriously and we're prudent about it.

The range between 690 and 740 is all about two things, where CS goes and where the economy goes.

And if you look at 690 which is obviously at the lower end and would represent a relatively flat Q3 to Q4, that would suggest that the economy is just not coming back as quick as any of us would like and CS stays relatively flat.

To the extent you're up at the higher end towards 740, that's a stronger CS quarter as well as probably a slight uptick in the economy and we've said the economy's been relatively stable but we certainly haven't seen it moving up yet.

I'm going to throw one more thing in there about the markets coming together.

Certainly from our perspective, pretty much 100% of our customers, the markets already have come together because every single one of our customers has to deal with figuring out how to track all of their assets.

That's what they come to us for.

To the extent that we can facilitate that and improve that experience, that will greatly improve our customer's ability to manage and measure and understand the return they're getting on those investments and one of the most frequent questions we get from our customers during this setup and implementation process is how do I know that 100% of my assets are being tracked so I can understand and analyze the return on that investment and so that's a question that our ability to answer improve's dramatically and in terms of our customer base, one of the things that's really limiting to us in terms of the opportunity is just educating customers about the fact that this all can be tracked and measured and optimized and so I think there's an opportunity also for our business especially once again to be able to be embedded into that creation process, that there's a lot of customers that don't understand the fact that they actually can track and measure all this stuff and we think there's an opportunity to certainly generate quite a few leads by embedding these pieces of technology together.

Next question, please.

Coming from Robert Breza with RBC Capital Markets.

Hi.

Thanks for taking my question.

Mark, quickly, can you talk about the foreign currency impact in the quarter and then Shantanu, as you talked about combining the creative tools with Omniture, should we think about you maybe in future versions five, ten years from now, do you see yourself actually offering extensions maybe to what maybe Creative suite is today, do you see yourself offering features, functions, capabilities in a software as a service format?

How should we think about where your vision is going relative to longer term?

Any insight would be helpful.

Thanks.

Hi, it's Mark.

I'll start.

So Q3 net of hedging year-over-year we had a loss to revenue of approximately $6.4 million.

That was 14.8 million lost from the euro and 8.4 million gained from the yen.

And with respect to the second question, associated with extensions, first as Josh mentioned we already have a number of extensions that people build into the creative process to actually build an end-to-end work flow.

For example, people trying to create ads are able today with the Flash architecture to be able to build that extension directly into the Flash professional offering application.

So certainly we expect to continue to build in terms of new extensions that add work flow capability and even as it relates to services, we've announced the acquisition of business catalyst that allows us to offer services as well as we're offering other services today in beta forms on Adobe labs.

So yes, you can certainly expect us to do more with respect to services on both the Creative as well as on the Acrobat side.

Thank you.

Our next question comes from Philip Rueppel with Wells Fargo Securities.

Yes, thank you.

First, more of a general question on integration given that you were -- most would agree that you were successful meshing MacroMedia with Adobe.

Do you see running the Omniture business unit more as a separate entity at least initially and if not do you really see additional challenges given that the culture of an On Demand Company, the sales compensation, the R&D cycle, all of that seems to be very different from most packaged software companies.

First, thanks for the compliment associated with our job in terms of getting Adobe and MacroMedia well integrated.

In many ways we think that this will actually be easier because it's additive and it actually combines the loop for us in terms of our services as well as the offerings that Omniture currently provides.

One of the very attractive parts of the conversations that we've had is the people and the culture that we've experienced in working with the folks from Omniture.

They have a real passion for solving customer problems which is something that both the companies share a history of delivering innovative products and really wanting to be successful in terms of solving customer problems.

So it's something that Josh and I will need to continuously focus on but we're confident that we will put together a strong integration plan.

Thanks.

One final question, just does it shift your M&A strategy going forward at all?

I mean, do you view Omniture as a new platform and sort of using that as something to add more capabilities or will you continue to really focus on adding technology around the design suite?

Well, two thoughts associated with it, quickly.

Firstly, we will be very, very focused on making sure that we take very seriously the integration associated with Omniture.

But to your point, we think that there are multiple opportunities that then present themselves as a potential of the combination coming together as well.

Great.

Thank you.

Ross MacMillan with Jefferies & Company has our next question.

Thanks.

I just had a high level one on Omniture.

I would have thought that it's the content itself rather than the creation of the website or similar that has the biggest kind of tie-in to the analytics, so changing content, changing offers, so on and so forth.

So I'm just trying to understand that dynamic in the context of the way that you're positioning this which is combination of design tools and analytics rather than content and analytics?

I would have just thought it was maybe, less closely tied around design than content.

Thanks.

That's a great question.

This is Josh.

So there are really two components and that's the way that we always talk about our business.

Our customers when they wake up in the morning, they don't say I want to go create something, I want to go analyze something, they say I want to improve my ad spend, the return I'm getting on my ad spend.

I want to improve my conversion rates.

The two pieces associated with that is the creation and then once you've made the offers on the content, optimizing that content.

And that's really what our products do.

If you look at, for instance, in a recent quarter of ours, the bookings that we have more than half of our bookings are associated with optimizing that content.

The other half is associated with the analytics and measuring and analyzing and collecting the data and in any given quarter, as Shantanu mentioned we'll have a trillion plus transactions and each one of those transactions is a human clicking on content, a human clicking on merchandise, and each transaction represents an opportunity to create an optimized or a personalized experience for that end user.

Less than 5% of our trillion transactions are currently being optimized by our customers.

That's the real opportunity for us.

The challenge though is still getting it all embedded, making sure through the creation process that it's easy to get the analytics in there.

Then in addition to that once you have those analytics there, just being able to leverage the other products and services that we have and there's many more opportunities as Shantanu was describing down the road for us.

So we're just really excited and I think this might be an appropriate time for me to say when we looked at this, we've always been laser focused on getting this business to $1 billion.

Every employee in our Company knows that's the goal.

We're going to get to $1 billion as fast as we possibly can and we want to win.

The way that we do that is by focusing on our customers and our customers continue to tell us that we want to see this platform.

We want to see you guys win and we want to see this platform so that we can standardize on it that's integrated with the ability to track this stuff more effectively, to optimize our content effectively and when we looked at this relationship with Adobe and this combination with Adobe, what got us really excited is the fact that we could accelerate the goals that we have.

We can get to $1 billion faster.

There's scale.

There's opportunities in different geographies.

There's opportunities in different market segments and when, back to the point focusing on the customers and trying to win, when we found that -- we found that this relationship, not only great people and we feel like it's a great place for our employees and it's a place that accelerates our ability to get to that $1 billion, that's something that excites all of us.

Thanks.

Let's move on to BMO Capital Markets, Dan Salmon.

Good afternoon.

Thanks for taking my call.

Mainly for Josh, just wondering how the acquisition may change some of your -- or may or may not hopefully, change some of your partnerships with some of your agency resellers and in particular if WPP had any role or advisory position in terms of your outcome here today?

I appreciate you asking that question because over the last 18, 24 months, agencies and other partners have become a really important part of our business and we've seen anywhere from 20 to 30% of our new bookings coming from our partners whereas 24 months ago that number was zero and so as we've emerged as the leader in our space and as we've become a more credible partner, folks like WPP have been able to invest their time and resources and educating their people on to our products and our platforms and one of the things that gets us most excited about this relationship with Adobe, this combination with Adobe is the fact that we're not changing our strategy.

We're accelerating our strategy and our relationships with our partners, we need to sit down and talk with all of our partners but by all accounts, it certainly seems that they're going to be very excited and WPP specifically I can't speak, I haven't had an opportunity to talk with them about the specific transaction but I can tell you that they have 500 people in their organization that are trained on our products and services.

I can tell you that most of the other agencies have very meaningful relationships with us and by the way, they also have in almost all cases more meaningful relationships with Adobe so by bringing these companies together it really strengthens our ability to partner with these agencies so that they can -- as they try to figure out how to deal with the ever-evolving digital marketplace, they've got a partner that can really help in some cases lead them, in some cases learn from them, but in all cases partner with them and that's something that we're really excited about.

Okay.

Great.

Thank you.

Yun Kim with Broadpoint AmTech is next.

Thank you.

Congratulations on the acquisition.

Just want to make sure, does this acquisition in any way impact your near term product road map, especially around CS5 release that is expected first half of next year?

No.

Okay.

Great.

And then also can you just update us on your latest progress on mobile space in terms of when we can start to see meaningful revenue growth there and how does Omniture fit into what you were trying to accomplish in that market, continue to invest in that market?

Thanks.

That's a good question.

As it relates to what we've talked about with mobile, you will see us at MAX talk a lot about the partnerships as well as actual deliverables associated with combining our Flash desktop player as well as our Flash mobile player.

As you know with open stream project we've changed the business model where we will not be charging royalty any more and so what you will find is increasingly revenue associated with what we have in the Flash platform will be shown vis-a-vis the tools as well as other services that we're offering much like we can with a product like Omniture and so stay tuned and that's something that we'll share a lot more with you at MAX.

One final question.

Just want to point out that the Omniture stock is trading higher than the offer price and the (inaudible) market.

Is there any way you can share with us how much line of credit you were able to line up for the deal?

I'm not quite sure how those two things relate.

But from a cash perspective, there's no contingencies on the deal and we have what we need to get the deal done.

Okay.

Great.

Thank you.

We're running close to our hour.

We will take two more questions.

Our next question now comes from Dan Cummins with Lime Rock.

Thanks.

Just two quick questions.

Can you give us a comment on how Photo Shop and your other products that you've typically sold at least partially through consumer channels historically are faring?

And question for Josh around mobile and analytics around campaigns.

I'm curious what your experience has been with customers who are trying to bridge both worlds with QR codes for example in Japan?

Thank you.

Dynamic imaging continues to be a key area of focus for us as a Company and so when you look at the revenue that we get from dynamic imaging, it's not just Photo Shop as a standalone but we all know that Photo Shop is a key part of the work flow as relates to Creative suite and so we continue to focus on innovation there.

The current economic climate is certainly impacted the revenue of Photo Shop, much like it's done for the entire Creative suite but we continue to think that imaging is an area of innovation for us.

And as it relates to our business in Japan and mobile in particular, we have many customers in Japan actually where we have larger relationships on the mobile side than we do on the PC side and none of those relationships started out that way.

They all started out on the website and then as their mobile business started to take off, they started to leverage their assets for their mobile business and whether it's QR codes or things like the (inaudible), for instance, or being able to -- I was sitting down with a customer and they looked at a wine bottle, decided they liked it, took a picture of the wine bottle.

Next thing you know it shows up in his camera.

He hits one button on the wine bottle gets shipped to his house.

There is some really interesting opportunities from a mobile perspective and those opportunities are optimized, enhanced by us having the data of which Flash is an extremely important component and then taking that data and integrating with Flash and with other technologies that allow that process to be optimized.

So it's -- Japan's definitely a leading market for us in helping us figure out how to address the mobile market.

Thank you.

Our last question now comes from Cowen and Company's Walter Pritchard.

Thanks.

Hey, Mark, just a couple questions for you actually.

I noticed on the G&A expense that looked like it ticked up quite a bit sequentially.

Just wondering what was behind that.

Maybe just a clarification on your comments on the education market.

It sounded like that was a source of strength in the quarter.

Was that unusually strong or I know that's typically sort of a seasonally strong business this quarter.

Just wanted to get a sense of relative to what you've expected and what you've seen in the past on ed?

Good catch on G&A.

G&A was up $10 million sequentially, a little over $10 million, and that's driven almost completely by our annual charitable contributions that we take.

So that was completely a charitable contribution that is nonrepeatable next quarter so that will go away next quarter.

And education was good.

We had a good, strong education quarter but it's pretty typical with what we've seen in prior Q3s.

Thanks, Mark.

And thank you again everybody for joining us on the call today.

I also want to take the opportunity to thank Josh for joining me on the call and I think you can clearly tell that we're both looking forward to the exciting opportunities that a combined Company of Adobe and Omniture can target.

Just, we're going to continue to focus on the key growth opportunities that we've identified for you.

We will closely manage our expenses as well in this tough economic climate.

But more exciting for us are the areas that we're investing in to drive our future growth.

And we look forward to sharing more with you, both our strategy at MAX and our financial analyst meeting about all the amazing things that are happening at Adobe.

This concludes our call.

Thank you for joining us today.

Again, that does conclude today's conference call.

Thank you for your participation.