Adobe Systems Incorporated (ADBE)
Q4 2008 Earnings Call Transcript
December 16, 2008 5:00 p.m. ET

Executives

Mike Saviage - Vice President, Investor Relations
Shantanu Narayen - President and Chief Executive Officer
Mark Garrett - Executive Vice President and Chief Financial Officer

Analysts

Michael Olson - Piper Jaffray
Brent Thill - Citigroup
Sara Friar - Goldman Sachs
Heather Bellini - UBS
Adam Holt - Morgan Stanley
Ross MacMillan - Jeffries & Company
David Hilal - Friedman, Billings, Ramsey
Steven Ashley - Robert W. Baird
Walter Pritchard - Cowen and Company
Brad Reback - Oppenheimer
Blair Abernethy - Thomas Weisel Partners

Presentation

Mike Saviage – Vice Presdient, Investor Relations

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 fourth quarter and fiscal year 2008 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 press 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 mile targets and our forward-looking product plans, is based on information as of today, December 16, 2008, 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 our earnings release and on our investor relations website.

Call participants are advised that the audio of this conference call is being broadcast live over the Internet in Acrobat Connect Pro and is also being recorded for playback purposes. An archive of the call will be made available in Acrobat Connect Pro under 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.

Shantanu Narayen – President and Chief Executive Officer

Thanks, Mike and good afternoon. Today we are reporting fourth quarter revenue of $915.3 million, and annual revenue of $3.58 billion. Despite a difficult economic environment in 2008, we were able to achieve record revenue and double-digit growth for the sixth consecutive year. Looking at 2008 as a whole, and knowing now that we were in the midst of a recession that spanned our entire fiscal year, it is clear that we executed well and achieved some notable results.

First, our creative business had a solid year, as we delivered the largest and most innovative product release in Adobe''s history with CS4. We grew our leadership position in the creative tools market and diversified by establishing growth businesses in the areas of dynamic media with Flash-based video and hosted services with our Scene 7 business. In business productivity solutions, Acrobat had a good year, with double-digit revenue growth and the launch of Acrobat 9. Our LiveCycle enterprise business had a great year, achieving more than a quarter of a billion dollars in revenue with 32% annual growth.

We established the Adobe Flash platform as the standard for how the world engages with ideas and information across platforms, devices, and operating systems. Our ubiquitous client technologies, including Flash player, AIR, and Reader uniquely position Adobe as a technology leader in a world in which the explosion of rich digital content is accelerating. These accomplishments helped us to meet our goal of 13% revenue growth in fiscal 2008 and our operational focus allowed us to greatly exceed our profit targets for the year. In a few minutes, I will comment on Q4 highlights in more detail but first I will turn it over to Mark for a review of our financial results.

Mark Garrett – Chief Financial Officer

Thanks, Shantanu. I will first comment on our full year fiscal 2008 results. Adobe achieved record revenue of $3.580 billion in the year compared to $3.158 billion in fiscal 2007. This represents 13% year-over-year revenue growth, consistent with the target we provided at the outset of the year. GAAP operating income in fiscal 2008 was $1.028 billion, compared to $858 million in fiscal 2007. GAAP operating margin for the year was 28.7% compared to 27.2% in fiscal 2007. Non-GAAP operating income in fiscal 2008 was $1.435 billion, compared to $1.209 billion in fiscal 2007, and representing 19% year-over-year growth. Our non-GAAP operating margin was 40.1% in fiscal 2008, compared to 38.3% in fiscal 2007, and exceeding our original target for the year.

Adobe''s annual GAAP net income was $872 million in fiscal 2008 compared to $724 million in fiscal 2007. Adobe''s annual non-GAAP net income was $1.136 billion in fiscal 2008 compared to $966 million in fiscal 2007. GAAP diluted earnings per share in fiscal 2008 were $1.59 compared to $1.21 in fiscal 2007. Non-GAAP diluted earnings per share were $2.07 in fiscal 2008 compared to $1.61 in fiscal 2007. Given the economic environment throughout the year, including the year-long recession in the U.S., we are pleased that our execution and cost controls helped to deliver strong growth in profitability and an expansion in our operating margin.

Looking at our businesses in fiscal 2008, we achieved revenue growth in every segment. Our Creative Solutions business achieved revenue of $2.07 billion, which represents 9% growth when compared to fiscal 2007. Revenue for our Business Productivity business grew to $1.06 billion, which represents 16% year-over-year growth. Within our Business Productivity segment, Knowledge Worker revenue was $810.9 million, representing 11% year-over-year growth, and Enterprise revenue was $253.1 million in fiscal ’08, which represents 32% year-over-year growth. Our mobile business achieved revenue of $113.1 million, which represents 115% year-over-year growth. Other revenue was $329.8 million, which was 15% higher than last year. Within other segment revenue, our platform business achieved $118.5 million in revenue, which was growth of 46%, and Print and Publishing revenue was $211.3 million, with growth of 3%.

Now I would like to discuss our quarterly results. For the fourth quarter of fiscal 2008, Adobe achieved revenue of $915.3 million. This compares to $911.2 million reported for the fourth quarter of fiscal 2007 and $887.3 million reported last quarter. GAAP operating expenses for the fourth quarter of fiscal 2008 were $555.7 million compared to $556.9 million last quarter. Non-GAAP operating expenses were $476.8 million compared to $475.1 million last quarter. GAAP operating income for the fourth quarter of fiscal 2008 was $273.2 million, or 29.8% of revenue. This compares to GAAP operating income of $275.8 million, or 30.3% of revenue in the fourth quarter of fiscal 2007, and $219.5 million, or 24.7% of revenue last quarter. Non-GAAP operating income in the fourth quarter of fiscal 2008 was $374.9 million, or 41% of revenue. This compares to non-GAAP operating income of $362.2 million, or 39.7% of revenue in the fourth quarter of fiscal 2007, and $351.9 million, or 39.7% of revenue last quarter. Adobe''s effective GAAP tax rate for the quarter was 11% and our non-GAAP tax rate was 16%. Our fourth quarter GAAP and non-GAAP tax rates benefited from two favorable items, a current quarter catch-up related to the reinstatement of the United States research and development credit and a favorable tax court settlement.

GAAP net income for the fourth quarter of fiscal 2008 was $245.9 million, compared to $222.2 million reported in the fourth quarter of fiscal 2007, and $191.6 million last quarter. Non-GAAP net income was $320.9 million, compared to $289.6 million reported in the fourth quarter of fiscal 2007 and $269.1 million last quarter. GAAP diluted earnings per share for the fourth quarter of fiscal 2008 were $0.46 based on 534.9 million weighted average shares. This compares with GAAP diluted earnings per share of $0.38 reported in the fourth quarter of fiscal 2007 based on 587.9 million weighted average shares, and GAAP diluted earnings per share of $0.35 reported last quarter, based on 541.3 million weighted average shares. Non-GAAP diluted earnings per share for the fourth quarter of fiscal 2008 were $0.60. This compares with non-GAAP diluted earnings per share of $0.49 in the fourth quarter of fiscal 2007, and $0.50 reported last quarter.