Adobe Inc (ADBE) 2011 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Adobe Systems' second-quarter fiscal year 2011 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'll discuss Adobe's second-quarter fiscal year 2011 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 Newsroom links to find an electronic copy.

Before we get started, I want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans is based on information as today, June 21, 2011, and contains forward-looking statements that involve risk and uncertainty.

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

For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe's SEC filings.

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

A reconciliation between the two is available in today's earnings release and on our Investor Relations website in the investor 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.

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 will now turn the call over to Shantanu.

Thanks, Mike, and good afternoon.

I'm pleased to report we delivered revenue of $1.023 billion in Q2, with non-GAAP earnings per share of $0.55.

Our strong performance reflects our unique value proposition in the industry.

We enable our customers to make, manage, mobilize and measure digital experiences across screens in ways no other Company can.

This end-to-end approach is resonating with our customers, and fueling our growth across an increasingly diverse set of markets.

As we have previously shared with you, we're focused on three significant growth opportunities.

Content Authoring, digital marketing optimization, and customer experience management.

We're executing well in each area.

In Content Authoring, we successfully launched Creative Suite 5.5, an update to the CS5 product family.

The release features enhancements for mobile content and application creation, new innovations for HTML 5 and Flash authoring, and amazing new features and productivity improvements in our video authoring solutions.

CS5.5 is the first release in our transition to an annual release cycle, enabling us to deliver content creation innovations to our customers more frequently in response to the rapidly evolving marketplace.

It also allows us to augment our business model to drive incremental revenue.

In addition to the perpetual license model we've always offered, we now offer a new Subscription Edition with CS5.5, that provides a lower upfront price point for customers.

Whether it be HTML, Flash or any other output format, the goal of CS5.5 is to be the best authoring suite regardless of platform, browser, or operating system.

Response to our HTML 5 tooling capabilities in CS5.5 has been positive, and we recently made new contributions to the HTML standards process by proposing enhancements to build complex magazine-like layouts in web browsers using web standards.

We are working on an implementation of this proposal in the WebKit open source HTML engine with Apple, Google and other members of the community.

Looking forward, we will deliver a beta release of Adobe Edge in July, which is a new creative tool for creating expressive animations in HTML for desktops and devices.

While we work to help advance HTML capabilities, we will also continue to innovate with our Flash technology, particularly in areas such as premium video content delivery and measurement, rich Internet applications and gaming.

In premium video content, services such as Amazon Instant Video, HBO Go and Hulu, and media companies such as ABC and CBS, the BBC in the UK, M6 in France, MTV, Turner and many others rely on Adobe's platform for delivering and monetizing their assets.

For mobile apps, the industry is starting to recognize the power of utilizing Flash through the Adobe Air runtime for devices running Android, iOS, RiM's Blackberry Tablet OS, and others.

IDC cited Adobe as having a quote, Leading multi-platform mobile development environment, end quote.

This week we released version 4.5 of FlashBuilder and Flex to extend the capabilities of our developer tools platform.

CS5.5 integrates with our new Digital Publishing solution, which enables publishers to create, distribute and monetize their digital publications for use on tablets.

Our Digital Publishing solution has enabled our customers to launch over 400 titles already, in over 40 countries.

We continue to be excited about the opportunity that the tablet market offers us, not only as a consumption device, but also as a creation platform for Adobe applications in the future.

Looking forward, expect this type of innovation to continue.

We intend to ship the next milestone release of Creative Suite in 2012, and it will include an updated version of PhotoShop.

In digital marketing optimization, Q2 was another record revenue quarter.

It's clear that the digital marketing category is exploding, as evidenced by our sold-out digital marketing summits in Salt Lake City and London.

We announced our next-generation platform for the Adobe Online Marketing Suite that helps our customers more quickly analyze and derive actionable insight from video, social and mobile traffic.

We also introduced Adobe Tag Manager, which provides a tag management framework to accelerate digital campaigns within the suite.

These innovations ensure that we continue to have the most comprehensive offering in this space.

As social media becomes an integral part of our customers' marketing, digital marketers find it critical to measure the impact of social media in their campaigns.

In March, we announced a beta release of our new Adobe Social Analytics product and reaction from customers has been strong.

The new product enables users to actively correlate social media sentiment to business impact.

Recent customer wins in our digital marketing business include Dell, Lenovo, the European financial group UniCredit and Vodafone.

In Customer Experience Management, we achieved year-over-year growth of 34%.

The integration of our Day Software acquisition has gone well, with Q2 customer wins including Delta Airlines, SAP, Barclay's Services, Louis Vuitton, and Cathay Pacific.

Yesterday, we announced the new Adobe Digital Enterprise Platform, a unified solution for Customer Experience Management, and a suite of Adobe Customer Experience Solutions to power engaging digital experiences across multiple communication channels.

This platform and set of solutions incorporate Day's web content management capabilities along with our LiveCycle capabilities and the measurement and analytics of our Online Marketing Suite.

We will roll out these offerings beginning later this summer, and we're excited about the progress that we are making in delivering integrated solutions which leverage many of our products.

This strategy is helping to grow the size of our engagements and sales with large enterprise customers, as we are increasingly benefiting from the synergy among our offerings to help customers create differentiated and effective digital experiences.

For example, both Nike and publishing firm Meredith Corporation purchased multi-product solutions across our Omniture and Day product lines in Q2; so did retail and online stores H&M, Marks and Spencer, and Nordstrom.

Success in selling multi-million dollar enterprise solutions such as these demonstrate how we've increased the value we provide to customers, and how we are increasingly becoming mission-critical to how our customers run their online business.

Later I will have some closing comments, but first I will now turn the call over to Mark, for a look at the financial results in the quarter.

Mark?

Thanks, Shantanu.

In the second quarter of fiscal 2011, Adobe achieved revenue of $1.023 billion.

This compares to $943 million reported in Q2 fiscal 2010, and $1.028 billion reported last quarter.

Year-over-year this represents 9% revenue growth.

Q2 GAAP operating expenses were $637.3 million, compared to $607.9 million reported in Q2 fiscal 2010, and $617.7 million last quarter.

Non-GAAP operating expenses in Q2 were $556.7 million, compared to $520.2 million reported for Q2 fiscal 2010, and $539.5 million last quarter.

GAAP operating income in Q2 fiscal 2011 was $276.7 million, or 27% of revenue.

This compares to GAAP operating income of $227.3 million, or 24.1% of revenue in Q2 fiscal 2010, and $302.3 million, or 29.4% of revenue last quarter.

Non-GAAP operating income in Q2 fiscal 2011 was $376.4 million, or 36.8% of revenue.

This compares to non-GAAP operating income of $334.5 million, or 35.5% of revenue in Q2 fiscal 2010, and $400.1 million, or 38.9% of revenue last quarter.

Adobe's effective GAAP tax rate in Q2 was 11.5%, and the non-GAAP tax rate was 22%.

Our GAAP tax rate was lower in Q2 due to the favorable impact of a state income tax ruling.

GAAP diluted earnings per share for Q2 fiscal 2011 were $0.45.

This compares with GAAP diluted earnings per share of $0.28 reported in Q2 fiscal 2010, and GAAP diluted earnings per share of $0.46 reported last quarter.

Non-GAAP diluted earnings per share for Q2 fiscal 2011 were $0.55.

This compares with non-GAAP diluted earnings per share of $0.44 in Q2 fiscal 2010, and $0.58 reported last quarter.

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

Creative and Interactive Solutions segment revenue in Q2 was $433.1 million, compared to $423.3 million in Q2 fiscal 2010, when we launched CS5, and $424.8 million last quarter.

While it's only been a matter of weeks since 5.5 shipped, we can make the following observations.

The release of CS 5.5 in Q2 has helped maintain the solid run-rate that CS5 established during the prior four quarters.

Interest in Master Collection, as well as Web Premium and the Production Premium video suites has been strong, indicating positive reception to the key innovations and new features that were added to those products.

Adoption of the new Subscription Edition has met our expectations and is attracting new users.

We expect this to build a new recurring revenue stream over time.

Digital Media Solutions Q2 revenue was $136.7 million, compared to $139.3 million in Q2 fiscal 2010, and $151.7 million last quarter.

The sequential revenue decline is primarily attributed to product lifecycle timing.

Digital Enterprise Solutions revenue was $283.5 million in Q2, compared to $231.9 million in Q2 fiscal 2010, and $286.6 million last quarter.

Within Digital Enterprise Solutions, Knowledge Worker revenue was $182 million, compared to $156 million in Q2 fiscal 2010, and $181.8 million last quarter.

Acrobat grew 17% year-over-year, driven by an increase in both ASPs and units.

Enterprise segment revenue was $101.5 million, compared to $75.9 million in Q2 fiscal 2010, and $104.8 million last quarter.

Year-over-year revenue growth of 34% was driven by strong adoption of Day content management, and the increased awareness of our broad Customer Experience Management solutions.

Omniture segment revenue in Q2 was a record $115.9 million, compared to $91.9 million reported in Q2 of fiscal 2010, and $110.9 million last quarter.

Omniture server transactions were up 13% on a year-over-year basis.

Mobile and tablet device traffic remains the fastest-growing part of the Omniture business, with the number of transactions we measured from mobile devices growing 24% quarter-over-quarter in Q2.

Omniture revenue diversification continued, with SiteCatalyst at 51% of Q2 Omniture product revenue.

Conversion and multi-channel analytics products are growing in size as the analytics business becomes a smaller percentage of the business.

Enterprise renewal rates remained at 95% in the quarter.

Finally, Print and Publishing segment revenue was $54 million, compared to $56.6 million in Q2 fiscal 2010, and $53.7 million last quarter.

Turning to our geographic segments in Q2, results on a percent of revenue basis were as follows.

The Americas.

48%.

Europe, 30%.

Asia.

22%.

At the time of our Q1 earnings call in March, the unfortunate events in Japan caused us to estimate that as much as $50 million in Q2 revenue was at risk in that market.

Fortunately, through the strong work of our team in Japan and the resiliency demonstrated in the country, we estimate the impact was only $10 million in the quarter.

This helped to drive a sequential increase in our Asia revenue, versus our estimate that revenue would decline sequentially.

Partially offsetting the Q2 upside in Japan, we experienced weaker-than-expected demand in EMEA.

In the Americas, the demand environment remained stable.

From a year-over-year currency perspective, FX increased revenue by $35 million.

We had a $0.2 million hedge gain in Q2 fiscal 2011, versus a $6.2 million hedge gain in Q2 fiscal 2010, thus the net year-over-year currency increase to revenue considering hedging gains was $29 million.

From a quarter-over-quarter perspective, FX increased revenue by $15.6 million.

We had a $0.2 million hedge gain in Q2 fiscal 2011, versus no hedge gain in Q1 fiscal 2011, thus the net sequential currency increase to revenue, considering hedging gains was $15.8 million.

We entered and exited the second quarter with no shippable backlog.

Employees at the end of Q2 totaled 9,770, versus 9,503 at the end of the last quarter.

The increase was primarily due to the addition of summer interns, and hiring in sales and marketing.

Our trade DSO was 51 days, which compares to 42 days in the year-ago quarter, and 47 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 $389 million.

Our ending cash and short-term investment position was $2.6 billion, the same as it was at the end of Q1.

Deferred revenue in the quarter increased by $38.6 million in the quarter to a total of $482 million.

In Q2, we repurchased approximately 13.7 million shares at a total cost of $461.6 million.

Entering Q3, $455 million of stock repurchase authority remains against the $1.6 billion stock repurchase authorization announced in July of last year.

This concludes my discussion of our financial results.

I would now like to comment on our financial targets for the third quarter of fiscal 2011.

We are targeting a Q3 revenue range of $1 billion to $1.050 billion.

At the midpoint of this targeted range, we would expect Omniture and Enterprise segments to grow sequentially, we would expect Creative and Interactive as well as Digital Media Solutions to be flat to slightly up, we would expect Knowledge Worker to decline; and we would expect Print and Publishing to be flat.

Geographically, we would expect Americas to grow sequentially, offset by an expected sequential decline in Asia and EMEA, due to normal seasonality in those markets.

For margins, we are targeting a Q3 GAAP operating margin range of 24.5% to 27.5%, and a non-GAAP operating margin range of 34% to 36%.

We are targeting our Q3 share count to be 501 million to 503 million shares.

We are targeting non-operating expense to be between $17 million and $21 million on both a GAAP and non-GAAP basis.

For our Q3 effective GAAP and non-GAAP tax rates, we are targeting 22%.

These targets lead to a GAAP earnings per share range of $0.35 to $0.42 per share, and a non-GAAP earnings per share range of $0.50 to $0.56.

We are also reaffirming today our 10% annual revenue growth target for fiscal year 2011.

In addition, we are targeting our full-year operating margin to be approximately 27.5% on a GAAP basis, and approximately 37% on a non-GAAP basis.

This concludes my section.

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

Thanks, Mark.

It is an exciting time at Adobe.

The Company is undergoing a significant transformation and our mission of changing the world through digital experiences has never been more relevant.

We continue to focus on our three large growth opportunities, Content Authoring, Digital Marketing Optimization and Customer Experience Management, and most importantly, on the synergies among them.

Increasingly, we are finding that the real power is in creating customer solutions, like digital publishing and web experience management, that integrate our product lines.

This will be a major thrust for us moving forward.

Regardless of whether our customers are major media companies, enterprises, government agencies, or educational institutions, they all face the same challenge with their digital content and applications.

They need to make compelling experiences that will scale across media and devices, manage their assets to streamline touch points with customers, mobilize the experiences to easily reach their audience across every channel; and measure the effectiveness of experiences to maximize customer conversion and revenue.

This need has never been more critical than it is right now, and we see the opportunities for Adobe continuing to grow as the digital landscape becomes richer and more diverse.

Adobe's success has always been due to our incredible team of employees throughout the world.

I would like to especially recognize the contributions of our employees in Japan, who showed tremendous commitment to serving customers following the earthquakes and tsunami.

Their dedication helped limit the impact on our business in Q2.

Thank you for joining us today.

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

Thanks, Shantanu.

Before we start Q&A I have a number of logistical items to go over.

First, we have set a date for our annual financial analyst meeting.

This year, the meeting will be held in New York City on Wednesday.

November 9.

Invitations and additional information will be communicated later this summer.

Registration for Adobe MAX is now open, and once again, we are offering a special registration price for Wall Street professionals to attend.

MAX will be held once again in Los Angeles during the week of October 3.

We will send out the special registration offer to attend MAX in the coming weeks.

In regard to today's earnings report, we have posted several documents on our Investor Relations website today, including a copy of the script containing our prepared remarks for today's call.

To access these documents and the other investor-related information, go to www.Adobe.com/ADBE.

We also encourage you to sign up for easy access to updated documents and communications via RSS feeds, that you can subscribe to on the website.

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 9999062.

Again, the number is 888-203-1112 with ID number 9999062.

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, June 24, 2011.

We would now be happy to take your questions.

In addition to questions that come in from those participating on the live phone call, we have also enabled the Question pod in the Connect session.

So those on the Connect session, feel free to send in your questions and we'll try to take a few.

Operator, we'll take the first question from the phones.

(Operator Instructions).

Our first question today comes from Steve Ashley with Robert W.

Baird.

Thanks very much.

I have a couple questions on CS5.5.

First of all, with respect to demand for the web premium end, which also drove demand for the Master Collection, what do you think the feature functions that were most desired by the customers, were the drivers of the demand?

My second question is about what -- in terms of seeing the demand, were you seeing it come from CS5 customers?

Were you seeing it come from older customers?

I don't know if you have any color on that, thanks.

Sure, Steve.

Why don't I take that.

Before I answer that specifically, let me give you a few more observations on 5.5, as we looked at it after the first quarter.

Clearly it was the first step in us moving to an annual cycle, and so I think we've successfully transitioned against that strategy, which really allows us to deliver more innovations on a more regular basis, and introduce new business models.

Where we saw the results, it is clearly demonstrating that it's extending the life of CS5, and we expect to see the CS5 and 5.5 revenue actually cross CS3 revenue within the comparable period right now.

So it's clear that it continues to do well in the marketplace.

The products that were updated in the CS5.5, and you know that all products were not updated, were clearly off to a strong start, which again I think reflects the need in the marketplace, so the web and video products, specifically the Master Collection, Production Premium and Web Premium.

I think there are a couple of features that seem to resonate particularly with the customers, clearly the HTML authoring that we are providing is resonating.

Mobile app creation, now that we can have mobile apps that are created and deployed across the iDevices, Android devices and the RIM devices.

The other thing that we're also seeing, frankly, is the tie-in from those products to our Digital Publishing Suite, and so for people who wish to use our Digital Publishing Suite, a lot of those products also enable you to participate in that entire workflow.

So I think that's a sampling of what we've seen.

And with respect to which customers, I mean, we clearly have very, very loyal customers, so a number of the customers who adopted were customers who were on CS5, but in addition to that, as we've said, we're targeting the earlier version customers, namely the CS4 and the CS3 customers.

Great.

Thank you very much.

We'll take the next question from Walter Pritchard with Citi.

Hi, thanks.

I'm wondering -- two questions.

One, just on the deferred revenue, Mark, looks like that was pretty strong.

I'm wondering what the drivers of that were.

Secondly, on Europe, I'm wondering, did that business get worse as you headed through May and into June, with sort of with the delay of the political events going on there.

Yes, Walter, hi.

With deferred revenue, yes, we were really pleased with deferred revenue.

It did go up $39 million, like I said.

It's driven by a few things.

It's clearly driven by the Omniture SaaS kind of ratable model, which drives a lot of deferred revenue every quarter, especially as we see their bookings doing so well.

We also have some royalty agreements that represent deferred revenue in there, as well as maintenance and support.

So it's kind of a combination of all those, frankly, but obviously very good results from a deferred revenue perspective.

As it relates to Europe, it was somewhat off of our expectations.

It was primarily in Northern Europe, which is the Nordic countries and the UK, obviously.

I wouldn't say it was concentrated more towards the end of the quarter or the beginning of the quarter.

I think it was fairly consistent tough selling throughout the quarter.

But again, we're very fortunate that we have a diversified model from a geographic perspective.

Japan did a little better this quarter.

Europe did a little worse than we thought, and in the end, overall, we had a good quarter.

Great.

Thanks a lot.

The next question will come from Brent Thill with UBS.

Thanks.

Just a quick follow-up to Walter's question on Europe.

I guess just in the tough selling environment, Mark, was there anything consistent in what you were hearing, and just in terms of customers, were they just putting off the decision for a while?

Was it something related to another topic?

I don't know if there's any other color.

Yes, I think, Brent, at this point all I can probably say is that the decisions have been deferred, or are taking longer than we would have anticipated.

Okay.

And for Shantanu, on the 5.5 launch, what was the most surprising thing that you took away?

And I know it's only been out for a few weeks.

Can you just talk about the carry-forward into this current quarter, and just in terms of how we should think about the impact for this current quarter as well.

Sure.

So Brent, I mean, I think with respect to 5.5, the fact that we have embraced and we're actually rapidly doing feature development for HTML 5, as people think about the different media formats, that's clearly resonating with customers.

Also, Digital Publishing's been a really pleasant surprise, as it relates to people, whether they're publishing catalogs, magazines, video training material, all of the media solutions, that's been a pleasant surprise.

We are definitely starting to see as we sell content management and we sell analytics, people want Creative Suite part of that.

So I mean, what's really playing out nicely is, as we are selling to the marketers, each of the different products are leading to other product sales.

So we've seen some fairly significant multi-million dollar deals with all of the Creative customers, and I think people are looking forward, frankly, to the next release as well, because there is significant anticipation that's being built up for all the cool things that we can do in imaging with PhotoShop, and there's a lot of exciting stuff on the way.

Maybe the last comment is video.

We are definitely making significant traction in video with our authoring tools.

People have seen the quality that we put in so for broadcast as well as high-end video.

We're clearly gaining market share.

Thanks.

And on the subscriptions, I think Mark just alluded to that.

We are seeing new customers coming to the platform as a result of subscriptions, so it's not material yet but what we are pleased with is people who would otherwise not be attracted to the Adobe platform.

It's clear that subscriptions is helping attract new customers to the platform.

And we'll take the next question from Mike Olson with Piper Jaffray.

Thanks.

Good afternoon.

Just a couple quick ones.

Can you provide any more details on what Adobe Edge will bring to the CS platform, and how it will change in Adobe Developer's design process with HTML 5 and Adobe tools, and then the second question is, as far as the annual release cycles for CS, should we expect that the timing is going to be kind of consistent during one time of the year, like we'll see CS every year in April-May time frame or will it be kind of variable each year?

So Mike, I'm glad you asked about Adobe Edge.

I think there's actually going to be a YouTube video that's being posted up later this day, to talk about some of the key new functionality.

Clearly, what Flash did a phenomenal job of was, everything from rich Internet advertising to completely interactive games.

That's what people were using Flash for.

And that's actually increasing.

When it comes to delivering these capabilities for PC, we've seen no let-up whatsoever in people using Flash.

But now people are trying to push the envelope with how they can use HTML 5 to do the same things, whether it's ads for mobile devices, whether it's interactive games, and completely new interactive websites, and so, think of it as everything you could do with Flash Professional, as that capability gets added to HTML over time and it will take many years before the functionality is comparable, we want Adobe Edge to be the best way in which people create, whether it's animation interactivity or rich Internet applications using HTML 5.

So that's sort of conceptually what we're doing.

With annual releases, we're still very focused right now on 5.5, and to also the question that Brent asked, continuing to drive that through the cycle until we release the next version, but I think it is fair to say that when we go to an annual release, the cadence will be about the same quarter, because that's what really enables us even with Enterprises to get to be far more of an annual release cycle, and have maintenance be a more meaningful part of the business.

Great.

Thanks.

The next question will come from Philip Rueppel with Wells Fargo.

Yes.

Thanks very much.

Just a couple quick questions on 5.5.

Are all languages shipping?

And then as a corollary to that, as you move to more of an annual cycle, will we see a condensation of when the languages roll out?

Yes, so as we did with CS5 itself, we are moving to a more consistent release schedule, where all major releases are released at the same time.

The reality is, we're in a global world, so the day we announce the product, the interest, whether it's in North America or whether it's in another part of the world, is consistent.

So yes, expect to see us do simultaneous releases of all major languages moving forward.

And then just as a corollary to that, you mentioned that some of the web publishing and video features were the key features of 5.5, and then in the next version Photoshop will be enhanced.

Do you see yourself moving to a yearly cycle where all or most of the modules are improved or pushed forward from a functionality perspective, or will we see sort of cycles like what you just described for 5.5 and the next release?

I would say that this one was more of a transition cycle and so expect to see most of the major products being updated with the future releases.

Great.

Thanks very much.

We'll take the next question from Ross MacMillan with Jefferies.

Thanks.

I have two.

The first is just on Enterprise.

It's been, [at one point,] I think you had seen some deal slippage in Q1.

Looks like it was scaled down a little in Q2.

Is much of that also reflective of Europe, or is there any other color you could maybe provide around that kind of sequential if you will on the Enterprise business?

Thanks.

Sure, Ross.

Why don't I take that.

First, we had 34% year-over-year growth.

The excitement around what we are delivering with the Adobe Digital Enterprise platform, the fact that we are selling deals between Day and Omniture and our business, we are definitely making a mark.

As it relates to specifically in the quarter, yes, some of that impact was Europe.

Otherwise, it looks really strong.

We have talked about government in the past being, some of the deals being pushed.

We're seeing government come back strong, the budgets have been re-released, I was in DC earlier last week and it's clear that they now have their budgets and our solutions are resonating there as well.

So I'm very excited about the progress that we are making across the CEM.

And then just a follow-up, Shantanu.

I'd love to get your thoughts on Flash and Flex and this notion of the cross-platform development for mobile devices versus what appears to still be the mainstay developing natively for the iOS or Android platform.

How do you -- where do you think we are in this kind of opportunity for the cross-platform development?

Thanks.

There's no question, Ross, that if they are going to be multiple platforms, any provider that provides tools that enable people to deliver applications across those environments, that value proposition is strong.

I think it's clearly true that with Apple, first people started to build native applications, but as you starting to see these new platforms take off, whether they be Android, whether they be what HP is going to come out with the Touch Pad as Microsoft and RIM deliver their mobile environments, customers are clearly struggling with being able to deal with all of these different platforms.

The other thing that we've done with FlashBuilder 4.5, which is also being released, is we actually now allow native extensions and so one of the things that I think we've done very creatively is allow people to use a common framework for the most part, but optimize for each of these native environments using the native extensions and that's clearly something that's resonating.

So you can take advantage of any specific features that you have, whether they be in Android or iOS.

And we have thousands of applications that people are building cross-platform, and I just think as there are more platforms, people are going to deliver that.

The last thing I would say is that when you build applications, people are building applications both within the web browser and they are building standalone applications, and if you can bridge that gap, I think there's a value proposition there for application developers around the world.

Great.

Thank you.

We'll now hear from Brad Zelnick with Macquarie.

Thank you very much.

With respect to Europe and the disappointment in EMEA, can we just clarify the extent to which this is due to environment versus execution?

And maybe can you provide more insight into which specific business segments or products were disappointing.

Was this public or private sector accounts that you were having disappointment in, and are there any particular industries that stood out?

Again, Brad, it was pretty much concentrated from a kind of expectation perspective that we had in the Northern European countries.

What we saw was customers delaying their purchases, slowing down the process to some extent.

It was focused around, like we've said, Enterprise.

There was some CS.

And there would be some Acrobat as well.

So it was a little bit more broad-based from a product perspective, and we've got, as we guide going forward, things staying relatively stable so that's somewhat factored into what we're talking about for the next quarter and for the guidance that we provided on the year.

I mean, in terms of --

Thanks, Mark.

In terms of sectors like private versus government, and government's been a little bit challenging around the world, we've been talking about that for a while so I don't think there's anything new there.

Thanks, Mark.

If I could just follow up with one other.

On Digital Publishing Suite, it's very encouraging to see that you're up to 400 titles.

Could you maybe just remind us of what that compares to last quarter.

What's the size of the market, and how is monetization going relative to your expectations?

Thanks.

Sure.

So again, just to clarify what the business model is with the Digital Publishing Suite, which was in beta up until very recently and so it's really just starting to ship from a commercial point of view.

We have a couple of different versions, but the core business model is, we charge a license fee and then think of it as a per-issue royalty fee associated with these titles as they scale.

So clearly, the business is going to scale as more and more people target tablet devices across the world, again as I said, for a variety of different magazines, catalogs, newspapers and publishing systems.

The other thing we do also is for people who want their Digital Publishing Suite that tie in with the Creative Suite, and that the Creative Suite is the best way to author all those SaaS-based services, so that's how we think about it.

At the analyst meeting we'll give you an update on the available market and the sizing of the market.

But clearly, I look at it and it's going to be the same kind of growth that you saw with websites.

Everybody's going to target these tablet devices.

I think Digital Publishing Suite positions us well very effectively in that space.

It's got analytics built in as well, so we charge for that same way we charge our core analytics with Omniture and over time if you want to build your own solution, we will also have our content management solutions be part of that.

Thanks, Shantanu.

Mark, just real quick, did you guys mention shippable backlog [with your stuff]?

We did.

Like we said in the past, it's not indicative of future performance.

We factored it into our guidance.

We did not have shippable backlog this quarter.

Coming in or leaving.

Thanks again.

Coming in or leaving; right.

Next question?

The next question comes from Adam Holt with Morgan Stanley.

Great.

Thanks.

Maybe just a follow-up on the backlog.

Is there anything changing about the business model that would lead to there being less backlog on a going-forward basis?

I mean, I think we're managing the channel much better.

We're doing a better job of managing the inventory as we go through product cycles and versions.

I think that's the gist of it.

And another for you, Mark.

The margins were obviously strong in the quarter.

As you look at the guide for the upcoming quarter, it looks like margins are implying to be down sequentially.

Could you walk us through what some of the elements would be given the higher revenue?

Yes, in fact, if you go back to the Q4 earnings call, we had said way back then that if you looked at margin over the course of the year, it would go down a little bit in Q2.

It would go down in Q3, due to seasonality of revenue and then back up in Q4.

We're actually following that trend exactly as we anticipated.

Basically, what you find is that as you look at the revenue guidance we provided for the third quarter, we're still ramping on the expense side as we hire primarily in sales and marketing for capacity for 2012.

And as a result of that, you've got some additional OpEx with not as much growth on the revenue line in the third quarter, but then we more than make up for that in the fourth quarter, with strong margin improvement and that's why you end up on the year with approximately 37%, which is up from last year.

If I could just sneak one last one in.

What was the Day contribution in the quarter?

Thanks very much.

So -- go ahead.

The way we're actually selling the entire Enterprise solution, we have, as you know, integrated everything together.

So you have core content management that's provided by Day.

You have the business process management that was provided as a result of what we had with LiveCycle.

You have the rich Internet applications front end, and you have analytics, and so increasingly all these sales are frankly the solutions that we have been delivering, rather than individual point products.

And so the Enterprise sales force was trained from day one of fiscal 2011 to sell the entire solution.

So we don't break out that revenue either internally or externally.

Great.

Thank you.

The next question comes from Kash Rangan with Merrill Lynch.

Hi, thank you very much.

It certainly looks like you seem to be confident the near-term business environment which is why you're hiring.

At the same time, the stock market has been going through some gyrations, with talk of economic slowdown.

From your position as CEO in the management team, what do you make of these changing macro conditions, and what is your feel for the pulse of your channels and what the system feedback is in general, that's just one broad macro question.

And I have a follow-up on CS5.5.

Thank you.

Sure, Kash.

That's a good question.

I think it just reflects, frankly, the enthusiasm for the growth we've been talking about.

The Enterprise business grew 35% year-over-year.

We mentioned, I think, throughout the year, that's capacity constrained and as we add more salespeople, it's clear that the demand is out there.

Same thing is true of the online marketing digital marketing business.

We haven't answered any questions yet about that, but that was record bookings again.

When you think about what's happening with respect to digital marketing, that category is exploding.

Social Analytics, we announced a beta of our product and we had over 100 customers wanting to sign up.

The business is diversifying, SiteCatalyst is again -- the lowest percentage of the overall business of the suite approach.

And there again, without a doubt as we add sales capacity, they're actually coming up-to-speed incredibly fast and contributing to the bottom line.

Digital Publishing and everything that's happening with Creative Suite, we've successfully transformed that to an annual cycle.

We've dealt with mobile.

We've dealt with HTML and Flash.

And so, the things we've outlined in terms of the core businesses for the Company, we're executing against all of those, and Acrobat again continues to perform well.

If there is a significant downturn, I think Mark has always demonstrated that we will find a way to deal with that situation.

But right now, given the opportunities and given the fact that we're executing against it, that's going to be our plan of record.

Got it.

Thanks a lot.

And you mentioned that CS5 is continuing to keep the current trajectory.

You also added that mobile and HTML incremental developments on both those fronts position the product suite quite well.

I'm just wondering, if this means that we'll have a good tail for 5.5 in the second half of the year?

Or do you really keep most of the excitement for the next release.

There's some skepticism on whether there can be enough innovation to come in successive releases.

I'm sure you have a different view on that.

I'm just curious how you balance out what you put in 5.5 versus 5 versus what you put in 6 and what 5.5 really means for the second half of the fiscal year, that's it.

Thanks.

Sure, Kash, and again, I think when you look at even the CS performance this quarter relative to the launch quarter of CS5, it continues to do well.

Mobile, the amount of features that we put in 5.5 as it relates to mobile is actually the tip of the iceberg and so, again, the focus on 5.5 was to start to transition to the annual release.

Most of the actual heavy investment has been left for delivery in the next version of our product.

But we're pretty confident that even if you look at the targets that Mark spoke to earlier, we have to continue to drive 5 and ensure that people adopt 5 and these are both 5.5, both the 5 customers as well as the earlier version.

So we're optimistic.

Thank you very much.

We'll now hear from Jay Vleeschhouwer with Griffin Securities.

Thanks.

Good afternoon.

Mark, I'd like to ask about the long-term evolution of your model since you did mention recurring revenue on a couple of occasions.

If you strip out Omniture, Adobe Connect and Scene7 from the reported subscriptions revenue, then we're left with about 1% or 2% of your revenue coming from product-related and maintenance or recurring revenue.

When you think out over the next number of years and consider the size of your base, particularly for CS, but as well for Acrobat, wouldn't it stand to reason that at some point, that form of product-based recurring revenue should get well into the double digits as a percentage of revenue, as we see with some of your peers?

Yes, without a doubt, Jay, that's what we're trying to do.

Between the subscription offering in CS as well as what Shantanu alluded to, moving more of the Enterprises to maintenance-type offering, I would fully expect over time that we grow a nice, significant, ratable revenue stream through those offerings.

It's going to take some time, but we certainly feel that that's the right answer from a long-term business model perspective.

Hey, Jay, another thing to add, CS in addition to CS moving to maintenance as Mark said, the entire Enterprise platform that we just announced yesterday, that's also SaaS-ready right now and so I think we're way ahead of the competition in terms of being able to offer those kinds of Customer Experience Management solutions, either on premise like we do with Connect or in the Cloud.

And so that's going to be an exciting new area for us as well moving forward.

Just a couple of clarifications or follow-ups.

With respect to CS5 and 5.5 revenue, would it be fair to say that while the third quarter of 2007, as I understand, it was record quarter for CS cumulatively,CS5 and 5.5 will exceed all of CS3.

And that 5.5 release itself is larger in terms of incremental revenue so far than the predecessor interim releases like you had with 2.3, 3.3 and 4.3 releases.

I think both of those are fair, Jay.

We believe that 5 will be able to cross over 3, with the dot release, and this dot release is certainly more significant than any other dot release we've ever done.

Okay.

And then lastly, you had about a $20 million sequential increase in sales and marketing.

You touched on that in an earlier comment.

But that's not strictly related to the launch costs for 5.5.

Some of that is long-term investment or hiring, it's not strictly launch costs, is it?

It's not all launch costs by far.

There's some -- we had our tech summit in there.

We had some marketing in there.

We had hiring for sales capacity in there.

It's kind of a combination of all those.

Okay.

Got it.

Thanks, Mark.

The next question will come from Chad Bartley with Pacific Crest.

Hi, thank you.

Basically all my questions have been asked, but I guess I'll throw in a question about 2012, and a while ago, you guys established a revenue target of $5 billion.

Curious if you could comment on that now that you've reaffirmed the goal to grow 10% in 2011.

This is Mark.

We still aspire to be a $5 billion Company, nothing has changed there.

And it's not something that we are going to do silly M&A to get to.

We're going to do things that are strategic.

We're going to grow organically.

And we still aspire to be $5 billion.

Okay.

Thanks, Mark.

We're coming up on our one hour ending time.

We'll take one more question from the phones.

Thank you.

Our last question will come from Dan Cummins with ThinkEquity.

I wanted to see if you would give us an update on your performance and near-term opportunity in the education vertical.

Captivate 5.5, I'm sure that's very small in revenue terms but it's there and in the Print and Publishing category it's the only product there that got a 5.5 upgrade, and it looks like a fairly compelling improvement for you guys strategically.

Also curious on what you're thinking about the opportunity around the eLearning suite 2.5 and its potential for Adobe in the electronic textbook curriculum market.

Thanks.

Sure.

So first, with respect to education as a vertical, it did really well for us in Q2.

Clearly, we're coming up to the seasonally strong educational quarter, which is Q3 in North America.

That's part of the reason for the sequential increase that Mark talked about, as it relates to target in North America.

You're right, Dan, in that we do have a fairly comprehensive offering of products, while they use Captivate and the eLearning solution, all of that stuff is actually played back in Flash, as people build training and curriculum, and I would also reflect the fact that whether it's electronic books, our Digital Publishing Suite can also be used for publishing electronic books.

The education vertical, the move towards electronic, whether it's textbooks, quizzes, surveys, et cetera, is clearly an area where people are using our tools, and that entire area is ripe for innovation and I think we're well-positioned there.

One thing I wanted to offer was we see again and again schools have purchased tablets and they're still kind of figuring out exactly what they're going to do with them, but a lot of teachers already know how to design or prototype electronic curriculum and Captivate seems to be something they can use right away without any programming know-how.

I agree.

The whole idea for Captivate was to target non-programmers with being able to create compelling content and deliver that across.

You also referred to tablets.

We talked about how we're going to be very aggressive about getting tablets, not just to be a consumption device, which is what they are today, but also to be a creative device, so watch out for some really exciting new products.

We already delivered some for Photoshop.

They've actually got a very good reception.

But you will see Adobe deliver a very comprehensive product suite on all of these tablet devices.

Thanks.

Given that's the last question, maybe I'll just end with a few summary remarks.

Again, which is it's an exciting time.

We're really executing well against the transformation agenda that we set for ourselves, and frankly, it leverages the tremendous franchise that we have at both our Creative and our PDF 2s.

What we're clearly seeing is that a new category is being created for marketing within the Enterprise, much like finance happened with ERP or sales happened with CRM.

And this era of marketing online, I don't think there's a Company that's better-positioned with a more comprehensive set of solutions for all of these marketers.

So whether it's creating the authoring tools to create the content, whether it's a platform to manage and deliver and transport that content, and measuring and monetizing and delivering it across all mobile environments.

We think that's a category that's going to increase significantly, and all of our products are very well-positioned to be able to deal with that particular marketplace.

We're very well-positioned in SaaS with all of these offerings as a combination of what we've done with Digital Marketing and Customer Experience and mobile is also clearly driving a lot of the interest, whether it's on authoring, analytics or creating the multi-channel solution.

So exciting time.

I think it was a strong quarter for us.

And we look forward to continuing to execute against the agenda we've set for ourselves.

This concludes our call.

We thank you for joining us today.

Ladies and gentlemen, that does conclude today's conference.