Adobe Systems Incorporated (ADBE)
Q2 2009 Earnings Call Transcript
June 16, 2009 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

Steven Ashley - Robert W. Baird
Kash Rangan - Merrill Lynch
Sarah Friar - Goldman Sachs
Brent Thill - Citigroup
Adam Holt - Morgan Stanley
Walter Pritchard - Cowen & Company
Ross MacMillan - Jeffries & Company
Sasa Zorovic - Janney Montgomery Scott
David Hilal - Friedman, Billings, Ramsey
Dan Cummings - Lime Rock Research
Blair Abernethy - Thomas Weisel Partners
Michael Olson - Piper Jaffray
Yun Kim - Broadpoint AmTech

Presentation

Mike Saviage – Vice President 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 second quarter fiscal year 2009 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, June 16, 2009, 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 on 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 Mark.

Mark Garrett – Chief Financial Officer

Thanks Mike. For the second quarter of fiscal 2009, Adobe achieved revenue of $704.7 million. This compares to $886.9 million reported in Q2 fiscal 2008 and $786.4 million reported last quarter. Q2 GAAP operating expenses were $471.3 million, compared to $543.8 million reported in Q2 fiscal 2008 and $501.1 million last quarter. Non-GAAP operating expenses in Q2 were $410.6 million, compared to $479.5 million reported for Q2 fiscal 2008 and $428.6 million last quarter. GAAP operating income in Q2 fiscal 2009 was $161.4 million, or 22.9% of revenue. This compares to GAAP operating income of $260.2 million, or 29.3% of revenue in Q2 fiscal 2008, and $207.9 million, or 26.4% of revenue last quarter. Non-GAAP operating income in Q2 fiscal 2009 was $237.7 million, or 33.7% of revenue. This compares to non-GAAP operating income of $349.6 million, or 39.4% of revenue in Q2 fiscal 2008, and $295 million, or 37.5% of revenue last quarter.

Adobe''s effective GAAP tax rate in Q2 was 23% and the non-GAAP tax rate was 23.5%. Q2 GAAP net income was $126.1 million compared to $214.9 million reported in Q2 fiscal 2008 and $156.4 million last quarter. Non-GAAP net income was $185 million, compared to $272.7 million reported in Q2 fiscal 2008 and $236.8 million last quarter. GAAP diluted earnings per share for Q2 fiscal 2009 were $0.24 based on 528 million weighted average shares. This compares with GAAP diluted earnings per share of $0.40 reported in Q2 fiscal 2008 based on 542.4 million weighted average shares, and GAAP diluted earnings per share of $0.30 reported last quarter based on 527.8 million weighted average shares. Non-GAAP diluted earnings per share for Q2 fiscal 2009 were $0.35. This compares with non-GAAP diluted earnings per share of $0.50 in Q2 fiscal 2008 and $0.45 reported last quarter.

I will now discuss Adobe''s revenue in Q2 by business segment. Creative Solutions segment revenue was $411.7 million, compared to $527.2 million in Q2 fiscal 2008 and $460.7 million last quarter. Business Productivity Solutions revenue was $209.7 million, compared to $252.8 million in Q2 fiscal 2008 and $227 million last quarter. Within Business Productivity Solutions, Knowledge Worker revenue was $156 million compared to $198.4 million in Q2 fiscal 2008 and $163.1 million last quarter.

The other component of our business productivity segment is our enterprise business. In Q2, enterprise revenue was $53.7 million compared to $54.4 million in Q2 fiscal 2008 and $63.9 million last quarter. Platform revenue in Q2 was $36.8 million compared to $52.6 million in Q2 fiscal 2008 and $52.3 million last quarter. Finally, print and publishing segment revenue was $46.5 million, compared to $54.3 million in Q2 fiscal 2008 and $46.4 million last quarter.

Turning to our geographic segments, results on a percent of revenue basis were as follows: the Americas, 45%; Europe, 31%; Asia, 24%. In North America, our business began to stabilize in February and that stability continued throughout the second quarter. In Japan, we experienced normal seasonal trends with a strong month of March, followed by the normal seasonal decline afterwards. Our European business was weaker than expected. Employees at the end of Q2 totaled 7,437 versus 7,173 at the end of the first quarter. The majority of the new hires in the quarter were in research and development located in lower cost geographies. Our trade DSO in Q2 fiscal 2009 was 34 days. This compares to 33 days in Q2 fiscal 2008 and 35 days last quarter. Our global channel inventory position at the end of the quarter was within company policy. During the quarter, cash flow from operations was $262 million. Our ending cash and short-term investment position was $2.7 billion, compared to $2.4 billion at the end of last quarter. In Q2, we repurchased approximately 900,000 shares at a total cost of $19.7 million.

This concludes my discussion of our financial results. I would now like to comment on our financial targets for the third quarter of fiscal 2009.

We are targeting a Q3 revenue range of $665 million to $715 million. We expect North America will grow sequentially from Q2 to Q3, offset by normal seasonal declines in Europe and Asia. From a business segment standpoint, we expect our Creative and Knowledge Worker businesses to be flat to slightly down sequentially in Q3. We expect normal seasonal strength in our education business in Q3 and our LifeCycle enterprise business to increase sequentially. For margins, we are targeting a Q3 GAAP operating margin range of 20.5% to 25.5% and a non-GAAP operating margin range of 31% to 35%. We are targeting our Q3 share count to be 529 million to 531 million shares. For non-operating income, we are targeting a range of $1 million to $3 million on both a GAAP and non-GAAP basis. For our Q3 GAAP effective tax rate, we are targeting approximately 22.5% and for our non-GAAP effective tax rate, we are targeting 23.5%. These targets lead to a GAAP earnings per share range of $0.20 to $0.27 per share and a non-GAAP earnings per share range of $0.30 to $0.37.

This concludes my section. I’d now like to turn the call over to Shantanu.