Adobe Inc (ADBE) 2010 Q1 法說會逐字稿

Good day, everyone.

welcome to the Adobe Systems Q1 fiscal 2010 earnings conference call.

(Operator Instructions).

At this time, I would now 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 first quarter fiscal year 2010 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 on this call, particularly our revenue and operating model targets, and our forward-looking product plans is based on information as of today, March 23, 2010, and contains forward-looking statements that involve risks 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 statement disclosure in the earnings press release that 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 website in the Investor Relations data sheet.

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

And archive of the call will be made available on the 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 will now turn the call over to Mark.

Thanks, Mike.

For the first quarter of fiscal 2010, Adobe achieved revenue of $858.7 million.

This compares to $786.4 million reported in Q1 fiscal 2009, and $757.3 million reported last quarter.

Our Q1 revenue includes $87.7 million in Omniture revenue, but excludes $14.9 million in deferred Omniture revenue in accordance with business combination accounting guidelines.

Our Q1 revenue benefited from an extra week in the quarter due to our 52/53 week financial calendar as we discussed in our December call, and which was factored into our financial targets.

We estimate the net revenue benefit from the extra week to be approximately $35 million in the quarter.

We entered the first quarter with approximately 9% of reported Q4 revenue in shippable backlog, and we exited the first quarter with approximately 6% of reported Q1 revenue in shippable backlog.

Q1 GAAP operating expenses were $592.5 million, compared to $501.1 million reported in Q1 fiscal 2009, and $521.3 million last quarter.

Non-GAAP operating expenses in Q1 were $498.7 million, compared to $428.6 million reported for Q1 fiscal 2009, and $428.8 million last quarter.

GAAP operating income in Q1 fiscal 2010 was $176.8 million or 20.6% of revenue.

This compares to GAAP operating income of $207.9 million or 26.4% of revenue in Q1 fiscal 2009, and $153.6 million or 20.3% of revenue last quarter.

Non-GAAP operating income in Q1 fiscal 2010 was $289.3 million or 33.7% of revenue.

This compares to non-GAAP operating income of $295 million or 37.5% of revenue in Q1 fiscal 2009, and $265.2 million or 35% of revenue last quarter.

Adobe's effective GAAP tax rate in Q1 was 23.5%, and the non-GAAP tax rate was 25%.

Our non-GAAP tax rate was approximately 1 point higher than our target of 24%, due to the non-renewal of the R&D tax credit by Congress.

Q1 GAAP net income was $127.2 million, compared to $156.4 million reported in Q1 fiscal 2009, and net loss of $32 million last quarter.

Non-GAAP net income in Q1 was $211.7 million, compared to $236.8 million reported in Q1 fiscal 2009, and $206.8 million last quarter.

GAAP diluted earnings per share for Q1 fiscal 2010 were $0.24 based on 532.6 million weighted average shares.

This compares with GAAP diluted earnings per share of $0.30, reported in Q1 fiscal 2009 based on 527.8 million weighted average shares, and GAAP net loss per share of $0.06 reported last quarter based on 532 million weighted average shares.

Non-GAAP diluted earnings per share for Q1 fiscal 2010 were $0.40.

This compares with non-GAAP diluted earnings per share of $0.45 in Q1 fiscal 2009, and $0.39 reported last quarter.

The higher non-GAAP tax rate due to the non-renewal of the R&D tax credit, reduced our Q1 non-GAAP earnings per share by approximately a $0.01.

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

As we discussed on our December call, beginning this quarter we have adjusted our reporting segments.

Specifically, we have moved our Adobe Connect product from our Knowledge Worker segment to our Enterprise segment.

Today's updated investor data sheet reflects this change, with our Knowledge Worker and Enterprise segment revenue restated back to fiscal 2006 for comparison purposes.

In Q1, Creative Solutions segment revenue was $432 million, compared to $460.7 million in Q1 fiscal 2009, and $429.3 million last quarter.

This solid performance in front of the CS5 launch quarter was driven by continued stability in our CS business, as well as strong Photoshop and hobbyist product revenue.

Business Productivity Solutions revenue was $245.8 million, compared to $227 million in Q1 fiscal 2009, and $211.8 million last quarter.

Within Business Productivity, Knowledge Worker revenue was $165.9 million, compared to $149.9 million in Q1 fiscal 2009, and $131.8 million last quarter.

Acrobat revenue rebounded strongly to start the New Year, driven by an improving economy and seasonal strength in Japan and Asia.

Enterprise revenue was $79.9 million, compared to $77.1 million in Q1 fiscal 2009, and $80 million last quarter.

Connect had another strong quarter, and our LiveCycle business experienced normal seasonality.

Omniture segment revenue in Q1 was $87.7 million.

This did not include $14.9 million of deferred revenue, which was excluded due to purchase accounting.

Omniture transactions grew to $1.23 trillion in the quarter, which represents 15% year-over-year growth for the similar period a year ago.

Platform revenue in Q1 was $46.6 million, compared to $52.3 million in Q1 fiscal 2009, and $47 million last quarter.

Print and Publishing segment revenue was $46.6 million, compared to $46.4 million in Q1 fiscal 2009, and $42.9 million last quarter.

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

The Americas 48%, Europe 32%, Asia 20%.

We experienced continued stability in North America and Europe, as well as seasonal strength in Asia.

Employees at the end of Q1 totaled 8,355, versus 8,660 at the end of the fourth quarter.

The reduction in heads, quarter-over-quarter was due to the impact of the restructuring we implemented last fall.

Our trade DSO was 40 days, which compares to 35 days in the year ago quarter, and 49 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 $260 million.

Our ending cash and short-term investment position was $2.7 billion, compared to $1.9 billion at the end of last quarter.

The increase reflects the impact of our debt offering during the quarter, less the subsequent repayment of our $1 billion credit line.

On January 25th, we announced a debt offering consisting of the pricing of two series of senior unsecured notes for an aggregate principal amount of $1.5 billion.

The notes consisted of two tranches, $600 million of 3.25% notes due on February 1, 2015, and $900 million of 4.75% notes due on February 1, 2020.

The cost of the debt will run at approximately $16 million per quarter, and effect our earnings per share by slightly more than $0.02 per quarter.

In Q1 the effect was only $0.01 due to the timing of the offering.

In Q1 we repurchased approximately 1.7 million shares at a total cost of $60 million.

This concludes my discussion of our financial results.

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

We are targeting a Q2 revenue range of $875 to $925 million.

This target range excludes an estimated $8.6 million in Omniture revenue, in accordance with business combination accounting guidelines.

Assuming achievement of the mid-point of our targeted revenue range, our Q2 revenue expectations by business segment are as follows.

We expect our Creative business to increase sequentially because of the launch of CS5.

We expect our Knowledge Worker and Omniture segments to decline slightly on a sequential basis, factoring one less week of run rate in Q2 versus Q1.

We expect our Enterprise business to grow sequentially, and our Platform and Print and Publishing businesses should be relatively flat in Q2, with revenue achieved in Q1.

We expect all of our geographic segments to grow sequentially from Q1 to Q2 due to the CS5 launch.

For margins, we are targeting a Q2 GAAP operating margin range of 21% to 24.5%, and a non-GAAP operating margin range of 33.5% to 35.5%.

We are targeting our Q2 share count to be 531 million to 535 million shares.

We are targeting non-operating expense to be between $16 million and $18 million, on both a GAAP and non-GAAP basis, due to the debt we put in our balance sheet with our bond offering in Q1.

For our Q2 GAAP and non-GAAP effective tax rates, we are targeting approximately 25%, which excludes the R&D tax credit.

These targets lead to a GAAP earnings per share range of $0.23 to $0.30 per share, and a non-GAAP earnings per share range of $0.39 to $0.44.

Looking towards the second half of fiscal 2010, we remain excited about our opportunities and the strong product line up we will deliver.

Although we are not providing specific financial targets for the rest of the year today, assuming we achieve results within our Q2 financial target ranges, we believe our revenue and margin will grow sequentially throughout the remainder of the year.

This concludes my section.

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

Thanks, Mark.

I'm pleased with the progress we are making against our strategic and business objectives.

The Flash platform continued to show significant momentum this quarter.

At Mobile World Congress, we made several announcements, including news that a beta of Flash Player 10.1 was made available to content providers and mobile developers worldwide.

With general availability expected beginning in Q2, 10.1 is the first runtime release of the Open Screen Project, enabling uncompromised web browsing of expressive content, high definition video, and rich applications across multiple screens including desktops, smartphones, networks, internet-connected TVs, new tablet devices and other consumer electronics.

The Open Screen Project is an industry-wide initiative, led by Adobe that now includes 70 ecosystem partners.

We've been working closely with our OSP partners to enable the deployment of Flash Player on Google Android, the Blackberry OS, the Symbian OS, the Palm webOS, and Windows Phone Series 7 devices.

You can expect to see some of these devices starting to ship with Flash Player in the first half of this year, and quickly ramping through this year and next.

We also unveiled Adobe AIR 2.0, for mobile devices, a consistent runtime for the delivery of stand-alone mobile device applications.

AIR leverages mobile specific features from Flash Player 10.1, is optimized for high performance on mobile screens, and designed to take advantage of native device capabilities for a richer and more immersive user experience.

We expect to roll out AIR support for mobile platforms later this year.

In our Creative Solutions business, we continued to focus on delivering an integrated authoring suite for all media platforms including Flash and HTML.

In Q1, our CS business remains stable, and our Photoshop and hobbyist products boosted strong results.

In our video business, we continue to transition marquee media and broadcast accounts to the Flash platform, for the delivery of video over the web.

We are seeing an unprecedented amount of change happening on the web, in publishing and across all forms of media and advertising.

Creation and consumption of content is transforming rapidly, as people engage across a growing array of devices.

And this is driving significant changes in the business and distribution models of content owners and publishers.

Against the backdrop of this changing environment, we are excited about the upcoming launch of CS5.

It will be a phenomenal release, rich with innovative "wow" features, new products and integrated workflows.

It will enable an even broader set of designers and developers to more effectively create, deliver, and measure engaging experiences across media and devices.

On April 12th, we will host an online event to launch CS5, which is on track to ship in major languages late in Q2.

Our Omniture solutions will enable our customers to measure and optimize rich content, including that created in our CS applications.

In Q1, we achieved record quarterly revenue for the Omniture business with strong sales momentum, a 95% Enterprise customer retention rate, and the addition of over 150 new customers including Air Canada, REI, CareerBuilder, Forbes.com, and Terra Networks, Latin America's largest internet company.

Integration of the two companies is going well, and we are meeting all of our major milestones.

We will debut product integration with CS5, and are already seeing benefits of a combined sales organization.

Earlier this month, we held the annual Omniture summit.

At that event, we announced version 2.0 of the Omniture Online Marketing Suite.

We also provided details about an exciting new business relationship with Facebook, which will enable marketers to buy highly targeted Facebook ads using Omniture's SearchCenter Plus, and then measure the performance of those ads in the context of their overall media spend.

We continue to leverage our PDF franchise in the Enterprise.

In our Knowledge Worker segment, Acrobat got off to a great start in 2010, driving strong year-over-year and sequential growth in Q1.

Acrobat.com now has over 10 million users, and we are excited about extending Acrobat functionality with Acrobat.com services in the next Acrobat release later this year.

In our Enterprise business segment, Connect had another strong quarter as government agencies and enterprises continued to adopt our Flash-based web conferencing solution.

We also continued to work with customers such as Northwestern Mutual Life, T-Mobile, and the California Department of Motor Vehicles to deliver LiveCycle solutions to extend the value of existing back-office systems.

With LiveCycle ES2, we are enabling developers to build and deploy customer interaction solutions quickly and easily, and empowering business users to manage application environments based on their specific needs.

Our strong Q1, combined with upcoming launches of our flagship products over the next several quarters make us bullish about the remainder of the year.

Thank you for joining us today.

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

Thanks, Shantanu.

Before we begin Q&A, I would like to cover a few housekeeping items.

First, as Mark discussed we have updated our reporting segments.

Adobe Connect revenue is now included as part of our Enterprise segment starting in Q1.

This means our Knowledge Worker segment will contain Acrobat product family revenue going forward, whereas our Enterprise segment will contain LiveCycle and Connect revenue.

The investor data sheet we are providing today, contains a table showing this new segment classification, as well as restated historical business segment revenue for comparison purposes.

Second, as Shantanu mentioned, there will be an online event on April 12th to announce CS5.

Invitations and information regarding how to register for the event will be made available later today.

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 Adobe Connect archive of the call will be available from the IR page on Adobe.com later today.

Alternatively, you can listen to a phone replay by calling 888-203-1112, use conference ID number, 4296476.

Again, the phone number is 888-203-1112, with ID number 4296476.

International callers should dial 719-457-0820.

The phone playback service will be available beginning at 4:00 PM Pacific Time today, and ending at 4:00 PM Pacific Time on Friday, March 26, 2010.

We'd be now happy to take your questions.

Operator?

(Operator Instructions).

And we will take our first question from Steve Ashley with Robert W.

Baird.

Great.

Shantanu, I guess the question I think probably many people have is, what factors give you confidence that CS5 will be back to kind of a normal release product cycle?

So, Steve, first I think you saw that the business even in Q1 2010, continued to be strong.

And that tells us that the demand for our offering applications continues to be similar to past product cycles.

And we also saw strength in imaging in our Photoshop products, on the extended product.

It's clear that the trends continue to be in favor of what we've been doing, which is to enable our customers to author once, and deliver across multiple media types.

And the amount of digital content that we see created, continues to increase.

And frankly, it continues to be richer.

So more video, more use of animation and interactivity.

And the need is still there from our customers for us to enable them to have one workflow, rather than multiple stove-pipe workflows.

So with that backdrop, we recognize that the creative pros and the companies are facing unprecedented challenges, frankly, which is how can they can deliver this engaging, consistent brand experience across many devices.

And we now think that our solution, the combination of Creative Suite with Omniture, as well as with Flash Player 10.1 really provides a comprehensive solution to enable them to do that.

That coupled with the strength in the economy, and the innovation that we have done in CS5 gives us a lot of confidence for the remainder of the year, but also frankly for the entire duration of the CS5 cycle.

Since it's probably going to get asked, let me give awe few factors about what's in CS5.

I think the big themes for us are first, the ability to design without boundaries, and that comes both from new products that we are going to introduce in CS5, like Flash Catalyst, everything we have done in InDesign, where you can now use InDesign content and repurpose that for electronic delivery, without writing a single line of code.

What we have done in Photoshop, including support for 3D capabilities.

So the whole design without boundaries, is one big theme for CS5.

The second one is really all about working faster with greater precision.

And this is support for new formats, HD for example, as well as what we did with the Mercury engine in our video product,which allows people to render video using hardware acceleration, as well as a native 64 -- native 64 bit support.

And finally services, we've talked about the desire to extend our desktop functionality with services.

You will see that with CS Live.

So all of that point to a solid release, and we are excited.

You learn owe lot more about what is in the product, pricing and the SKUS on April 12th.

Great.

And maybe one quick question for Mark.

In terms of the headcount, I know that there are a kind of confluence of forces going on here -- you are kind of doing a reduction, but you are simultaneously hiring.

Where are we in kind of the headcount adjustment, what percentage of that was done in the first quarter, how much of that needs to continue, and would we see general headcount growth going forward?

Thanks.

Yes, Steve, hi.

There is approximately another couple hundred people that are on transition through the rest of this year.

Offsetting that as you just said, we will continue to be hiring.

So it's hard to say exactly where headcount will be each quarter, but there's still another couple hundred folks on transition.

Great.

Thank you.

Thank you.

We will go next to Walter Pritchard with Citi.

I'm wondering if you can talk a little bit you mentioned all the major language.

I just wanted to clarify, you said the major language versions in Q2, should we expect everything, including Japanese and the European languages all out in the May quarter?

What I said is we will have all the major languages late in Q2.

So the current plan is to get that.

And again we will share more on the 12th, but expect the major languages which we've traditionally said are English, French, German and Japanese to ship late in Q2.

I know there's been some confusion about what we mean by launch versus what we mean by ship.

So just for everybody again on the call, on the 12th, we will talk a lot more about the features and functionalities of the product, the various product configurations, what we have done with pricing.

Clearly, we have some new products, which we will factor into the pricing moving forward.

The early feedback has been very positive.

And then traditionally four weeks later or so, you tend to ship the English version followed by the major language versions a few weeks after that.

So things are on track, as we've said.

All that is factored into the targets that we provided earlier today.

Great.

And then, I don't know if you'll answer this on pricing, but just relative to the sort of upgrade pricing you did in the last cycle around charging more for older versions, and tiering it in that fashion, should we expect to see some sort of similar scheme in the CS cycle?

Yes, Walter.

That is something that we've strategically said we will continue to have, and so expect to see the tiered pricing continue.

Great.

Thanks a lot.

We'll go next to Brent Thill with UBS.

Yes, thanks.

Shantanu, there has obviously been a lot of confusion over HTML 5 versus Flash.

I was just curious if you can just provide us an update, how quickly can you introduce support for 5 when it comes?

Does it require a separate release, or is this something that you can provide, if you can just clear the air on that, that would be helpful.

Sure.

So Brent, firstly, we already support HTML in all of the different flavors that exist today with our creative products, or whether you are using Dreamweaver, or your using any of our other tools.

If you want to output, we will definitely support it.

The context that we see ourselves in is, is people are using tools to author more content.

We will support any format that takes stock in the marketplace, and we have done that right through the existence of the Company.

So standards that exist, whether they would be PDF, whether they be Flash, whether they be HTML, the new imaging and video standards that are emerging like H264, dynamic image resolutions, we are going to support all that have in our creative tools.

And we want to make sure as our publishing customers approach us and say, "hey, these are the different formats that we want Adobe to support", we are not going to allow anybody to come in and create a wedge between us and our customers.

Clearly most of our customers recognize that as their new devices that are emerging, whether they be of the smartphone, phone factor, or they be of the tablet category, they'd like to leverage their assets, so they don't have these multiple stove pipe workflows.

And while none of these customers want to create multiple websites, some will have to do it because of the different formats that are supported by each of these different vendors.

So we will support HTML out of the gate.

The reality is that it's a fragmented standard, but we will continue to support it within our applications.

We think the benefits for our customers when they use our authoring tools in conjunction with our runtime, which is Flash and in conjunction now with the Omniture suite is a more comprehensive solution that is out there.

Great.

And just a follow-up for Mark if you back out Omniture, it looks like you are targeting double digit growth organically for Adobe, and I was wondering if you can clarify that.

For the -- are you are talking about for the year Brent?

In just in terms of the trajectory for the quarter business, yes, (inaudible) for Omniture.

Clearly I'm not going to parse them out.

Clearly Omniture, we've said in our prepared remarks, is kind of slightly down based on the fact that you lose that extra week when you go into Q2.

So you can take what we did in Q1, and back that out and kind of derive what you believe the rest of the Company will do.

Thanks.

We will go next to Sarah Friar with Goldman Sachs.

Great, thanks a lot.

Good quarter guys.

Mark, on the cost side, at the Analyst Day, you talked about a 34% floor on margins for the year, and clearly you've outperformed even this quarter.

And now it looks like it's --- clearly get the leverage as the product cycle gets into gear.

Any kind of update on how you think about that base on margins?

And as you get rid of the rest of the heads and so on, wouldn't we see even more margin expansion through the year now?

Yes, sure, let me talk about that, Sarah.

Yes, we did say, quite a while ago that 34% will be our floor for margins for 2010, as we integrate Omniture into the business.

And we did say that Q1 margin would be the low point for the year.

And if you remember, we guided Q1 margins to 30% to 32% with earnings at $0.34 to $0.39.

Clearly we outperformed all those Q1 targets with margins at 33.7% and earnings at $0.40.

And we did it by absorbing as well, the impact of the debt interest, and the fact that the R&D tax credit has not been renewed.

So with that, we clearly believe that revenue and margin should improve sequentially as we go through the year.

And we will, as we have for years, invest prudently to both drive revenue which is our first and foremost goal, and also continue to deliver margin improvement to shareholders.

So we are focused on both revenue and margin improvement as we go through the rest of the year, and it will improve sequentially from where we are today.

Okay.

Great.

And then, if I could just ask you on the cash flow, it's the only thing that looked a little off to us in the quarter.

Is there anything in terms of timing that is going on there?

And I would presume cash flow would come back to grow, easily in line with net income growth.

It's not all but ahead, it's the product cycle starts.

There's nothing unusual.

I mean cash from operations was like I said $260 million.

Capital expenditures were $25 million.

We had the proceeds from the debt.

We paid back the credit line.

That's really all, there's nothing unusual.

DSOs came down.

So DSOs got much better in the quarter.

Okay, I think it was just on the year-over-year basis, it looked like it was down a lot, but tough comp.

Yes, yes, completely different environment a year ago.

Okay.

Okay.

So no kind of bigger outlays coming, as the product launches for us to be looking out for?

No.

Great.

Okay, good.

Thanks a lot.

We will go next to Adam Holt with Morgan Stanley.

Hi.

Thank you.

It looked like a lot of the out performance in the quarter was from Acrobat and Enterprise, and a substantial percentage of the raise for next quarter appears also to be in those two line items.

Can you talk about what you think inflected in the quarter, and what gives you confidence in that continuation into the next quarter?

Adam, let me take that.

First, across the business we actually saw strength, and I think Mark alluded to that.

So whether it was the Omniture, whether it was Connect, whether it was Acrobat, as well as in the Creative and the hobbyist products, we continue to see strength.

I would say for Acrobat, when we looked at the business, it was really driven by both stabilization in IT spend.

And frankly, we continue to see our run rate business which we say is dependent on the economy continue to do well.

So that was is really good to see.

And we also think that that's driven a little bit by the whole move towards digital workflows for critical processes, as people are moving from paper to digital, we do continue to see PDF adoption increase.

I was with the US court system and they are increasingly looking at PDF as the way in which they archive all of their court cases.

And not for just what happens in terms of the judgment, but also adding audio and video, so they can have the actual depositions in there.

So we think that the continued move to online and digital workflows plays into the strength of Acrobat, which is why we are optimistic about that business.

And if I can just ask a follow-up.

It sounds like we should expect changes around the pricing around Creative suite as we get into CS5..

As you think about the relative growth drivers for CS5, how should we think about pricing as a lever?

Would you expect to see the majority of the growth to come from units, or do you believe you have the ability to use pricing as a lever for growth as we get into the cycle?

So, Adam, we will continue to tweak our prices.

We have clearly done a lot of research, as we prepared CS5.

As I said, there is at least one new product that will go into a number of the suites, which is Flash Catalyst, so we'll factor that in.

But I think the big opportunity really is, when CS4 came out, it was in a tough economic environment.

And so what we find is that the number of people who migrated from prior versions of Creative Suites to CS4 were not as high as in traditional cycles.

So enabling people who are on versions before CS4 to move to CS5.

And frankly the innovation that we have in CS5, allowing CS4 users to move to CS5, that is what we believe will drive revenue for us for the Creative products.

I have been with a number of customers over the last few weeks, and all of these new devices that are coming, they are increasingly looking to Adobe to help them with their authoring workflows.

It's very gratifying to see, as people think about how their content will be viewed on mobile devices, on how their content will be viewed on the 12 or so slate devices that are going to come out over the next year.

People want to make sure that they can modify their existing Adobe authoring workflow, to deal with that.

And frankly that's again where there is some great functionality in CS5 that allows people to author for multiple devices.

Terrific.

Thank you.

We will go next to Heather Bellini with ISI Group.

Yes, hi, thanks.

Shantanu, I had a question for you about CS5.

There's a lot of people talking about the fact that CS5 could match the success that you had with CS3.

But some of the things that you've been discussing, whether it's about the tiered upgrade pricing, or all the new functionality that you talked about would suggest that CS5 could actually be a bigger cycle, in terms of revenue than CS3, and I was wondering if you can share your thoughts on that?

Heather, clearly our expectations are relative to CS4.

We do expect CS5 to be stronger, and that's primarily driven by the economic environment.

As you pointed out, we are very optimistic about what we've done in terms of helping people design without boundaries, the working faster, and the new services, But really, it's going to take a few quarters for us to get it out in the marketplace.

We expect to see the traditional early adopter use in Q2, and then Enterprises will put it through it's phases as they transition from older versions of Creative.

So I think it's a little early to call where it's going to finally land.

We definitely expect it to be a better revenue generator for us than CS4.

Can I ask a follow-up as well?

Just in regards to CS4, it seemed like you had a lot of success in getting people to take advantage of Design Premium versus Design Standard, when you narrowed the price gap between the two of them.

Is that something that you've been able to look at the CS4 cycle, would you say that Design Premium, that SKU in particular performed better than the CS3 cycle, in terms of what it contributed?

Is there anything you can tell us in particular?

So Heather, I think we will continue to focus on suites, as the general message.

And especially as again relates to multiple media and multiple devices, pushing the suites and getting customers to adopt the suites is clearly going to be part of the marketing focus.

One of the areas, that even in CS4, one of the products that grew version over version, was the Master collection.

So continuing to have the Master collection, be the flagship product as people increasingly use video, is clearly going to be a priority for us.

And so I think the Premium suites continue to resonate with our customers, as people move towards using video Master collection will be there.

So that will all factor in, and we have to keep something for the launch event to tell you about what's new.

So, stay tuned.

Okay, great.

I appreciate it.

Thanks and congratulations.

Thank you.

We'll go next to Brad Zelnick with Macquarie.

Thank you, nice quarter guys.

Shantanu, as you speak about all the exciting features in CS5, I didn't hear you speak much about the integration of Omniture capabilities into the product, and what it might mean in terms of making CS5 a must-have release.

I was hoping that you could maybe speak a little bit more to that?

Sure.

We've talked about that, despite the fact that the acquisition really closed in the October time frame, we were expecting to see some functionality within CS.

And we are pleased, because the two areas in particular that I can talk about in Flash Professional and Dreamweaver, we showed this at the Omniture Annual Summit.

We expect to have their visitor conversion products like Test&Target directly integrated into those Creative Suite products.

Also with video, as people are increasingly creating video, having library and a framework that allows you to have analytics built in is something we will definitely deliver.

So it's early, we think there's a lot more integration that we can do, but the combination of Creative Suites and Flash and Omniture, we think definitely meets the customer needs.

And Shantanu, if I could just ask a follow-up of Mark.

Mark, on cash flow and follow up to Sarah's question about the quarter, as we think about the remainder of the year, is there any insight directionally that you can speak to on cash flow, as we put together our models?

Thank you.

If you look back over our history we generated roughly a $1 billion of cash flow every year.

I don't see any reason for that to change.

This $260 million is just another testament to that.

And as the business improves, it will only get better.

Thanks again.

Nice quarter.

Thank you.

Let me add one other thing back to Brent's question.

If you do look at, I just jotted some numbers down here.

If you look at a year ago Q2 revenue, and then you back out Omniture from Q2 of this year, you easily get into double digit growth for core Adobe.

It's actually in the mid-teens.

Next question, operator.

We will go next to Philip Rueppel with Wells Fargo.

Hi, great, thank you very much.

Given what you commented and we have all seen that the adoption of CS4 was muted due to the economic environment, do you see the slope of adoption of CS5 very much different than another strong product cycle like CS3?

And I'm getting at things like is there pent-up demand in Enterprise and larger customers who might buy earlier?

Do you see more move to the Master collection, the larger suites, anything that you could help us, in terms of just understanding how you view the slope over the product cycle would be helpful.

So, Philip, I think when the product comes out as I've said, you have the early adopters, and they tend to be more the freelancers because with respect to their own workflow is much easier for them to convert.

I think the larger companies are increasingly asking us more about what we can do in newer versions of the Creative Suites to enable them to author for multiple devices.

That is a need, where that demand has certainly gone up in terms of what those customers are telling us.

I still think they have to put it through it's paces.

They may use CS5 to be able to output to the slate devices or to the tablet devices that are going to come out, because we have done a couple of really compelling demos.

But after April 12th, we'll start to get data as we start to take orders, and as the channel starts to take orders.

So it's going to take a couple of quarters, frankly, for us to get a better read on actuals.

Great.

Thank you.

And maybe a quick one for you, Mark.

You had mentioned last quarter that you thought the extra week would add about $20 million and it turned out to be 30 million.

Was that spread across the strength of the all the products, or was there anything in particular that drove that upside?

Thanks.

Yes, it was spread across all the products.

Although, like we said Acrobat did do really well, so a large portion of that was Acrobat.

And if you look at the quarter, our sell-through business was pretty ratable throughout the quarter, pretty consistent throughout the quarter I should say.

And it kind of gives me a chance to talk a little bit here about NPD data.

So I just want to make sure that you all appreciate the fact that Adobe has a very, very diversified business.

I've talked about quarter after quarter.

We sell to multiple routes to market, we sell direct.

We have a licensing business.

We sell off of our website.

And we sell shrink wrap, of course, through a two-tiered distribution channel.

And we also sell in multiple geographies, and NPD data as you know, only captures US and it only captures shrink wraps.

So when you do the quick math, our shrink wrap business is down to say 20% of our worldwide revenue, and North America is less than half of our business, and NPD captures only 85% of North America.

So when you do that math, you end up with about 8% of our business.

So if you are using just NPD data to predict our business, you are going to get the wrong answer.

We will go next to Jay Vleeschhouwer with Ticonderoga Securities.

Thanks.

Shantanu, I'd like to ask about your thoughts on the possible incremental revenues from the services that you'll be making accessible from within CS.

You talked about this a bit at MAX last October.

So two things, is it conceivable that those services could become roughly as large as the Connect business has become?

We can see from the data sheet that's a $65 million, $70 million business now.

When you consider the size of the CS space, is it feasible that you can grow CS Live as you now call it, into something comparable if not larger, and then a follow-up for Mark.

So Jay, let me reiterate the strategy around services is, first to be able to provide functionality on a quicker cadence than we can with just desktop applications.

So that is certainly one of the benefits that we see for services.

The second benefit that we clearly see is additional revenue, and keeping people current on our new releases which we think helps us.

And third, combating piracy So over the long run, as we introduce more functionality through services, and require an Adobe ID, we think that enables us to combat piracy.

In terms of how we might deliver services though Jay, you can imagine with that with the first purchase of the product you get, is maybe an annual subscription to the services.

It's similar to what we have done with our Photoshop Elements product line.

And so in year one, you will not see a material amount of revenue, but over the long run as you point out, it helps us both with keeping products current, and it helps us with piracy and potential new revenue stream.

So in year one, I wouldn't model too much into the services but I think it starts to show directionally where we are going with that.

Okay.

Thanks.

For Mark, in light of the Omniture results reported in the quarter, particularly the transactional volume, would it be fair to infer that they have seen a resumption of year-over-year bookings growth, if the inference is correct that they had bookings decline for most if not all last year?

Why don't I take that as well, Jay.

When we look at the Omniture revenue, we were pleased for multiple reasons.

And the revenue itself as you know we gave a target range that was lower than what we announced, which was closer to $87 million.

And I think the over accomplishment was due to increased bookings, excess of plan.

And also some of the higher variable revenue, as you know some of the way which we charge for Omniture is through over usage and actuals base revenue.

So that exceeded our plan.

As well as in the past, Omniture has already differed reporting of revenue until the actual collection happens of the receipt.

So all of those contributed to the revenue being greater than what we had originally targeted.

I think the better news for us, frankly, was when we conducted the annual Omniture Summit, it was sold out.

And the number of customers excited about the joint offerings, and the new customers we reported over 150 new customers, with Enterprise customer retention greater than 95%.

That was really exciting.

And if you parse their business, there's the visitor acquisition business, there's the analytics business, and the visitor conversion business.

We are certainly seeing more adoption of the entire online marketing suite.

That was a strategy Omniture put in place, and usage of multiple products makes it sticky as well, as drives greater revenue to Adobe.

If I can squeeze one follow up to your comments earlier about the services business and the functionality.

At what point do you think Adobe might move availability or delivery of product upgrades solely to your Adobe store, and no longer have it through current distribution, and perhaps use that then as a platform to move to more of a maintenance or subscription model?

It's a good question, Jay, and frankly what we are already seeing in terms of the upgrade business is that, in North America for example, the majority of the upgrade revenue is coming through Adobe.

And what that means to us is that customers like the direct relationship with Adobe.

We will still offer the upgrade through channels, but frankly is becoming smaller and smaller of the percentage of the business because they are all coming direct with us.

And then as you said, that starts to allow us new possibilities in terms of offerings that we provide.

So upgrades already moving, that would be a logical driver to keep driving more and more of the upgrade business to Adobe.com.

Thanks, Shantanu.

We will go next to Mike Olson with Piper Jaffray.

Alright, thanks.

Good afternoon.

Are there any numbers or qualitative comments that you can put around what you believe the size of the Creative pro user base is, as we go through CS5 versus what is was at the time of the CS3 launched?

Thanks.

Mike, there is really no material changes in the numbers that we've outlined for you, both in terms of the Creative professionals as well as the non-Creative professionals.

And in terms of the mix that we see, we still continue to see both creative professionals and frankly the non-Creative.

These are Knowledge Workers, professionals and other aficionados who buy our products.

The characteristics that we shared are the attributes at previous analyst meetings, we're still all in line with that.

Okay.

I know there is going to be more functionality around CS5, but can you just talk about in general, the pace at which, from a high level, the markets embracing rich internet application development, and I guess, is this phenomenon taking hold as fast as you expected?

We definitely see the trend more towards rich internet applications.

We also announced a couple of other products earlier this week.

We had an update to the flex framework, which is the framework that people used to create these rich internet applications, as well as an update to the Flash Builder, as well as the Cold Fusion product.

But there is no question in our mind that when you see the next generation of experiences that people are creating, whether they would be for Enterprise applications, social applications, or just websites, the distinction that we've consistently talked about, between what's content and what is application continues to blur.

And so, the number of people who download beta copies or Flash Builder applications, that is in the hundreds of thousands.

No question that rich internet application are emerging.

And especially I would also say, on non-PC devices, because on non-PC device whether it's an Android or any other device, is that a rich internet application or is that a piece of content?

It's really hard to distinguish.

So we are really excited about that.

Alright, thanks.

We'll go next to Sasa Zorovic with Janney.

Yes, thank you.

If you could sort of specifically address the issue with, if you don't mind, with Flash and the iPhone obviously.

I guess, it was sort of missing from the list of platforms that you mentioned in your prepared remarks.

And obviously, as we kind of look at it very closely as being, very sort of -- a partnership that was is sort of so critical, or remains so critical to the Company.

So, how -- what is, what are your plans or strategies sort of to address that going forward, if you don't mind giving us a comment and update on that?

Sasa, I think we've been fairly transparent about that issue, which is, we are committed to bringing Flash to any platform on which there's a screen, and it has nothing to do with technology.

I think you've seen demonstration of Flash running on smartphones from multiple vendors at Mobile World Congress including Android, where Eric showed it as part of his keynote speech.

So it's nothing to do with technology.

It's an Apple issue, and I think you'll have to check with them on that.

Thank you.

My second question is regarding the Enterprise.

You obviously showed a very strong comeback, as specifically I'm looking at the number of transactions over 50,000.

So is it -- something really specifically that happened here in the quarter, or something that kind of a hold over from the fourth quarter?

Or is it just really beginning of sort of a healthy spending on that higher end of things?

You obviously mentioned that with Acrobat, if you can provide us with more color there.

Yes.

I think you are seeing IT stabilization in terms of the spend.

And also the move to customer interaction solutions, where people are revamping their websites to enable their customers to access that content and application from multiple devices.

We definitely see that trend, and so we think the economy has helped.

We think our authoring with LiveCycle ES continues to address that market need.

And we are excited about the pipe we are building.

I think Mark talked in his prepared remarks about our expectation that the Enterprise business will continue to grow in the rest of the year.

And clearly, web conferencing with the move towards green as well as reduced travel, I think that also plays to the strength of our Connect business.

Thank you.

We will go next to David Hilal with FBR.

Great.

Thank you.

Mark, on the shippable backlog number, if you look at the last two quarters, it's been a higher percent than its representative historical quarters.

And I wanted to see if -- what is driving these higher numbers that we saw in the last two quarters.

David, I think the simple answer is reflective of a better business environment.

But even if you go back a couple of years ago, when things weren't as bad as the last year, they still seem to be even higher than that.

I wonder if there's anything in the business or model that suddenly may have changed that I am not aware of?

No.

No change at all.

Okay.

And Shantanu, can you give us a rough breakout of your CS install base, what you think is on CS3 versus CS4?

David, those are numbers that we don't give out all of the numbers.

I'll maybe share a couple of statistics, which is when we look at people who moved to CS4, let me just pull the numbers out.

There was certainly less of the install base than CS3, CS2, and CS1.

I would say the transition from 1, 2 and 3 to 4 was not as high.

But we are not going to share too many more numbers as it relates to the penetration right now.

Okay.

Thank you, guys.

We will go next to Ross MacMillan with Jefferies & Company.

Thank you.

You talked a lot about CS5.

Maybe if I can just ask one question, which relates to that addressable units.

You are introducing Flash Builder, Flash Catalyst which are really more developer tools.

You mentioned some of the light services as well.

It strikes me that the addressable units may be increasing here, addressable user units may be increasing, especially as you push harder on developer tools as opposed to design tools.

Is that fair?

If it is, should we expect to see separate suites for developers or at least in this situation will they be wrapped up with design suites?

Thanks.

So Ross, you are right in saying that we are certainly targeting more developers.

And I think we've been careful to point out that the developers that we are targeting are primarily web developers, people who have been using scripting languages.

And that will be an area of focus for us, because they are the folks who are increasingly creating rich internet applications.

So you can expect to maybe see some of what we have Flash Builder and Flash Catalyst show up in each of the suites.

We'll share all of those details with you on April 12th, but we do see that as one way in which we want to address and increase the addressable universe of people for our authoring applications.

And then just a quick follow-up if I could for Mark.

Can you just touch on the other income line again, as we think about Q2, I heard your comments around the -- I think $16 million to $18 million.

I thought that was going to be the interest charge, and you have some interest income against that on the cash, from the cash.

So I wanted to kind of go through that once more.

Thanks.

Yes.The debt is about $16 million, but you still end up with about $16 million to $18 million charge.

There's other things in that line besides interest income on the cash and interest expense on the debt.

There's FX charges that flow through there as well.

So that is our best guess, as to where it will end up right now, when you factor all those things together.

Great.

Thanks a lot.

Congratulations.

Thank you.

We are running close to our one hour time.

We'll take one more question.

We'll take the next question from Kash Rangan with Merrill Lynch.

Hi.

Thank you very much.

Shantanu, if I listened to your comments carefully on the end point and adoption cycle of CS5, is is it an appropriate expectation that this could be a longer cycle, a longer tail cycle, and maybe less exaggerated up front, but more uniformly distributed?

And also secondly, where are we with cross-selling of Omniture within Adobe install base, if you can give us an update?

I know it's early but just wondering how that's coming along?

That's it.

Thanks.

Sure.

So, Kash, with your first question, we think that the adoption cycle for CS5 and the Enterprise will actually mirror that of CS4 and of previous versions, which is they will try it out.

What I actually said was, I think I sense a little more excitement from the Enterprise, because a number of those customers are dealing with this challenge of how do they repurpose their content from print to the new set of slate and tablet devices.

So I think that might prompt them actually to use CS5, hopefully in certain scenarios quicker than they might traditionally have done, if they were only doing print.

So that is really how we see CS5 play out in the Enterprise cycle.

With respect to Omniture, we are definitely seeing more customers coming to us for an Enterprise license with Creative products, LiveCycle products, as well as the Omniture products.

And so you are certainly seeing customers saying we want to standardize on the Adobe Creative Suites, and we want that integration with Omniture.

So it's early as you point out, but we've been very pleased.

And frankly, we have seen very little disruption.

One of the real positives for us in the quarter was the fact that there was such little disruption in sales, which is as we've known is one of the key drivers of the Omniture business and the revenue engine.

And so the fact that that's continuing to perform well, we've put the Scene7 field organization and combined that with the Omniture field organization, because they are selling very, very frequently to the same customer, many times to exactly the same person in the Enterprise, so early indications very positive.

Great.

Thank you very much.

Well, thanks again everybody for joining us.

As I think we reported, Q1 was a strong start to the quarter.

And given everything that we see in terms of the product launches, we continue to remain really bullish about the remainder of the year.

And we look forward to sharing more with you, both on April 12th, as well as on our next earnings call.

Thank you.

And this concludes the call.

Thank you for joining us today.