Analyst Conference Summary

Adobe
(ADBE)

conference date: September 17, 2007 @ 2:00 PM Pacific Time
for quarter ending: August 31, 2007 (3rd quarter fiscal 2007)


Forward-looking statements

Overview: Record revenues 41% above year-earlier due to strong Create Suite 3 sales.

Basic data:

Revenues were $851.7 million, up sequentially 14% from $745.6 million and 41% from $602.2 million year-earlier.

Net income was $205.2 million, up sequentially 34.6% from$152.5 million and 117% from $94.4 million year-earlier.

Resulting GAAP EPS were $0.34, up sequentially from $0.25 and up from $0.16 reported in the year-earlier quarter.

Cash and short term investments ended at $1.95 billion.

Guidance:

Q4 targets are revenues of $860 to $890 million with a GAAP operating margin of 30 to 31%; on a non-GAAP basis, operating margin of 41%. GAAP tax rate 25 to 26%. GAAP EPS $0.35 to $0.37; non-GAAP $0.46 to $0.48.

Conference Highlights:

Outstanding growth and record revenue far exceeding prior guidance. Led by Acrobat and Creative Suite 3.

In addition to the GAAP results shown above Adobe gave non-GAAP EPS as $0.45, operating income of $340.9 million and net income of $269.4 million.

Product revenue was $813.4 million; service and support revenue $38.3 million. Cost of revenue was $92.6 million. Gross profit $759 million. Operating expenses were $504 million. Operating income $255.0 million. Income tax provision $71.7 million. Interest and other income was $22.7 million.

25.9% effective tax rate.

Creative Solution $545.5 million, up 65% y/y. CS3 doing much better than CS2 when introduced. Design Premium had highest revenue. Strong demand for Mac versions for Intel chips. Digital video grew 70% y/y, with Mac demand high. Flash Media Server 3 previewed. Adobe Media Player seeing good early adoption.

Knowledge worker revenue 175.6 million up 17% y/y. Acrobat led. Professional revenue was more than half of revenue. Acrobat Connect adopted by Pentagon.

Enterprise and Developer revenue $59.3 million up 20% y/y. Lifecycle ES saw good customer wins.

Mobile and device segment $13 million, up 43% y/y. Flashlight adoption strong. Applications being developed with AIR.

Other revenue was $57.1 million declined y/y.

Geographic: Americas 47%; Europe 33%; Asia 20%.

6677 employees at end of quarter.

Global channel inventory was within policy. Deferred revenue declined due to CS3 shipments. $425.2 million cash generated.

17.6 million shares repurchased.

Q&A:

What are best indicators outside the company for growth? Overall marketing spend (by outside companies) is a good indicator; used to use advertising spend, but not any more. Overall IT spend. Consumer spending at high end.

Acrobat in CS vs. stand-alone? Pleased with direct sales and licensing results.

Suites are generating more revenue than stand-alone products, but they also are doing well.

Master Collection? Did well, but was only available for part of the quarter. Creative professionals are using the product to branch out from print/web to video/wireless. Expect to see enterprise adoption going forward. Saw better than expected adoption in Europe.

Acrobat revenue is primarily from licenses. In fact licenses represent majority of revenue overall, so reports on shrink-wrap sales from retailers may not be a good indicator.

Americas weakness? No, the Europe numbers were high, so the Europe percentage was up and Americas down, but actual Americas sales were strong.

Why predicting a long tail fro CS3? It was a long cycle between CS2 and CS3, and reviewers praised it; CS2 also had a long tail.

Enterprise growth due to Lifecycle ES? Not really, there is an overall adoption growth that goes beyond new releases.

Video? Flash is available across platforms and devices. It is a compelling medium. We will not rest on our laurels; we will continue to innovate; Microsoft is always a threat. Working with large media companies to make sure they adopt Flash as a standard. Over 70% of video played on Web is Flash; even Microsoft is a heavy Flash user.

We believe most of our corporate customers have not moved up to CS3, so we expect further growth, but revenue could peak in Q4 because people will be finishing up on upgrades.

Operating margins? We want to grow our earnings through revenue growth, not through savings.

Shrink wrap sales actually includes copies of CS3 that are downloaded.

Asian revenues are largely driven by Japan, because in the rest of Asia we have piracy issues.

We are not a product lifecycle driven business. Because of our server business, licensing, and variety of products, overall growth is not due to any particular product release.

Currency benefit, year over year, was only $11 million.

Acrobat Connect revenues? Pleased with results. Focus is in e-learning segment.

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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. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers