This is a summary of the first quarter fiscal 2006 earnings call conducted by Adobe Systems Inc. (ADBE) on March 22, 2006
Management:
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President and Chief Operating Officer Shantanu Narayen
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Chief Executive Officer Bruce Chizen
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Executive Vice President and Chief Financial Officer Murray Demo
Key Investor Issues:
- Revenue was $655.5 million, up 38.6% from $472.9 million in the prior year.
- Net income dropped 45% to $105.1 million or 17 cents a share.
- The firm repurchased 9.6 million shares at a cost of $355 million.
First Quarter Highlights:
Adobe achieved revenue of $655.5 million, up 38.6% from $472.9 million in 2005 due to solid demand for the Creative Suites and new Bundles.
- The video product launch is also heading for a good start.
- Gross margin was 88.1% compared to 94.3% in 2005 resulting in operating income of $130 million or 19.8% of revenues.
- Operating expenses amounted to $447.8 million, 62.7% from $275 million in the prior year and constituted of research and development, 21% with sales and marketing of 32.6%.
Net income was $105.1 million or 17 cents a share compared to $151.9 million or 30 cents a share in the prior year on acquisition related charges.
- Cash and short-term investments were $2.1 billion compared to $1.7 billion at the end of the fourth quarter of fiscal 2005.
- Adobe repurchased 9.6 million shares at a cost of $355 million as part of its share repurchase programs.
- It now expects a loss of approximately $60 million in fiscal 2006 revenue due to purchase accounting, an increase of $10 million over the previous estimate of $50 million.
Segmental Analysis:
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Creative Solutions revenue was $379.6 million, with solid demand for the Creative Suites and new Bundles, while the video product launch was also off to a good start.
- Knowledge workers’ segment revenue was $168.8 million with good results from Breeze, while Enterprise and Developer segment revenue was $45 million, with a record quarter for LiveCycle, up 45% from the year ago quarter.
- Mobile and Device segment revenue was $8.6 million on strong demand for Adobe technologies but however overall revenue was down from pre-acquisition levels due to lost revenue from acquisition accounting
- Overall Adobe experienced solid demand in all of the major geographies and with respect to global channel inventory, it ended the quarter at a level higher than the previous quarter due to high distribution sell through in November in advance of some distributor margin decreases, and higher selling to distribution in February to meet strong seasonal demand.
Fiscal 2006 Outlook:
- Adobe is expecting a revenue range of approximately $640-670 million.
- The company is targeting operating margin of 22-24%.
- Earnings per share are expected to be in the range of 18 cents to 21 cents for the second quarter.
- For the full year Adobe reaffirmed fiscal 2006 revenue targets of approximately $2.7 billion.
- Adobe continues to expect the third quarter of fiscal 2006 to be the lowest revenue quarter of the year due to typical summer weakness in Europe and Japan.
- The fourth quarter is expected to be the highest revenue quarter of the year, primarily due to the launch of the next major version of the Acrobat family of products.
Key questions and answers from the first quarter fiscal 2006 earnings call conducted by Adobe Systems, Inc. (ADBE) on March 22, 2006
Steve Ashley:
Would it be possible for you to give us the year-over-year growth rates for the five business segments of which you had given the dollar revenue breakdown?
Murray Demo: When we factor out the Macromedia revenue and we look at just the Adobe core revenue, that business grew double digits year over year, but even without Macromedia we saw healthy growth.
Steve Ashley:
What kind of impact did FX have on the topline and maybe on the mid-income line or bottomline?
Murray Demo: If we could have had the same exchange rates, Euro-to-Dollar and Yen-to-Dollar this year that we had last year, our revenue would have been about $25 million higher this quarter.
Steve Ashley:
Can you comment on how CS2 continues to perform versus how CS1 could perform with a similar stake in its life?
Shantanu Narayen: If we take the same duration that CS2 has been out relative to CS1, we are very pleased with the performance of CS2. It continues to outpace what we saw with CS1, and we were able to have a record revenue quarter again for the Creative Suite Standard and Premium and the two new bundles that we introduced.
Thomas Ernst:
Where are you in the integration of the two companies in terms of overlapping functions and pulling costs out of the business?
Murray Demo: The work is essentially done. Our focus now is on hiring more people to help drive the opportunities that we have on a go-forward basis. Overall the integration is going well, the strategy is set and complete, and it has been communicated to both the financial community and to customers.
The market plans are in place and we are executing against our vertical solution strategy, and most of the transition employees who were helping us through this period are no longer with Adobe.
Thomas Ernst:
How much cost was pulled out of the business and how much of that could we feel this quarter?
Murray Demo: We have provided a target for the second quarter of 37-38%. We have fixated our priorities with a reduction in force in many years across the company, on projects that we no longer want to spend resources on, to make sure that we could fully resource those projects that we are most excited about.
We are in the process of continuing to ramp head count against those projects, which is why our expenses will go up throughout the year.
Heather Bellini:
Comment on the type of impact the MacTel transition would have on your revenues?
