This is a summary of the third quarter fiscal 2006 earnings call conducted by Adobe Systems, Inc. (ADBE) on September 14, 2006
Management:
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President, COO Shantanu Narayen
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EVP, CFO Randy Furr
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CEO Bruce Chizen
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VP of IR Mike Saviage
Key Investor Issues:
- Revenue rose 24% to $602.2 million from $487 million in 2005.
- Net income of $94.4 million or 16 cents a share was down 34.9% from $144.9 million or 29 cents a share in the prior year
- The firm repurchased 12.1 million shares at a cost of $358.3 million.
Year to date Highlights:
- Revenue rose 30.3% to $1.89 billion from $1.45 billion in 2005.
- Net income dropped 28% to $323 million or 53 cents a share from $447 million or 91 cents a share in the prior year
Third Quarter Highlights:
Revenue rose 24% to $602.2 million from $487 million in the prior year as the firm continues to leverage its service platform and benefit from economies of scale.
- Net income was $94.4 million or 16 cents a share, down 34.9% from $144.9 million or 29 cents a share in the prior year due to higher cost of revenues and operating expenses as gross margin dropped to 88.5% from 94.4% in 2005.
- Operating expenses increased by 53% to $422.7 million, from $276 million in the prior year mainly driven by research and development costs.
- In addition, regular employees totalled 5,879, versus 5,678 at the end of the second quarter of fiscal 2006, with the majority of the headcount increase in research and development.
Cash and short-term investments were $2 billion, compared to $1.8 billion at the end of the second quarter of fiscal 2006.
- Adobe repurchased 12.1 million shares at a cost of $358.3 million and concluded the $1 billion share repurchase program.
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Creative Solutions segment revenue was $328.1 million, compared to $357.3 million consistent with expectations related to normal seasonality and customer deferrals in anticipation of the Creative Suite 3 launch next year.
- Knowledge Worker segment revenue was $154.1 million, compared to $163 million last quarter
- Enterprise and Developer segment revenue was $49.4 million, compared to $42.8 million last quarter as the Lifecycle Server business achieved record revenue in Q3.
- Mobile and Device segment revenue was $9.1 million, compared to $7.9 million last quarter as revenues continue to be impacted due to purchase accounting from the Macromedia acquisition.
Earnings guidance for the fourth quarter 2006:
- Adobe is targeting a revenue range of approximately $655 million to $685 million.
- It is also targeting operating margin of 21% to 24%.
- These targets lead to an earnings per share target range in of 19 cents to 22 cents per share.
Key questions and answers from the third quarter fiscal 2006 earnings call conducted by Adobe Systems, Inc. (ADBE) on September 14, 2006
Steve Ashley - Robert W. Baird:
Do you plan to take any marketing or promotional steps to bolster the demand of CS2 as we get closer to the release of CS3?
Shantanu Narayen: We do marketing to make sure we provide benefits of the product to people who have not yet moved to the existing version.
Bruce Chizen: If many of our customers buy the current CS2 under the maintenance program, they actually get a free upgrade to CS3.
Steve Ashley - Robert W. Baird:
Do you think the strong Lifecycle performance was tied just to government and government budget flush?
Shantanu Narayen: Yes, it was.
Joseph:
How is the Microsoft Vista launch going to affect you?
Bruce Chizen: The current version of the Adobe products will work just fine in a Vista environment.
Joseph:
Can you update us on what the status of your discussions with Microsoft concerning the fact that it is going to make available an add-on to enable Office 2007 to save as PDF?
Bruce Chizen: The impact of Microsoft doing PDF creation in their applications or in their operating system is not a major risk to Adobe.
Jay Vleeschhouwer:
Do you expect to have more product segmentation than you have to date?
Bruce Chizen: There will be a number of SKUs or different products associated with the Creative Suite.
Jay Vleeschhouwer:
How well do you think your sales and development and market resources and capabilities are aligned to all new strategies?
Bruce Chizen: Our revenue today is dependent much more on the quality of the product and our ability to market that product to constituents or customers that are already familiar with us and are very loyal to us.
Jay Vleeschhouwer:
To what extent have been the new bundles, able to offset some of the weakness in CS?
Shantanu Narayen: The web bundle, which is the super bundle, continues to perform well, which means there are creative people who want to standardize on the entire platform.
