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Summary
conference date: September 14, 2006
for quarter ending: September 1, 2006 (3rd quarter 2006)
Overview: Year-over-year revenue growth due to acquisition of Macromedia is balanced by sequential revenue decline and declining earnings per share. Guidance to major increase in revenue for 4th quarter, but warns on 1st Q. 2007.
Basic data:
Revenues of $602.2 million were down 5% sequentially from $635.5 and up 24% from $487 in the 3rd quarter of 2005, largely reflecting the acquisition of Macromedia.
GAAP net income was $94.4 million, for earnings of .16 per share, at the high end of Adobe's target. This was way down from $144.9 million year-earlier and $123.1 million in 2nd quarter 2006. Non-GAAP earnings were .29, well above targets. Non-GAAP net income climed to $171.5 million from $146.4 year-earlier.
Guidance:
4th quarter 2006, revenue target is $655 million to $685 million.The GAAP earnings per share target range of approximately $0.19 to $0.22. On a non-GAAP basis target range is approximately $0.32 to $0.34.
$2.0 billion dollars cash. $358 million was spent on share-repurchasing in quarter.
Expects Q1 of 2007 to be lowest revenue in 2007 due to customers waiting for next version of Creative Quite in Q2 2007.
Conference Highlights:
Q3 is normally seasonally weak, hence the sequential declines from Q2. GAAP earnings were down (compare to non-GAAP) partly due to Macromedia acquisition costs.
Tax rates were lower than targetted due to an R&D
Creative solutions segment declined to $328.1 million. Due to seasonality and deferals waiting for next Expects growth in 4th quarter. Photoshop sales grew. Photoshops Elements to released this week. Production Studio revenues grew 34%.
Flash video becoming very important as video-on-web becomes common.
Knowledge worker segment $154.1 million. Acrobat revenue showed year-over-year growth despite upcoming new release late 4th quarter.
Enterprise, developer, and Lifecycle products grew well.
Expects Q1 of 2007 to be lowest revenue in 2007 due to customers waiting for next version of Creative Quite in Q2 2007.
Mortgage industry approved filings of PDF documents.
Flashlight and Flashcast doing well in mobile device software segment.
Q&A:
Creative Studio 2? Is doing marketing in advance of Creative Studio 3 release. Also, people are using video, so they have higher-end bundles for it.
Lifecycle product performance? Not just government-driven, doing well in enterprise space.
Vista launch effects? Migration will be seamless. Current versions of Adobe products will work fine in a Vista environment. Bulk of revenue will be in business space, who will upgrade to Vista slower than consumers.
Office saving to PDF? Anticipated PDF as a commodity, but Acrobat has features that make it much more valuable than just just PDF creation. Acrobat Elements is PDF creation only, and is less than 5% of Acrobat revenues.
Segmentation and marketing? Has done well segmenting products; enterprise, requiring direct sales, is still a minor part of business. May start differentiating Photoshop products.
Defered revenue keeps increasing as model shifts to enterprise license base. Acrobat growing in acceptance across board.
Cost of sales, gross margins? Have been in line with expectations. Trend from shrink-wrap to licensing helps. Going forward expects to say about same as Q3.
Google revenues will be seen in Q4, but will not give guidance.
Receivables are of very high quality.
Linearity in quarter? In Q3 August tends to be strong in Europe. Did have a strong education season.
Creative Suite 3 will be intermixable Mac to Windows, which is of big interest to customers. Also video capabilities will drive sales. Feedback from large customers very positive.
Acrobat 8 improvements? Will do that when they publically announce the product, soon. Analyst question indicated analyst believes Adobe customers believe upgrades no longer critical.
3D vector graphic space? Illustrator is still most-used products. Acrobat can store any vector; Acrobat 3D can store 3D vectors. The competitors in space still need to use Acrobat as a file format.
Apollo? It is a multiyear investment. Web has fundamental limitations that Apollo will break through. Will talk about plans at next developer conference.
Sales and marketing expense has been flat for several quarters. Will it ramp up for launches? Does not provide guidance on that.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2006 William P. Meyers