Adobe Inc (ADBE) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome the Adobe fourth quarter and fiscal year 2009 earnings conference call.

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

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

Mike Saviage, Vice President of Investor Relations.

Please go ahead, sir.

Good afternoon and thank you for joining us today.

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

In the call today we will discuss Adobe's fourth quarter and fiscal year 2009 financial results.

By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago.

If you need a copy of the press release, you can go to Adobe.com under the Company and press links to find an electronic copy.

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

It contains forward-looking statements that involve risk and uncertainties.

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

For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release which 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 today's earnings release and on our Investor Relations web site in the investor data sheet.

Call participants are advised that the audio of this conference call is being broadcast live over the Internet in the Acrobat Connect Pro, and is also being recorded for playback purposes.

An archive of the call will be made available on Adobe's Investor Relations website for approximately 45 days, and is the property of Adobe Systems.

The audio and archive may not be re-recorded 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.

I'm pleased to report that in Q4 we experienced an improvement in customer demand for our products across many of our major business areas and geographies and are reporting fourth quarter revenue of $757.3 million.

We've successfully navigated through a difficult environment in 2009.

We are reporting annual revenue in fiscal 2009 of $2.95 billion, and are proud of how we managed our business during the year.

Accomplishments during the year include, realign the Company around our key strategic imperatives and made investments that we believe will drive top line growth as the economy improves.

We grew the relevance of the Adobe Flash platform as the standard for how the world engages with ideas and information across platforms, devices, and operating systems.

We maintained our leadership in online video distribution and achieved significant momentum in the mobile space with our Open Screen project.

We continued to focus on improving the segmentation of our customer base and driving new adoption and penetration of our CS4 and Acrobat products.

In the enterprise, we continued to make good progress with LiveCycle, and achieved 23% year-over-year revenue growth with our Connect web conferencing business.

And finally, the addition of Omniture in Q4 uniquely positions Adobe to deliver a more complete customer work flow, spanning content creation, delivery, and optimization.

This strategic acquisition will help Adobe-enabled customers to realize greater return on their digital media investments, and improve the end user's experiences across multiple screens.

Later I'll provide some highlights regarding our performance in Q4, and discuss our priorities for fiscal 2010.

But first, I'll turn it over to Mark for a review of our financial results.

Mark?

Thank you, Shantanu.

Our earnings report today covers both Q4 and fiscal year 2009 results.

Given the addition of Omniture from mid-quarter, I have quite a bit to cover today.

First, I'm going to provide some background on the Omniture business model, which will help everyone understand how the addition of Omniture impacts Adobe's results going forward.

Second, I'm going to review our approach for how we'll report our financials with Omniture folded in.

As you know, we are reporting results today with roughly one month of Omniture's business included in both our fourth quarter and full year 2009 results.

Finally, I'll discuss results for both Q4 and fiscal 2009, followed by a discussion of our financial targets for Q1 and some color on fiscal year 2010, including the impact of Omniture.

Let's start with an overview of the Omniture business model.

An explanation of some key metrics we'll provide on a quarterly basis to help you understand Omniture business unit results and momentum.

The Omniture online marketing suite, which we either host and deliver to customers on demand, or provide as an on-premise solution, consists of Omniture's open business analytics platform, and an integrated set of optimization applications for online analytics, channel analytics, visitor acquisition, and conversion.

Our flagship Omniture product is SiteCatalyst which represents a majority of the reported Omniture revenue.

Increasingly, however, in number and type of services Omniture provides has expanded into areas such as advertising and conversion optimization.

Omniture also provides professional services including training, consulting and implementation services.

Once a customer contracts for Omniture services, there is generally an implementation period of 30 to 90 days before the products are configured for the customer's use, at which point revenue recognition commences.

The value of the contracts, including professional services contracted at the same time as the product purchase, amortizes revenue over the term of the contract, which generally ranges from one to three years.

Customers are invoiced on a monthly, quarterly, or annual basis, some of which are invoiced in advance.

As a result, Omniture deferred revenue represents only future revenues that have already been invoiced.

Because Omniture customers generally sign contracts of one to three years in duration, and Omniture has achieved enterprise customer retention rates in excess of 90%, the visibility into future revenues, as well as future contract billing and cash flow is high.

Although revenue from a customer contract is amortized over the contract term, the majority of the investment made by Omniture on behalf of the customer occurs during the implementation period.

This includes training, implementation consulting and capital provisioning to support the customers' projected use of Omniture's hosted products.

To help analysts and investors track and understand the momentum in our Omniture business, we will provide several key business metrics beginning in Q1 of fiscal 2010.

They include the number of Omniture user transactions captured in the quarter, the enterprise customer retention rate, this is an important metric which shows the percent of existing enterprise customers that have renewed their contracts during the quarter, the percentage of SiteCatalyst revenue in our reported Omniture segment, this is a data point Omniture has historically provided, and shows how the mix of Omniture revenue is expanding beyond SiteCatalyst, which anchors the analytics business.

We expect this mix to continue to diversify in favor of the new services and solutions we offer Omniture customers, and it demonstrates we are expanding the number of products and solutions Omniture customers are adopting beyond analytics.

Finally, we will provide a gross margin for the Omniture business.

Our investor data sheet will contain this information beginning with Q1 results.

Next, I want to provide clarity around the impact of the write downs of Omniture deferred revenue due to business combination accounting guidelines, which is typical in a software Company acquisition.

Based on our analysis, we will lose a total of approximately $40 million in Omniture deferred revenue through the end of fiscal 2010.

The impact of the write-down of Omniture deferred revenue is broken down by quarter as follows.

Q4 fiscal 2009, $8.3 million.

Q1 fiscal 2010, an estimated loss of $14.7 million.

Q2 fiscal 2010, an estimated loss of $8.6 $8.6 million.

Q3 fiscal 2010, an estimated loss of $5 million.

Q4 fiscal 2010, an estimated loss of $3 million.

For the entire year of fiscal 2010, an estimated loss of $31.3 million in revenue.

We will report this impact on a quarterly basis.

We do not plan to report specific pro forma revenue numbers but this impact to revenue information will be helpful to those who wish to factor this into any pro forma revenue models.

I will now comment on our full year fiscal 2009 results.

Adobe achieved revenue of $2.946 billion year, compared to $3.580 billion in fiscal 2008.

The revenue contribution from our new Omniture business unit was $26.3 million for the year, which does not include the $8.3 million I mentioned that was written down pursuant to business combination accounting guidelines.

GAAP operating income in fiscal 2009 was $691 million, compared to $1.028 billion in fiscal 2008.

GAAP operating margin for the year was 23.4%, compared to 28.7% in fiscal 2008.

Non-GAAP operating income in fiscal 2009 was $1.035 billion, compared to $1.435 billion in fiscal 2008.

Our non-GAAP operating margin was 35.1% in fiscal 2009, compared to 40.1% in fiscal 2008.

Adobe's annual GAAP net income was $387 million in fiscal 2009, compared to $872 million in fiscal 2008.

Adobe's annual non-GAAP net income was $815 million in fiscal 2009, compared to $1.136 billion in fiscal 2008.

GAAP diluted earnings per share in fiscal 2009 were $0.73, compared to $1.59 in fiscal 2008.

Non-GAAP diluted earnings per share were $1.54 in fiscal 2009, compared to $2.07 in fiscal 2008.

Given the economic environment throughout the year, we are pleased that our execution and cost controls helped to deliver solid profitability and operating margin.

Now, I'd like to discuss our Q4 results.

For the fourth quarter of fiscal 2009, Adobe achieved revenue of $757.3 million.

This compares to $915.3 million reported in Q4 fiscal 2008, and $697.5 million reported last quarter.

Our Q4 fiscal 2009 revenue result includes a $26.3 million in Omniture revenue, but excludes $8.3 million in deferred Omniture revenue in accordance with business combination accounting guidelines.

We exited the fourth quarter with approximately 9% of reported Q4 revenue in shippable backlog.

Q4 GAAP operating expenses were $521.3 million, compared to $555.7 million reported in Q4 fiscal 2008, and $464.9 million last quarter.

Non-GAAP operating expenses in Q4 were $428.8 million, compared to $476.8 million reported for Q4 fiscal 2008, and $409.9 million in the last quarter.

GAAP operating income in Q4 fiscal 2009 was $153.6 million, or 20.3% of revenue.

This compares to GAAP operating income of $273.2 million, or 29.8% of revenue in Q4 fiscal 2008, and $167.6 million or 24% of revenue last quarter.

Non-GAAP operating income in Q4 fiscal 2009 was $265.2 million or 35% of revenue.

This compares to non-GAAP operating income of $374.9 million, or of 41% of revenue Q4 fiscal 2008, and $237.1 million or 34% of revenue last quarter.

Adobe's effective GAAP tax rate in Q4 was 120%, and the non-GAAP tax rate was 23.5%.

The GAAP tax rate for Q4 was in line with the targeted Q4 tax rate we provided in September, with the exception of a one-time charge related to our acquisition of Omniture.

The charge was the tax cost of intercompany transactions necessary to license certain Omniture assets, so that Omniture services can be offered to customers from Adobe companies going forward.

Q4 GAAP net loss was $32 million compared to net income of $245.9 million reported in Q4 fiscal 2008, and net income of $136 million last quarter.

One-time tax charge and restructuring charges recognized in Q4 were the primary drivers for the GAAP net loss in the quarter.

Non-GAAP net income was $206.8 million, compared to $320.9 million reported in Q4 fiscal 2008, and $186.1 million last quarter.

GAAP diluted net loss per share for Q4 fiscal 2009 was $0.06, based on 532 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.46 reported in Q4 fiscal 2008, based on 534.9 million weighted average shares, and GAAP diluted earnings per share of $0.26 reported last quarter, based on 531.8 million weighted average shares.

Non-GAAP diluted earnings per share for Q4 fiscal 2009 were $0.39.

This compares with non-GAAP diluted earnings per share of $0.60 in Q4 fiscal 2008, and $0.35 reported last quarter.

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

Creative Solutions segment revenue was $429.3 million, compared to $508.7 million in Q4 fiscal 2008 and $400.4 million last quarter.

We experienced a pick-up in CS4 demand during the quarter, as well as strength in our hobbyist business, due to the new Elements product launch.

Business Productivity Solutions revenue was $211.8 million, compared to $278 million in Q4 fiscal 2008, and $210 million last quarter.

Within Business Productivity, knowledge worker revenue was $149.3 million, compared to $199 million in Q4 fiscal 2008 and $154.5 million last quarter.

Despite a tough year, Acrobat had strong momentum as we exited Q4.

Connect continued to perform well with record bookings in Q4 and 2009.

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

In Q4, Enterprise revenue was $62.5 million, compared to $79 million in Q4 fiscal 2008, and $55.5 million last quarter.

Sequential growth with our LiveCycle business resumed in Q4, and we entered Q1 with a solid pipeline.

Print and Publishing segment revenue was $42.9 million compared to $52 million in Q4 fiscal 2008, and $42.2 million last quarter.

Platform revenue in Q4 was $47 million, compared to $76.6 million in Q4 fiscal 2008, and $44.9 million last quarter.

The year-over-year decline was due to the change in our business model as a result of the Open Screen project.

Finally, in our new Omniture segment, revenue for the partial quarter was $26.3 million.

As I indicated earlier, $8.3 million in Q4 Omniture deferred revenue was excluded from this result, due to purchase accounting.

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

The Americas, 51%, Europe, 32%, Asia, 17%.

Our business in North America showed signs of improvement.

We had a strong quarter in Europe, particularly in Germany and France.

This strength was offset by normal seasonal weakness in Asia.

Employees at the end of Q4 totaled 8,660, versus 7,564 at the end of the third quarter.

We added a total of 1,184 employees as part of the Omniture acquisition.

We also implemented a restructuring at Adobe during the fourth quarter, which will result in a reduction of approximately 630 positions at Adobe.

The purpose of the restructuring was to align our costs with our strategic priorities and our fiscal 2010 operating plan.

Cost benefits from the restructuring will occur over several quarters as some affected employees remain on transition plans.

Our trade DSO in Q4 fiscal 2009 was 49 days, and includes the impact of Omniture.

This compares to 46 days in Q4 fiscal 2008, and 37 days last quarter.

Excluding Omniture receivables, our trade DSO in Q4 fiscal 2009 was 37 days.

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

During the quarter, cash flow from operations was $254 million.

Our ending cash and short-term investment position was $1.9 billion, compared to $2.6 billion at the end of last quarter.

We assumed an additional $137.4 million in cash from Omniture's balance sheet as part of the acquisition.

We used cash as well as a draw-down on our $1 billion credit line to pay for the Omniture acquisition, the net of which was responsible for the sequential decline in our cash position.

In Q4, we repurchased approximately 5.3 million shares at a total cost of $174 million.

For the year, we repurchased approximately 15.2 million, removing approximately $425 million to our stockholders.

This concludes my discussion of our financial results.

I would now like to comment on our financial targets for the first quarter of fiscal 2010.

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

This target range includes the benefit of an extra week of revenue in our first quarter due to our corporate 52, 53 week financial calendar.

It also includes a full quarter of Omniture revenue, but excludes the estimated loss of $14.7 million in Omniture revenue that I discussed earlier in accordance with business combination accounting guidelines.

Despite the positive business momentum we experienced at the end of our fourth quarter, we are being prudent in our expectations, given we historically experience a modest sequential seasonal decline in Q1.

As such, and assuming achievement of the mid-point of our targeted revenue range, our Q1 revenue expectations by business segment are as follows.

We expect our Creative and Business Productivity segments to increase modestly on a sequential basis.

We expect our Platform business to decline, and we expect Print and Publishing business to be flat with revenues achieved in Q4.

We expect our Omniture business to report revenue of between $78 million and $83, which does not include approximately $14.7 million in deferred revenue that I noted earlier.

From a geographic perspective, our Americas segment will benefit from a full quarter of Omniture revenue and grow sequentially.

We also expect Asia to grow sequentially due to normal Q1 seasonal strength in Japan, and we expect EMEA to be flat on a quarter-over-quarter basis.

For margins, we are targeting a Q1 GAAP operating range of 19% to 21%, and a non-GAAP operating margin range of 30% to 32%.

We believe these margin target ranges represent the low point for fiscal year 2010 that will improve during the year as a result of realizing the full benefit of our recent restructuring as well as new product launches that come later in the year.

We are targeting our Q1 share count to be 530 million to 532 million shares.

For nonoperating income, we are targeting a loss of between $2 million and $4 million on both a GAAP and non-GAAP basis.

For our Q1 GAAP and non-GAAP effective tax rates, we are targeting approximately 24%.

These targets lead to a GAAP earnings per share range of $0.21 to $0.25 per share, and a non-GAAP earnings per share range of $0.34 to $0.39.

We are optimistic about fiscal 2010, but due to continuing economic uncertainty, we are not providing full year financial targets at this time.

However, as we outlined at our analyst meeting in October, we remain committed to delivering at least a 34% non-GAAP operating margin for the year.

This concludes my section.

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

Thanks, Mark.

I'll spend the next few minutes reviewing business results from Q4.

In Creative Solutions, our business was strong.

benefiting from the increased demand for Creative Suite 4 in both North America and Europe.

This positive trend was seen with our Creative Suites and extends to our digital imaging business.

We had a successful Q4 launch for our hobbyist products.

Photoshop Elements version 8 for Windows and Mac, and Premiere Elements version 8 for Windows were launched in September and received great reviews.

In particular, Photoshop Elements had strong results in the Mac retail market.

Our dynamic media business remains stable and momentum continued for Flash video on the web.

Over the past two years, the annual volume of video streamed in the Flash format has grown 1300%.

Just last week, both Bandai and NHK in Japan announced they are change to Flash video.

Scene 7 had a strong bookings quarter in Q4.

We expanding our go-to-market reach with introduction of Scene 7 services in the Asia-Pacific market.

We expect synergy between our Scene 7 offering and our Omniture business in the targeting of eCommerce customers that can utilize both solutions.

At Adobe MAX, and at our financial analyst meeting in October, we highlighted key features of the next release of our Creative Suite product family.

We expect CS5 will be a must-have upgrade when it ships this fiscal year.

In Business Productivity solutions, LiveCycle revenue grew sequentially, exceeding revenue achieved in both Q2 and Q3.

We believe there's a large market opportunity to transform the way customers and enterprises do business, using solutions to create interactive multi-channel experiences that incite action and dramatically improve business outcomes.

Our strategy is to deliver comprehensive solutions based on LiveCycle and Connect, leveraging the reach of the Adobe Flash platform.

Connect Pro had a record bookings quarter and government revenue doubled on a year-over-year basis.

In Q4, we announced significant updates for Connect Pro.

New features enable organizations to provide rich communication and collaboration experiences for their employees, partners and customers.

Our integration of Omniture is going well and customers are excited about our vision to deliver a more complete customer work flow, spanning content creation, delivery, and optimization.

We are leveraging the strength of Adobe's brand and global infrastructure to expand opportunities for Omniture solutions, and the integration of Omniture technology into CS5 is underway.

We added 17 new Omniture customers in October and November.

We quickly rolled out a unified go-to-market strategy, enabling each of the product sales organizations to widen and deepen their executive level relationships.

We have completed training of the various solutions across the sales organization.

We are now focused on a strong close to the selling season for Omniture.

And I'm pursuing strategic customer opportunities in streaming media, mobile and eCommerce, all of which represent large growth opportunities.

At the Adobe MAX conference in October, we unveiled Flash Player 10.1 and Air 2.0, enabling rich web content video and applications to reach more users across a broader set of devices.

We announced new HTTP streaming technology for video, delivered on the Flash platform.

Released betas of Adobe Flash Builder and Flash Catalyst offer and introduced new Adobe Flash platform services.

In the recent Gartner report, discussing mobile consumer application platforms, Adobe was positioned in the Visionaries magic quadrant.

The report highlights Adobe's long-term commitment to mobile support and vision for experiences across multiple devices as well as our strong reputation for content creation and high awareness with developers.

We're excited about our prospects for 2010.

As we highlighted at our recent financial analyst meeting, our areas of focus in the coming year continue to be delivering a must-have release of Creative Suite, driving double-digit growth in the enterprise with our LiveCycle, Connect, and Acrobat businesses, integrating and delivering incremental value with our Omniture business, to help customers optimize their businesses on the web, 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.

Assuming the economy remains stable, we believe our investments throughout the past year in these areas, combined with our outstanding global team of employees and the innovative new products we will ship this year, have positioned Adobe to return to strong top line growth in 2010.

Thank you for joining us today.

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

Thanks, Shantanu.

Before we begin Q&A, I need to point out we are changing our reporting segments slightly in fiscal 2010.

Given our enterprise focus on customer interaction solutions, we will report Connect Pro revenue in our Enterprise segment, starting in Q1.

This means in fiscal 2010, our Knowledge Worker segment will contain all Acrobat revenue, whereas our Enterprise segment will contain LiveCycle and Connect Pro revenue.

The investor data sheet we are providing today contains a table showing the new segment classifications.

The investor data sheet we provide as part of our Q1 earnings report in March will contain these revenue reporting changes with restated historical business segment revenue for comparison purposes.

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

Including a copy of the script containing our prepared remarks for today's call.

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 at Adobe.com later today.

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

Use conference ID number 304-4898.

Again, the phone number is 888-203-1112, with ID number 3044898.

International callers should dial 719-457-0820.

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

Pacific time today, and ending at 4 p.m.

Pacific time on Friday, December 18, 2009.

We would now be happy to take your questions.

Operator?

Thank you.

The question-and-answer session will be conducted electronically.

(Operator Instructions).

And we'll go first to Mike Olson with Piper Jaffray.

Thanks.

Good afternoon.

So couple quick questions.

One for Shantanu and then one for Mark.

Creative was actually ahead of what we were expecting while business productivity was a little below.

If anything, I would have expected it would be the opposite.

As kind of Creative maybe starts to slow down into CS5.

What are the factors that may still be weighing on business productivity and is CS4 holding up better than expected as we get closer to CS5?

And then for Mark, what kind of near term and long-term gross margins are you expecting for the overall business with Omniture built in?

Is something like a high 80s number and can you repeat the shippable backlog number?

Thanks .

In really all of our products and in both North America and EMEA, so that extends to both the Creative as well as the Acrobat products.

So let me say that.

With respect to Creative, we've always maintained that we do see a correlation with GDP, CS4 was a great product, is a great product and shipped in I think what we now recognize was a bad economic environment, and as creative professionals realize that they have old hardware and software, I think we're continuing to see them upgrade and that's benefiting Adobe.

I'll also say that we've really focused a lot with the creative business on better segmentation, crisper marketing messages and driving adoption and penetration and I think we're seeing some of the benefits of the focused marketing efforts that we've put to try and get new people to adopt Creative and for existing customers to upgrade.

On the Acrobat side, again, while Acrobat 9 has been impacted by the economic environment, we're definitely seeing PDF as a platform continue to gain momentum.

There are more PDFs that's being created.

One of the things that we also see is, frankly, the PDF creation business is also becoming more server based, and as we are offering LiveCycle, there's a fair amount of the LiveCycle revenue that can be attributed to PDF generation, because it's happening on the server.

We had a strong end of year enterprise licensing part of the Acrobat business and so we'll continue to focus on driving growth in both businesses.

Okay.

And then on the gross margin question, the addition of Omniture into our business for 2010 will pull our gross margins down approximately two to three percentage points.

So it will be closer to that 90% range, if you look at it going forward, and we do expect to be able to improve that over time as we drive better purchasing and better data center consolidation but that will take a little bit of time, so assume for now roughly 90%.

And on the backlog question, it was 9% of total revenue or 9% of the $757 million.

Thank you.

Thank you.

We'll go next to Steve Ashley with Robert W Baird.

Great.

In terms of the first quarter margin guidance, when we look at the 9% reduction in force you're doing, just trying to understand how much of that benefit will be realized in the first quarter, maybe as a percentage basis, and how we might think about that being phased in over the fiscal year?

Hi, Steve, it's Mark.

Let me talk about operating expenses a little bit.

One way for you guys to think about it is if you took the mid-point of our revenue range of $825 million, and you assumed the 90% gross margin that I just talked about, and the middle of our range for operating margin of 31%, that would suggest that OpEx goes up approximately $58 million from Q4 to Q1.

The biggest piece of that of course is we have a full quarter of Omniture in Q1 that we only had a month of in the fourth quarter.

We also have an extra week of cost, goes along with the extra week of revenue that we talked about on my prepared notes.

And then we have the variable cost that we've been talking to you about for a few quarters now that we will layer back into the business, assuming of course we pay out bonuses and variable compensation going forward.

And then some of that gets offset by some of the restructuring that we took, Steve, but the bulk of the restructuring really occurs later in the year as people that are on transition roll off from the Company.

Great.

And then just Shantanu, very high level question.

When you look at CS5, outside of the improved feature functionality that will be in that product, what factors give you the confidence that we may be back to a normal product cycle with that?

Thanks.

Steve, at the analyst meeting we talked about a number of factors that we think would lead to CS5 being a must-have upgrade.

We're clearly seeing an aging of hardware.

When I talk to my peers across the industry, they have certainly held off on hardware transitions and I think you find in many cases that the Windows operating system that's still being run is seven or eight years old, if that's Windows professional.

So the move towards Windows 7, some of the new hardware changes, we have clearly demonstrated how for both imaging and video, we are taking advantage of all of the GPU acceleration that's now available, the desire from our customers to have multi-screen capability as they increasingly target multiple devices for their content, Snow Leopard on the Mac, also should help, because it's a new OS, and frankly, thinking about Omniture and demonstrating to our customers how we can help them derive business value from the investment that we're making in Creative, and the fact that the economy should see improvement, and that fact that the economy should see improvement, I think all of those lead us to have confidence looking forward to 2010 in CS5.

Great.

Thank you.

Thank you.

We'll take our next question from Heather Bellini with ISI Group.

Hi.

Thank you.

Two questions for you.

Shantanu, I was wondering if you could talk to us a little bit about the 64-bit enablement and how you think that could drive upgrades, I know you were just talking about the aging hardware base a second ago, but in particular, I'm wondering how much of a driver that is in and of itself, and secondly, I'm wondering if you have a view on how you would place CS5 in terms of your prior CS releases, and obviously, it's not out yet, but should we think that CS5 could be a cycle that tops that of CS3 from a revenue perspective based on the comments you were making before from a hardware perspective?

Thank you.

Heather, on the 64-bit enablement, it's certainly one of the multiple features that we will be introducing, and I think where it has the most dramatic impact will be in video and in some of the imaging functions that we provide, both on the Mac and on Windows, we're going to start to support 64-bit.

When you're thinking about rendering video in particular, the movie can take advantage of hardware advances, the more you really see the benefits that that provides, as well as GPU acceleration, frankly.

When we think about a movie like Avatar that's being released, a significant amount of the time that's taken goes in rendering.

So whatever we can do to accelerate the rendering, really improves both the creativity and productivity.

I would say it's one important feature, but frankly there's thousands of features that are going into CS5 that should help it make it be a very compelling release.

While we're very excited and I want to highlight the excitement that we have with respect to CS5, I think comparisons are still a little bit early.

We're focused on CS4 and continuing to drive adoption and penetration for CS4 and as you know, a a large part will also rely on what happens with the economic environment in 2010.

Again, the peers that I talk to, people feel like the entire supply chain has been building up for a strong end of year, and I think when we get into early 2010, people are going to look back and see if there's going to be continued demand to really determine if the recession is finally over.

But we're excited.

We're doing everything that we can within our power to deliver a really compelling value, there have clearly been people who haven't switched as a result of the economic environment and how strong it is I think GDP will be one important factor in determining that.

Okay.

Great.

Thank you.

We'll go next to [Brett Sill] with UBS.

Thanks.

Just a follow-up on Heather's questions on CS5.

I know you're not giving us a release date but Shantanu, what leaves you comfortable that you're on time with your internal plan.

I don't know if code complete or the release date being fixed is something that you've discussed.

Any color would be helpful, just to give us a sense of kind of where you're at.

Well, I think we've demonstrated over the last decade that we've had very, very good reliability and predictability in delivering what are really massive products, as large as really operating system releases that go out when you think about the number of applications and technologies.

I will say I do a review of the engineering schedule very frequently.

I had one this Monday and the teams are making great progress.

So we've been focused on it.

What I'm particularly excited about also is some of the work that we've been able to do with respect to integrating Omniture into CS5 and if you go back to when we reported Adobe and Macromedia together, what we're finding is as you get these two teams together, the number of ideas that we have in terms of providing even more value to people who either used Omniture or didn't use Creative Suite or used Creative Suite but didn't use Omniture is quite significant.

I'll give you two examples of that.

What we're able to do is in terms of tracking Flash, video that might exist on the web, we now have the act through the open source media framework that we've built to, with a single line of cord, turn on analytics for Flash video if you want to use Omniture in conjunction with that.

Another example is with the creative products.

If you're trying to do test and target or allow people to measure how their Flash Media applications are being consumed, you can do that through point-and-click and no code to write, so there's a still a fair amount of work that has to go in the glide path to get this out to our customers.

We have early data in the hands of our customers, feedback is positive.

It's not in the bag, but based on what we've seen and past history, I'm confident that this will be a great release.

Thanks.

Thank you, we will go next to Ross MacMillan with Jefferies & Company.

Thanks.

Just going back, Mark, to the mess of jump and unshipped product at the end of the quarter, can you just talk to the linearity, and I don't think we've seen that sort of number since Q4 2007 as a dollar number.

Is there any way you could help us understand that linearity, and then maybe the mix between CS and other products that constitute that?

Thanks

Sure, Ross.

There's no doubt that we saw a demand uptick more towards the end of the quarter, if you go way back to the beginning of this year, we said that the US was stable back in February.

That started to improve over the course of the year.

We definitely saw an uptick in demand from there in Europe and in North America, particularly at the end of the quarter that was the large driver of that substantial backlog.

In terms of mix, we don't dive into the details of what's in that backlog number by view, Ross, so I can't help you there.

Okay.

And then maybe just a follow-up, just to be clear, Mark, when you talked about your 34% non-GAAP profit margin floor, you're talking about in the context of the way you're reporting which is excluding the deferred revenue write-down; correct?

Yes, that's correct.

So that's without -- everything that we're going to talk about will consistently be without that $30 million and we'll constantly remind you of the impact each quarter of what that $30 million was.

By the way, on the backlog, it's pretty evenly distributed around all the products.

Great.

And then just I wonder if you might -- we could probably work it out but any -- is there any way to think about the EPS impact from the $31 million of deferred this year?

Is that a number you happen to have?

Well, I mean, you could definitely do the math but it works out that roughly $7 million is $0.01, $7 million of revenue as a rule of thumb works out to be $0.01 if you just take that math through the margin tax rate and share count calculation.

Perfect.

Thanks so much.

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

Great.

Just to finish out that question that Ross was asking, so Mark, to be ultra clear, as we go -- as we annualize through the acquisition, in effect you almost see margin expansion as you hit kind of the full revenue potential of Omniture without the deferred revenue writedown.

Correct?

Yes, that's right.

In fact, this margin number in Q1 will be the low point and it's a good opportunity, Sarah, for me to add on OpEx line, it's very conceivable that we could keep OpEx at this Q1 level through the rest of the year, because we will be continuing to invest but we also get the offset of some of the restructuring that helps us later in the year, so depending on what we see from a revenue perspective, it's conceivable that we could keep OpEx at this level for the rest of the year, roughly, and then drive towards a minimum of 34%, again, without the benefit of that $30 million of deferred revenue write-down.

Sure.

And then maybe as a follow-up to that, in terms of thinking about costs, because we've not really talked to you live since we got the news on the incremental headcount reduction.

I mean, is the view that there is still more low hanging fruit in terms of optimizing the core Adobe operating line still or are you now kind of refocusing back to growth in a way and you're done with kind of a lot of kind of the pulling out the incremental costs that come out when you go through a bad time like we've just been through.

Maybe I'll take that, Sarah.

When we think about 2009, it was clearly a tough year, and in terms of the restructuring, we did a restructuring both at the end of last year, as well as the end of this fiscal year, 2009.

As a Company, based on what we are seeing in the marketplace, based on the product road map that we see ahead of us, based on the opportunities to continue to drive top line growth, we think we're down with the focus on costs, it's going to be a lot more focused on driving top line growth and meeting customer needs.

We have some significant opportunities as we talked about at the Analyst meeting, whether it's with the Omniture Marketing Suite, Customer Interaction Solutions, and driving LiveCycle and Connect, and clearly, the Acrobat and the Creative Products, so that's really going to be the focus of the management team for 2010.

Great, and if I could ask just one more follow-on, Shantanu, on the revenue side, clearly we see that very nice sequential uptick in Europe.

Qualitatively, where are you finding Europe relative to the Americas?

Is it still somewhat lagging, or are you really starting to see a turn come in EMEA as well.

As you know, entering into Q4, we were a little concerned about and cautious about what would happen because we go through the typical season in Q3 in Europe.

We did see an uptick, as Mark said, it was really pretty late in the end of the quarter, Q4, and I would say it's still lagging the US a little bit, but we definitely saw an uptick in improvement.

Perfect.

Thank you very much.

Thank you.

Will go next to Adam Holt with Morgan Stanley.

Thanks for the question.

My first question, Mark, is maybe a housecleaning question.

Is sizing the extra week for the quarter as easy as just dividing the guidance by the 13 weeks?

No, it's not, Adam, because it's really the volume business, so you really have to look at what goes through the channel from a shrink wrap and a licensing perspective, so it's substantially less than just dividing by the number of weeks in the quarter.

Okay.

I guess what I'm getting at is obviously the quarter you've got more visibility heading into Q1 than normal with that backlog number.

I was trying to understand how we should be thinking about the guidance relative to normal seasonality if we X out that extra week.

Are you baking in the assumption for maybe a little bit softness on the CS side as we get closer to the CS5 release.

So the extra week, you can think roughly is $20 million, just to size it for you, so you don't have to try to guess, and the way we came up with the guidance for Q1 is as you pointed out, there is Q1 seasonality that we want to be careful of, and we want to be prudent about the guidance from a seasonality perspective, as well as still an economic perspective.

To the extent that we see this Q4 strength that he with saw at the end of the quarter continue into Q1, that's exactly what would put us towards the high end of the range as opposed to the middle or low end of the range.

And just one more question.

What was the impact of currency on the quarter and how do you think of currency on a going forward basis?

So in the quarter, from a year-over-year perspective, we had a gain of $22 million.

It was 16 from the Euro and 6 from the yen.

And again, whenever we give guidance we kind of factor in what we think rates are going to do based on where they are today, so basically the rates would stay the same.

We don't try to forecast what rates are going to do.

Terrific.

Well, great finish to the year.

Thanks.

Thank you.

Thank you.

We'll go next to Jay Vleeschhouwer with Ticonderoga Securities.

Thanks.

Good afternoon.

Couple of questions.

Shantanu, irrespective of the recurrent revenues that you've now had with Omniture, what else could or should the Company do for Adobe's creative business, in particular, to establish for contractually recurring revenue, as the maintenance or subscription question that's come up from time to time, LiveCycle gives you that, but what can you do on the creative side?

You experimented with the tiered pricing earlier this year, talk about that effect or anything else you might do of a more recurring nature on the creative side and then a follow-up.

Sure.

So Jay, first, the big win for us with Omniture is the strategic opportunity to really provide the more complete solution to our creative customers and to complete the market.

Without a doubt, that continues to be the area that's most exciting for us and we talk to customers, I've been out of the road, they're really pretty excited about the vision for providing both the creative tools as well as a playback environment with Flash and now tools to help them optimize their online content.

So without a doubt, that's the most exciting part for us.

But specifically, I think there are a couple of things that you will see us do.

Because whether it's CS5 or Scene 7 or LiveCycle or Flash platform, they all actually benefit from increased integration with the analytic products that we get from Omniture.

We've talked about the subscription at the analyst meeting.

As we said, we are running a pilot.

That pilot continues to have promising results.

Don't expect us to roll out the subscriptions on a worldwide basis I think when the next version of creative launches we would continue to stick with our current offering.

But I think you're going to continue to see us offer subscriptions as an alternate mechanism to get people who don't want to give all the money up front into the platform.

Clearly, the other thing that you're going to also continue to see is software plus services and one of the key features that we will deliver in the next version of Creative Suite will be new services like we've already announced.

We announced the acquisition of a company called Business Catalyst, there's Browser Lab, which allows people to see how the websites that they're creating will render on mobile devices and alternate platforms.

So you're going to see us also deliver these new services, and those services will also be recognized ratably.

And finally, when we do Acrobat in the later half of 2010, everything that we've done with Acrobat.com and the 7 million subscribers that we have there, we're also going to deliver that as a software plus service collaboration capability.

So.

Okay.

The second question is, at the time of the restructuring in October, it was mentioned that Adobe has something over 100 products and projects, but that there's only so much even you as a company can do or support.

Is there an update on the extent of the portfolio now?

Again, X on [mutualware], and more specifically, what are the criteria for keeping or not keeping a business?

When is something too small to matter for you, or conversely, what small businesses do you have that have the potential to become even 9-figure businesses at some point?

Jay, every year, we have a very comprehensive strategic plan where we do portfolio analysis, much like other companies would do, and look at, for each of the projects that are underway, what the potential is both from a short-term perspective as well as from a long-term perspective, and we're clearly driving a balanced portfolio, so we have a number of businesses which are high-growth opportunities, but earlier on in their life cycle, like Scene 7, like Connect, so we're investing, we have seed businesses which are a gleam in somebody's eye, it's a $0 billion business, but hopefully it has great potential.

So I would say that we've done a really good job of optimizing the business across the entire portfolio that we have, and that's something that we will continue to do, so do we have new creative things underway?

At MAX in our sneak peeks, we showed some examples of some very creative things that we believe will lead us into new businesses moving forward, but in addition to that, we do have more material products, where we're constantly looking to see how we can optimize it.

Thanks, Shantanu.

Thanks, Jay.

We'll take our next question from Philip Rueppel with Wells Fargo.

Great.

Thank you very much.

You talked about some new ideas for integrating Omniture with Creative Suite that have bubbled up recently.

Has there been any significant change in the original schedule of CS5 due to the Omniture acquisition?

And then second of all, just looking at Omniture standalone now that you have had it under your belt for a few months, has there within any disruption in that business and are you comfortable as you head into the -- as you said, the seasonally strong year end, things are moving along fine with that business.

Thanks.

So on the first question, as it relates to the CS5 product schedule, we're not going to make any changes in the CS5 product schedule as a result of Omniture.

We're going to stick to the current schedule and we're going to try and as I said get some quick wins in from integration perspective, and I've been very pleased with what the teams have been able to do, so the creativity has been fabulous.

With respect to Omniture itself, we're very pleased.

We actually have got most of the employee population in Omniture excited and signed up as part of Adobe, and I would divide the integration into three or four different work streams.

We talked a significant amount about the products so I won't repeat myself.

On the sales side, we really focused on making sure that we had a strong end of year close, so we kept the Omniture sales force separate because they had a traditional end of December close so we're continuing to have them focused on driving to a strong close.

But what we have already done is we've had our annual sales kickoff for the combined organization, where we train both organizations in the combined value proposition and we're certainly starting to see some joint account value propositions.

There was a large food Company services, for example, that is a big user of LiveCycle, now wants to know which of their smaller, medium business customers are using that technology and are very excited about integrating Omniture as part of that.

I would also say that we've been able to open a lot of doors.

Josh talked at the analyst meeting about how the brand will help Omniture's sales force open doors and we're certainly starting to see that as well.

Great.

Thank you.

Thank you.

We'll go next to Robert Breza with RBC Capital Markets.

Hi.

Thanks for taking my questions.

Shantanu.

I was just wondering, I think in Mark's prepared comments, talked about Asia being seasonally down.

Was there anything else economically that you're seeing over in Asia that would cause it not to follow normal seasonal patterns, and Mark, just one comment for you, if you could help us understand maybe the direct expenses associated with Omniture for Q1, that would be great.

Thank you.

No, Robert, we saw nothing in Asia that would lead us to believe that it's not following normal seasonal patterns.

As you know, Japan is a large market for us and the traditional strong months in Japan tend to be February and March as part of their fiscal year-end, so we expect, as Mark said, I think, that to reflect in the Q1 results for Asia, and the rest of Asia, while piracy continues to be an issue in terms of what we are seeing for adoption of our solutions, that continues much like it has in the past.

And for Omniture, I'll give you this for the first quarter, and frankly, just like every other business unit, we'll probably just stick to the gross margin going forward, but Omniture in our first quarter will be something slightly less than $50 million in OpEx for Q1, and then, the COGS or the gross margin, you can figure out based on the fact that the total company will, like I said, come down from the 92, 93% range to roughly 90% range.

Great.

Nice quarter.

Thank you.

We'll next to Brad Zelnick with Macquarie.

Thanks for getting me in.

Just, to follow up the comments, now that you've closed on Omniture and what we think about the ultimate opportunity to bring it into the product set and combine capabilities with Creative Solutions, I guess the question would be what is the ultimate vision, and how much of that vision do you expect to with able to achieve in the CS5 time frame, Shantanu and I have just a quick follow-up for Mark.

The long-term vision for us continues to be for anybody who is creating online media, digital assets, to be able to allow them to provide a complete work flow that spans the creation, distribution and optimization of those media assets.

It's a big vision that will, much like when we acquired Macromedia, will take a few years to realize.

We want to demonstrate clear commitment to that vision and early successes with the CS5 time frame and so you will see that in the CS5 time frame.

We want to continue to demonstrate successes with the next generation of the Flash platform and delivery of the Flash platform and what's very interesting is even in government, as government continues to use more LiveCycle solutions, they clearly want us to provide them better analytics, so you start to see early results with CS5 but frankly it's going to be a multiple generational effort here.

The other two things that I'll talk about is video.

Video is clearly an explosive opportunity.

Flash video being 75% of all online video.

People have really been clamoring for who is watching that video, how can they optimize search spend by providing better analytics into that.

Huge opportunity for us.

Mobile.

Mobile is a very nascent opportunity.

RIM announced at their RIM developer conference that they're working both with us on the Flash side to enable Flash to work on the RIM platform.

They also announced that they were working with Omniture, so that as advertising becomes really the bigger form of revenue on mobile devices, they can provide each of their publishers and advertisers with information about who's actually accessing this information.

So there is some very big market opportunities that this combination allows us to go pursue.

Thanks, Shantanu.

And just a follow-up for Mark.

When you announced the restructuring, you said you expect it to impact 18 to $20 million on the fourth quarter, and I think we ended up in excess of $25 million.

Could you just talk a little bit about what accounted for the variance?

And maybe in terms of headcount, again, 680 target, where are we in that process?

Thanks again, and nice quarter.

The restructure ended up at about 630 people when we finished it all out.

We do a lot of puts and takes at the end of that process and it ended end of that process and it ended up at $25 million.

So we're done with it.

But like I said, the savings doesn't all happen in the first quarter.

There are people on transition.

There are facilities that get consolidated later in the year, so the full benefit doesn't happen until later in the year.

Thanks.

Thank you.

We'll take our next question from Sasa Zorovic with Janney.

Thank you.

I have a question regarding the uses of your cash, so one would be, and I don't want to feel bad asking this since just a month into an acquisition, but for potential other M&A opportunities out there, there are great technologies that are available for very compelling prices at this point, and then secondly also about buybacks, obviously you've done some in the past year, and how you look particularly as the economy continues to recover and we have a strong release about maybe speeding up some of the buyback programs.

Sure, Sasa, that's hard to say.

From an M&A perspective, we continue to believe that that's strategic for us, there will be a lot of technology plug-ins that we'll continue to look at like we've done in the past, and we certainly have the available cash to do that.

We're very fortunate that we have a great business model that generates $200 million to $300 million in free cash flow every quarter, so we've definitely got the capital to do that.

As it relates to buybacks, we've clearly slowed down a little bit, because of the acquisition of Omniture, but we've continued to buy back shares, like I mentioned this quarter, and the $350 million VWAP that I talked about last quarter still has some room left in it, so there's still about $60 million worth of room on that program where those shares will get delivered, most likely in the first quarter, and we still believe that from a shareholder perspective, that the best vehicle for us to return excess cash in, when we have it, we'll continue to use it for that.

Great.

Thank you.

So, operator were running tight on time.

We'll take two more questions.

We'll go next to David Hilal with FBR Capital Markets.

Great.

Thank you.

Just two questions on Omniture.

First, Mark, on the revenue in the quarter and your guidance, could you share with us the mix or maybe the rough mix between subscription and services?

And then my second question, I think Shantanu mentioned the new customer additions.

I was hoping you could talk a little bit at least qualitatively about churn and renewal rates that they have seen in their business over the last few months.

Thanks.

Well, let me take that, David.

I think as it relates to Omniture, what we wanted to do was make sure that we gave you a significant amount of information as it relates to the business model as well as some of the key metrics that we will measure model as well as some of the metrics that we will measure moving forward.

Overall, I would say with respect to the Omniture business, we didn't see anything different in the six weeks or so that they were part of Adobe.

And really, I think at the end of Q1 when we look at full quarter on the Adobe, that makes a lot more sense.

As you know, a significant amount of the Omniture revenue in the quarter is already there and it's just a question of continuing to deliver.

So the services stayed up really nicely.

The customers continued to be pleased.

So I would say there really hasn't been any significant change in customer retention rates or in the sources of revenue.

And just to clarify that even further, they were running -- Omniture was running standalone of about $10 million, roughly per quarter in 2009 for professional services revenue and in our one month in Q4 they were somewhere between $3 million and $4 million in professional services, so very consistent with that run rate.

Okay.

Perfect.

Thanks.

Thank you.

And we'll take our final question from Kash Rangan with Banc of America/Merrill Lynch.

Hi.

Thank you very much.

Shantanu, I was wondering when you talked about double-digit targets for LiveCycle, Acrobat.

Just wondering, since you didn't talk about a specific growth target for Creative Suite, how are you thinking about Creative Suite in 2010.

I'm asking that just because you didn't specifically address the topic.

Just wondering if there's any variables, external variables that still cause you to not give any particular forecast, just want to get a little more color on that.

Thanks.

Sure.

So Kash, first, overall for the Company, I think we're excited as we said about fiscal 2010 but we're definitely going to be cautious about providing any guidance until we get through the holiday season and get a little bit more data under the belt.

What I was attempting to do with the business productivity business was reflect how we saw the overall growth opportunity for that entire business, and how it's actually transitioning to be a combination of Acrobat on the desktop, as well as LiveCycle on the server, and I believe that that continues to be a large growth opportunity for us, so it was more of our talking about the target market opportunity, both in terms of how rich internet applications and document services come together, rather than a specific target for fiscal 2010 for any of our businesses, and clearly we continue to think that there's significant opportunity in the Creative business as well.

Maybe a question for you, Mark.

As we get closer to the CS5 launch, I guess you will alert us to the transition in the quarter before that release, and incorporate that into the guidance, so if you look at the Q1 guidance, it doesn't reflect a lot more seasonal slowdown if you exclude the Omniture piece of it, so obviously, it doesn't look like we're very very close to the transition quarter.

Just wanted to get your thoughts on how we should be thinking about how we should interpret your guidance as we get closer to CS5.

That's it.

I guess the simple answer, Kash, is when we're ready to announce CS5 publicly, then clearly, I'll provide you guys guidance as it relates to CS5.

Until we announce it publicly I can't give you any more than that.

I just wanted to say thank you again for joining us today.

We're really pleased with Q4.

As I said, we saw increased demand and I think the Company did a really good job in a tough economic climate of continuing to focus on our long-term strategic opportunities while making sure that we delivered back to our shareholders, and as we look forward, frankly, when we think of the breadth of Adobe's opportunities, we just see significant opportunity across multiple customer segments.

There's going to be an amazing lineup of products, and with Omniture now on board and the Flash platform as a competitive advantage, we're really entering the year with the goal of continuing to deliver top line growth and increasing shareholder value.

So thank you again for joining us on the call today.

This concludes our call.

Thank you again.