The Adobe Systems (ADBE) call is now beginning, and I’ll be taking notes. (All quotes are paraphrased.) Refresh this page for the latest. Adobe CEO Bruce Chizen is speaking. Revenues were $745.6 million, more than expected. Creative Suite products drove results, as did Acrobat.
Revenues were $745.6 million, more than expected. Creative Suite products drove results, as did Acrobat.
Mark Garrett, CFO: Revenues were $635.5 million a year ago, $649.4 million last quarter. GAAP operating income was $180.4 million, 24.2 percent of revenue. That compares with $147.9 million, 23.3 percent of revenue a year ago, and $146.3 million, 22.5 percent of revenue last quarter. They gave non-GAAP numbers also, but I’ll focus on GAAP here.
By the way, GAAP net income was $223.2 million, compared with $189.4 million in the year-ago quarter and $183.6 million last quarter.
Revenues by business segment:
Creative Solutions: $436.6 million, up from $360.1 million a year ago and $346.4 million last quarter.
Knowledge Worker: $184.8 million, $160.1 million last year, $174.8 million last quarter.
Enterprise: $52.3 million, $42.9 million last year, $50.9 million last quarter.
Mobile: $12.3 million, $7.7 million last year, $13.7 million last quarter
Other: $59.6 million, $64.7 million last year, $63.6 last quarter. The lower revenue is due to the decline of legacy products like PostScript.
Revenues by geographic segment:
Americas: 52 percent
Europe: 28 percent
Asia: 20 percent
There was exceptionally strong demand in North America because of the CS 3 launch. Adobe had 6,427 employees, up from 6,151 at the end of Q1. R&D hiring makes up most of it. Global channel inventory ended within company policy.
At end of Q2, cash and short-term investments were $2.3 billion dollars.
Targets for next quarter:
Revenue: $760-800 million, GAAP operating margins 27-28 pct, non-GAAP 39 percent.
Share count: 607-609 million shares
Other income, $21-22 million dollars
GAAP effective tax rate, 25-26 percent
Non-GAAP effective tax rate, 26-27 percent
Shantanu Narayen, president:
Creative Suite 3 began shipping in April in English. French and German began in early Q3, Japanese and some others will ship soon. Reviews have been strong. The bestselling suite is design, and web is also outselling the norm. Version over version, there’s a 30 percent increase in revenue. There’s strong demand for the Mac versions that support the Intel architecture.
The two versions of Photoshop are getting particularly strong reviews.
Acrobat had record revenues, thanks to volume licensing. Acrobat Professional revenue is still stronger than that for Acrobat Standard. Next quarter, knowledge worker revenue will be lower seasonally.
Mobile and devices: There is more demand for interactive mobile experiences. Verizon and a Taiwanese operator plan to deliver FlashCast before the end of 2007.
Adobe expects to exceed its original revenue and profit targets.
A sampling of questions:
What assumptions are you looking at with the international launch of CS 3?
Bruce: This is a tough period in Europe because of seasonality, which is why the numbers are conservative.
The design suite is the bestselling version of CS 3, as Adobe suspected. Will others surpass design eventually? Also, the company had said it will need to communicate well to describe which product is for whom. How is that working?
Shantanu: We predicted that design suite would do best, yes – but we haven’t shipped the master collection yet, so we’ll have to wait and see how it shakes out. But it’s early to tell what will do well down the stretch. We feel pretty good about how we’re communicating the segmentation. Results are good so far, but it’s early in the cycle.
Bruce: We continue to see Acrobat Pro slightly outselling standard Acrobat, which makes us feel like customers understand the added value.
Why did accrued expenses go up sequentially?
Mark: Mostly that’s due to marketing. (It’s quite a bit of an increase – is that all due to marketing?) It’s not. Let me get back to you. The other part of accrued expenses has to do with the employee stock purchase program.
Looking at the CS 3 sales, will the suite sales be a bigger part of the mix than they were with CS 2?
Shantanu: We expect the suites to be a greater percentage of the revenue in the creative business. We expected 60 percent of the revenue to come from the suites, and it came in a little higher than we expected. It’s clearly in line with what the strategy is, which is to get our customers to adopt our entire platform.
Mark: We expect things to be up sequentially from Q2 to Q3 in CS 3.
Do you think CS 3 will have more staying power than CS 2 did?
Shantanu: Looking at the digital explosion, the continued use of video on the Web, the MacTel transition (Apple’s transition to Intel), the first release of the product that combines Macromedia and Adobe – all the macro trends look good. But it’s still very early.
Bruce: There’s nothing that we’ve seen change in the marketplace that would change what we said at the analyst meeting. The fact that we exceeded the original targets seems to indicate that we were right, and we expect the business to improve over time.
What are the assumptions next quarter and the full year about the mix of suite vs. individual products?
Shantanu: Our initial expectation would be that 60 percent would be suites.
Bruce: We haven’t shipped the master collection or video yet. So for us to draw conclusions based on that limited data wouldn’t be prudent. We’re ecstatic that we’re exceeding revenue and profit expectations. But we’re entering a historically weak period. (Bruce actually sounds a little annoyed.)
About Apollo (now called AIR), and how it fits with Google Gears:
Shantanu: We’re excited about developer feedback. We’re starting to see applications that are built on this platform. It’s early. The revenue model is associated with the tools that we deliver, and the creative applications. Google Gears is complementary. But the reality with even Google Gears is that it’s still in conjunction with the browser, and we enable something more (outside the browser).
On buybacks:
Mark: We rep 5.9 million shares, up a million from what we did last quarter. We’re committed to continue to buy back shares to prevent dilution. We’re doing all this while balancing tax and other concerns.
On guidance:
Bruce: We believe we will exceed our original guidance if trends continue. How much we’ll exceed will depend on how Q3 shakes out.
Major language versions of master collection will also ship in Q3, but Adobe’s not saying exactly when.
Flex Builder: (Shantanu’s giving a muted response to how well Flex Builder is going. It’s hard to tell whether this is Adobe’s typical humility or an indication that it’s going just OK.)
Average selling prices:
Shantanu: The early feedback has been that people are adopting the suites – that’s why there’s quite a bit of revenue increase. Right now it’s early to say what the ASP increase is.
Bruce: Keep in mind, we haven’t shipped the “uber-suite” that’s $2,500 in English. … (On CS 3 projections) First batter up, we just hit a home run, and we expect many more home runs to come.
(The analysts are asking very critical questions, and there’s not much “great quarter” banter happening, which isn’t typical. Actually, Adobe management just got its first such attaboy.)
Shantanu: It is true that the price in Europe is higher than the price in the U.S., but it’s not necessarily the difference that you’ve mentioned (one analyst suggested Adobe charges twice as much in Europe).
Bruce: We’ve always priced higher in Europe, and there is some effect from the weak dollar.
