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Executives

Mike Saviage - VP IR

Shantanu Narayen - President and CEO

Mark Garrett - EVP and CFO

Analysts

Steve Ashley - Robert W. Baird

Jay Vleeschhouwer - Merrill Lynch

Philip Rueppel - Wachovia Securities

Heather Bellini - UBS

Robert Breza - RBC Capital Markets

Brent Thill - Citigroup

Yun Kim - Pacific Growth Equity

Walter Pritchard - Cowen & Company

Gene Munster - Piper Jaffray

Sasa Zorovic - Goldman Sachs

Ross MacMillan - Jefferies & Company

Adobe Systems Inc. (ADBE) F1Q08 (02/29/2008) Earnings Call March 18, 2008 5:00 PM ET

Operator

Welcome to the Adobe first quarter fiscal year 2008 Earnings Call. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir.

Mike Saviage

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 will discuss Adobe's first quarter 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 model targets, and our forward-looking product plans is based on information as of today, March 18, 2008 and contains forward-looking statements that involve risks 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 including our Annual Report on Form 10-K for fiscal year 2007.

During this call we will discuss GAAP and non-GAAP financial measures. Reconciliation between the two, are 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 theInternet in Acrobat Connect. It is also being recordedfor playback purposes. An archive of the call will be made available in Acrobat Connect at Adobe's Investor Relations website for approximately 45 days, and is the property of Adobe Systems. The audio and archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe Systems.

I would now like to turn the call over to Shantanu.

Shantanu Narayen

Thanks, Mike, and good afternoon. I am pleased to announce Adobe's business continues to perform exceptionally well, with Q1 financial results exceeding the targets we provided at the outset of the quarter. Revenue in the quarter was $890.4 million which was above the high end of our targeted range and represents 37% year-over-year growth. Non-GAAP earnings per share were $0.48, also above the high end of our targeted range.

Driving our results in Q1 was continued strong demand for Creative Suite 3 and LiveCycle and another record quarter for our Acrobat family of products. Another significant highlight during Q1 was the public launch of Adobe AIR, a key element of our technology platform for designers and developers. Adobe AIR is enabling a whole new class of rich Internet applications that many of our customers are already using to deliver engaging experiences that we believe represent the future of the web.

In a few minutes I will comment on business highlights for the quarter. But first, I'll turn it over to Mark for a review of our financial results.

Mark Garrett

Thanks, Shantanu. For the first quarter of fiscal 2008, Adobe achieved revenue of $890.4 million. This compares to $649.4 million reported for the first quarter of fiscal 2007 and $911.2 million reported last quarter. GAAP operating expenses for the first quarter of fiscal 2008 were $532.5 million compared to $536.8 million last quarter. Non-GAAP operating expenses were $471.8 million compared to $480.3 million last quarter.

GAAP operating income in the first quarter of fiscal 2008 was $275.4 million or 30.9% of revenue. This compares to GAAP operating income of $146.3 million or 22.5% of revenue in the first quarter of fiscal 2007 and $275.8 million or 30.3% of revenue last quarter.

Non-GAAP operating income in the first quarter of fiscal 2008 was $359 million or 40.3% of revenue. This compares to non-GAAP operating income of $223.8 million or 34.5% of revenue in the first quarter of fiscal 2007 and $362.2 million or 39.7% of revenue last quarter. Adobe's effective GAAP tax rate for the quarter was 25.8% and our non-GAAP tax rate was 26.3%.

GAAP net income for the first quarter of fiscal 2008 was $219.4 million compared to $143.9 million reported in the first quarter of fiscal 2007 and $222.2 million last quarter. Non-GAAP net income was $273 million compared to $183.6 million reported in the first quarter of fiscal 2007 and $289.6 million last quarter.

GAAP diluted earnings per share for the first quarter of fiscal 2008 were $0.38, based on 571.3 million weighted average shares. This compares with GAAP diluted earnings per share of $0.24 reported in the first quarter of fiscal 2007, based on 604.2 million weighted average shares and GAAP diluted earnings per share of $0.38 reported last quarter, based on 587.9 million weighted average shares.

Non-GAAP diluted earnings per share for the first quarter of fiscal 2007 were $0.48. This compares with non-GAAP diluted earnings per share of $0.30 in the first quarter of fiscal 2007 and $0.49 reported last quarter.

I will now discuss Adobe's revenue in Q1 by business segment.

As a reminder, we have modified our business segments for fiscal year 2008. Our 2007 10-K provides information about our new segments and our updated Investor Relations data sheet provides product classifications and revenue results for prior period comparison purposes. Both the 10-K and our IR data sheet can be found on the Investor Relations page of adobe.com.

The Creative Solutions segment revenue was $543.5 million compared to $346.4 million Q1 of fiscal 2007 and $570.5 million last quarter. On a year-over-year basis, this represents 57% growth. Business Productivity Solutions segment revenue was $249.7 million compared to $217.3 million in Q1 of fiscal 2007 and $246.4 million last quarter. On a year-over-year basis, this represents 15% growth.

Within Business Productivity Solutions, our Knowledge Worker revenue was a record $195.5 million in Q1 of fiscal 2008 compared to a $174.8 million in Q1 of fiscal 2007 and a $192.1 million in the last quarter. On a year-over-year basis, this represents 12% growth.

The other components of our business productivity segment is our Enterprise revenue. Effective this quarter, ColdFusion revenue is reported as part of our platform business within our other segment. In Q1 Enterprise revenue was $54.2 million compared to $42.5 million in Q1 of fiscal 2007 and $54.3 million last quarter. On a year-over-year basis, this represents 28% growth.

Mobile and Device segment revenue was $15.2 million compared to $13.7 million in Q1 of fiscal 2007 and $13.5 million last quarter. Year-over-year this represents 11% growth. Finally, the other segment revenue was $82 million compared to $72 million in Q1 of fiscal 2007 and $80.8 million last quarter. Year-over-year this represents an increase of 14%. Our IR data sheet now reflects Platform and Print and Publishing as part of the other segment.

Turning to our geographic segments, results on a percent of revenue were as follows; the Americas 45%; Europe 36%; Asia 19%. Europe had a strong quarter and Asia performed well driven by normal seasonality. The sequential decline in revenue in North America was in the Creative business and was consistent with historical Q4 to Q1 trends. Regular employees at the end of the first quarter totaled 7,037 versus 6,794 at the end of the fourth quarter of fiscal 2007. The majority of the headcount increase from last quarter was in research and development.

Our trade DSO in the first quarter of fiscal 2008 was 30 days. This compares to 43 days in Q1 of fiscal 2007 and 32 days last quarter. In regard to our global channel inventory position, we ended the quarter within company policy.

In Q1, we repurchased a total of 33.3 million shares for a total cost of $1.25 billion. Of these shares repurchased in the quarter, 26.6 million shares were against our 50 million share stock repurchase program and 6.7 million shares were against our ongoing stock repurchase program to offset dilution from employee stock programs. In total, we have repurchased 44.3 million shares against the 50 million share stock repurchase program as of the end of Q1. To facilitate the stock repurchases in Q1, we drew down $450 million against our $1 billion credit line.

During the quarter, cash flow from operations was $399.3 million. Our ending cash and short-term investment position was $1.7 billion compared to approximately $2 billion at the end of last quarter.

This concludes my discussion of our financial results. I would now like to comment on our financial targets for the second quarter of fiscal 2008.

Like everyone, we are closely monitoring the economic environment in the US to understand the potential impact to our business. While we are not immune to an economic downturn in any of our major markets, we are fortunate in that we have a global diversified business. Based on Q1 results and the latest data we have, we are targeting a Q2 revenue range of $855 million to $885 million. In addition, we are targeting a GAAP operating margin of 29% to 30% and a non-GAAP operating margin of approximately 39%. These second quarter targets are consistent with the comments we provided in December when we shared our 2008 targets.

We are targeting our Q2 share count to be 546 million to 550 million shares. For GAAP non-operating income, which includes an expected investment gain of approximately $9 million, we are targeting $14 million to $16 million.

For non-GAAP non-operating income, we are targeting $5 million to $7 million. For our GAAP and non-GAAP effective tax rate, we are targeting approximately 27%. This tax rate target does not include a potential one point benefit, if there is a reinstatement of the R&D tax credit in 2008. These targets lead to a GAAP earnings per share range of $0.35 to $0.37 per share and a non-GAAP earnings per share range of $0.45 to $0.47.

We are reaffirming our annual revenue growth target of approximately 13% in fiscal year 2008. We are also reaffirming our full year GAAP operating margin target in fiscal year 2008 of approximately 30% and our non-GAAP operating margin target of approximately 39%. We are also providing full year earnings per share targets.

On a GAAP basis, we are targeting a range of $1.45 to $1.51, and on a non-GAAP basis, we are targeting a range of a $1.86 to $1.92. Our financial targets are based on the same quarterly assumptions we stated in December. We expect revenue in Q3 to be approximately the same as revenue in Q2. New product releases in the second half of the year will offset normal seasonal weakness in Q3 and will also help to make Q4 the highest revenue quarter of the year, which we believe will set us up for a successful fiscal 2009.

As a reminder, all of our targets assume a baseline of current economic conditions in our major markets. If the economy were to weaken in any of our markets, this could impact our ability to achieve these targets.

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

Shantanu Narayen

Thanks Mark. I'll spend the next few minutes reviewing highlights from our performance in Q1. Our Creative Solutions business had another solid quarter of performance, led by strong results in Europe. Based on total Creative Suite 3 results to-date, version-over-version we have achieved a 40% increase in revenue, with our CS3 family of products for the comparable CS2 time period. CS3 penetration into our creative professional customer base continues to mirror the adoption curve we experienced with CS2. Approximately 68% of the CS3 revenue is suites revenue.

Mac revenue for our CS3 product continues to be solid, and as expected, the Design Standard and Design Professional suites continue to be the leading suites in terms of mix.

We continue to be excited about the long-term market dynamics that drove the CS3 performance, and we remain confident our Creative products will continue to perform well into the second half of fiscal 2008.

In our Video business, we achieved 20% year-over-year growth and continue to view the dynamic media market as a key strategic growth opportunity for Adobe.

Since we announced the new Flash Media Server 3 with revised pricing and the updated Flash player with HD support, we have seen an acceleration of our Flash Streaming business. The monthly volume of video streamed and viewed in Flash through our content development network partners using the Flash player and the Flash media server increased over 300% between August 2007 and January 2008.

In addition just last week, Operation MySpace marked the first music concert ever to be broadcast live over the web in high definition. The concert held for US troops in Kuwait was broadcast using the Flash media server and Flash player with an estimated audience of 5 million viewers.

Our Professional Digital Imaging business performed well in Q1. In fact, the Professional Digital Imaging segment, which includes Photoshop, Photoshop Extended, and Photoshop Lightroom achieved its highest revenue quarter since CS3 shipped.

Our hobbyist product revenue has benefited from customers increasingly purchasing the Photoshop Elements Premiere Elements bundle, which has a higher average ASP. As expected, revenue for these products declined in Q1, when compared to Q4.

In Q1, we achieved 15% year-over-year growth in our Business Productivity Solutions segment which includes our Knowledge Worker and enterprise businesses. Our Knowledge Worker business, which includes Acrobat and Acrobat Connect, achieved record revenue and 12% year-over-year growth. This was driven by solid Acrobat demand throughout the quarter.

In the enterprise business, LiveCycle achieved 28% year-over-year growth. Enterprise wins during the quarter included the United States Marine Corp, which is utilizing LiveCycle Reader Extensions to convert their forms to PDF and enable digital signatures. Iberia Airlines in Spain, which is utilizing a LiveCycle Form solution to develop a maintenance order management system that is integrated with SAP and EMC applications.

In the New York State Insurance Fund, the state's largest workers' compensation and disability benefits carrier, which is implementing an Adobe Form solution to support payroll services and improve internal business work flows. In total, transactions greater than $50,000 in Q1 were [123].

In our Mobile business, we achieved record OEM shipments in Q1. In fact, we had our first 100 million unit quarter over a 100 million devices with Flash Lite shipped last quarter. This is a major milestone and we have already passed a total of 500 million devices shipped cumulatively with Flash Lite since inception.

At the Mobile World Congress in Barcelona, we announced that many major content providers are using Flash player compatible mobile products and solutions to extend their brands to the handheld market. They include MTV Networks, the NASDAQ Stock Market, eBay, Reuters, Dolce & Gabbana among others.

Yesterday we announced Microsoft has licensed Adobe Flash Lite software to enable web browsing of Flash content within the Internet Explorer Mobile Browser in future versions of Windows Mobile devices. As part of the agreement, Microsoft licensed Adobe Reader LE software for viewing Adobe PDF documents, including e-mail attachments and web content. Both Flash Lite and Reader LE will be made available to OEMs worldwide who license Microsoft Windows Mobile software.

February 25th marked the official launch of Adobe AIR which signals the next wave of rich Internet application innovation. Companies demonstrating applications built on Adobe AIR included AOL, eBay, Salesforce.com, the NASDAQ Stock Market, The New York Times Company, Nickelodeon, MTV and Sharp Corporation. Response to Adobe AIR from the press has been extremely positive. MIT Technology review highlighted AIR as one of the 10 most exciting world changing technologies of the year in its emerging technologies of 2008 issue.

Given the strong start to the year, a new product launches in the second half. We are reiterating our target of approximately 13% revenue growth in fiscal 2008. Adobe is performing exceptionally well against our strategy, and the fundamental market forces driving our long-term outlook are as strong as ever.

As the proliferation of digital content accelerates, customers worldwide are looking to Adobe for solutions that enable the creation of rich, engaging experiences across a variety of media and devices. This trend will continue to drive our diverse business. We look forward to seeing you on May 1st, at our financial analysts meeting in San Francisco, where we will provide more details about our long-term strategy.

Now, I will turn the call back over to Mike.

Mike Saviage

Thanks, Shantanu. Before we start Q&A, I would like to go over a few items. As Shantanu mentioned, our financial analysts meeting will be held on Thursday May 1st in downtown San Francisco. Invitations for the all day meeting will be sent out later this week. We have posted several new documents on our Investor Relations webpage today. They include today's earnings release and our updated investor data sheet, which includes restated data related to the new business segments classifications for fiscal 2008 as well as GAAP to non-GAAP reconciliation information. To access these documents and the other investor related information, you can go to our website at www.adobe.com/adbe

For those who wish to listen to a playback of today's conference call, a web-based Acrobat Connect archive of the call will be available from the IR page on adobe.com later today. Alternatively you can listen to a phone replay by calling 888-203-1112; use conference ID number 4698403. Again, the phone number is 888-203-1112 with ID number 4698403. International callers should dial 719-457-0820. The phone playback service will be available beginning at 4:00 pm Pacific Time today and ending at 4:00 p.m. Pacific Time on Friday, March 21, 2008.

We would now be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We will go first with Steve Ashley with Robert W. Baird.

Steve Ashley - Robert W. Baird

Hi. In the Creative Solutions business, are you able to tell whether there is any difference in the demand between the enterprise customers or maybe the hobbyists customers?

Shantanu Narayen

Steve, this is Shantanu. I think overall as it relates to our Creative performance, we did have a solid performance. At this time in the cycle it tends to be that licensing is one of the drivers of our business and whether it's marketing departments within the enterprise or large publishing houses, as they start to test out the Creative suite, we are seeing adoptions. No, we are really seeing difference in customer adoption across those two segments.

Steve Ashley - Robert W. Baird

Great. And in respect to the AIR client, any kind of qualitative comment? And what kind of distribution and penetration you would hope to see after a year?

Shantanu Narayen

Well, Steve with respect to AIR, it's very, very early in the process. What's very exciting is, even a month after the launch of AIR, we have about 45 applications. These are shipping applications that are already available on the Adobe website, which reflects great customer developer adoption. Clearly, getting AIR run time out there is one of our key priorities, but we have the ability to piggyback off of both the Reader, as well as the Flash distributions. And like the penetration that we've got in the past for Reader and Flash, we're confident that we will get the AIR run time also out, not just on PCs but also on alternate devices.

Steve Ashley - Robert W. Baird

Great. Thanks so much.

Operator

We'll go next to Jay Vleeschhouwer, Merrill Lynch

Jay Vleeschhouwer - Merrill Lynch

Thanks. Good afternoon. Shantanu, in the last three or four months, have there been any sort of changes behind the scenes in terms of expense or resource commitments at the company even perhaps just subtle ones or subtle changes of focus at all in terms of things like marketing programs, programs out in the field, even any changes that with respect to any particular product commitments, products you may want to spend less time developing perhaps or anything along those lines and then a follow-up?

Shantanu Narayen

Well. Jay, I think every year as part of our annual process, we clearly have a strategic planning process where we talk about the key priorities of the company. And the key priorities as related to this year are our continued investment in our Creative business as well as our Acrobat and Enterprise business. But in addition to that, I would say a particular focus on making sure that we are leveraging the opportunity that we have in video and the opportunity in AIR and getting our platform out there as well as in the hands of developers.

So, from a product perspective those are the key initiatives. We also continue to invest in software as a service, which is clearly one of the key trends moving forward. And I think what we've always done is look at other products, which maybe we are over invested in and re-arrange priorities accordingly.

From a field perspective, I think we continue to make sure that we are focused on providing a great experience for our direct customers. I think the LiveCycle success is a reflection of what we've done with Matt Thompson and the field organization and in addition, we tend to focus on the mid-market. But I think in conjunction with Mark, we are constantly looking at revenue and expenses and making sure that we invest in the long-term while returning to shareholders right throughout.

Jay Vleeschhouwer - Merrill Lynch

With respect to the Creative business, is it fair to assume that with CS4 you'll keep the segmentation as it is with three, that is to say you won't go any further with respect to configurations. This is about the right number in terms of complexity of products? And secondly, would this be the right time to change your pricing model for upgrade in particular, the CS3, ASPs of course generally moved higher with the configurations, but would it now also make sense to have some kind of a stepped or tiered pricing mechanism for upgrades?

Shantanu Narayen

Well to answer your first question Jay, I mean certainly every time we release a new version of the Creative suite, we do look at the segmentation and try and make sure that we are meeting our customer demands. Having said that the overall segmentation that we put in with respect to CS3, which is having a master collection for people, who want to standardize on the entire platform, the design web and production has clearly resonated with customers. So I would imagine if anything there is a little tweaking rather than any significant changes because I think we got it right.

With respect to your second question, again, we look at that with every cycle, we do believe there is an opportunity for people who are doing version skipping, for example, to have a disincentive for version skipping and to enable people to constantly upgrade with new versions of our products, but it's a little early to be sharing details. CS3 still continues to deliver great performance. So we are focused on marketing it and getting penetration among our existing customers.

Jay Vleeschhouwer - Merrill Lynch

Okay. And then lastly, at MAX, by my count, you had 8 new product and service initiatives like the Media Player, Astro, CoCoMo, and others, you might want to save this for the analysts meeting, but any quick update on any of those that might convert to revenue at all this year or where you think your are furthest along in terms of development?

Shantanu Narayen

Well, we talked about AIR a fair amount at MAX and it's good to see AIR out in the market and customer adoption of it. The second one that I would highlight is the Media Player, we are clearly seeing a lot of customer adoption from media companies who want to have their video content work both online and offline. The bid has been a successful data. I'd encourage all of you to download it and you can see the amount of content that people are already providing in Flash over the Internet is increasing quite dramatically. So we are excited about that. Revenue from the Media Player is probably not going to be material this year, but I think it reflects an adoption of Flash and the Flash platform.

Jay Vleeschhouwer - Merrill Lynch

Great. Thanks, Shantanu.

Operator

We'll go next to Philip Rueppel with Wachovia Securities.

Philip Rueppel - Wachovia Securities

Yes, thanks. Shantanu, and building on that last comment on Flash, you've talked about the strategy to make it to the de facto standard for video streaming on the web. How important is it to you to get greater Apple Flash support on its mobile devices?

Shantanu Narayen

Well, you really believe that Flash is synonymous with the Internet and frankly, anybody who wants to browse the web and experience the web and all it's glory really needs Flash support. We are very excited about the announcement from Windows Mobile adoption of Flash on their devices and the fact that we've shipped 0.5 billion devices now, non-PC devices. So we are also committed to bringing the Flash experience to the iPhone and we will work with Apple. We've evaluated the SDK, we can now start to develop the Flash player ourselves and we think it benefits our joint customers. So we want to work with Apple to bring that capability to the device.

Philip Rueppel - Wachovia Securities

Great, thanks. And for you Mark, could you give us a little update on sort of the strategy behind stock repurchases given the guidance for Q2. Does that assume an additional stock repurchase ability and also do you think you will continue to fund that with debt and sort of now the debt is part of the balance sheet, how do you view that from a strategic perspective?

Mark Garrett

Sure. We continue to believe that returning excess cash to the shareholders in the form of stock repurchases is the right methodology. We made great progress against the 50 million share authorization. We only have a little over five million shares to go. The guidance that we gave you for the next quarter in terms of share count factors in what's already been done, it does not factor in anything over and above what we have already accomplished. And we will continue to look at it. Yes, I did draw down debt off the balance sheet. I thought given where the stock was and given where interest rates are, that was the right capital mix and capital structure for us, and we'll continue to evaluate that every single quarter.

Philip Rueppel - Wachovia Securities

Great, thanks very much.

Operator

We'll go next to Heather Bellini, UBS.

Heather Bellini - UBS

Hi, good afternoon. I had two quick questions for you. The first is, I see you were able to hit I think 68% of your sales came from suite this quarter on the Creative side. I was wondering Shantanu if you could give us a sense of what's your goal for where that penetration can ultimately get to? And then I was also wondering if you could just comment a little bit as Silverlight gets ready to go in to its second revs of the product, if you can kind of highlight your competitive differentiators?

ShantanuNarayen

Sure. So Heather first on the CS penetration, we are pleased with 68 penetration of the Suites, this being the first release between Adobe and Macromedia. We are pleased but we continue to see adoption of the Point products which also represents an opportunity for us to move the Point product users whether they are illustrative, whether they are imaging users or whether they are premier etcetera to the platform. And then within the Suites as well, we have an opportunity to continuously move the design suite customers or the production suite customers to the master collection.

So overall, I would say we are pleased. We certainly think there is room for improvement in getting more people to standardize on the suites, but also within the suites to move up as they use more products. With respect to Silverlight, its clear Microsoft also views the same opportunity that we have been spearheading with respect to video on the web. And among the key differentiators for Adobe is first our Authoring Suite. It's clear that our Authoring Suite, the video business for Creative grew over 50% CS3 over CS2, so people are adopting our video products in order to output flash video for the web.

The adoption of the Flash client, we have virtually 98% of all PCs that are connected with Flash, the new edged high-definition flash player that we have delivered is also seeing just tremendous adoption, I talked about Operation MySpace using it. We have the Flash Media streaming server, we were able to deliver a great version that allows a lot more streams. And finally the fact that we are now delivering a media player as well as the ability to have DRM, we're really the only company that provides an end-to-end solution that's across platform. We delivered Flash Lite to all of our mobile partners as well. So that's one key competitive differentiation.

The other one that I would say is that our media partners have been using Adobe products for decades and Creative people who are creating this content are very, very familiar with Adobe products, which also I think enables us to be a differentiator. But none of those preclude us from continuing to innovate, which is what we are focused on.

Heather Bellini - UBS

Thank you very much.

Operator

Next to Gene Munster, Piper Jaffray. Gene, your line is open. Please check your mute button. There is no response. We'll move on to Robert Breza, RBC Capital Markets. Robert, your line is open. Please go ahead.

Robert Breza - RBC Capital Markets

Hi, can you hear me now?

Operator

Yes, sir.

Robert Breza - RBC Capital Markets

Great, thank you. Shantanu, I was wondering if you could talk a little bit about the growth in Europe. Surprisingly strong, I mean obviously the foreign currency probably helped a little bit. But is there anything beyond kind of for almost looking at the outside and seeing the foreign currency and the falling dollar? Anything else you would point to, that's really driving that really strong growth there?

Shantanu Narayen

Well, I will let Mark reflect on the currency. I think it's clear that a number of the emerging markets as well as the overall European market continue to be a large market opportunity for us. So we are seeing quite a bit of traction of our products in Eastern Europe as those countries enter the European Union. And given that the release of Creative was a quarter behind typically in those other foreign markets, it tends to continue to be strong through the cycle. So those are the two things that I would point to, which reflect our European strength.

Mark Garrett

And then on the currency benefit from a year-over-year perspective, we've got a $25 million favorable uplift from the euro and $7 million favorable uplift from the yen from a year-over-year perspective?

Robert Breza - RBC Capital Markets

That's helpful. Maybe as a follow-up, Shantanu, do you see more newer customers in those emerging areas really gravitating more towards the web more as it kind of more product cycle from your perspective?

Shantanu Narayen

No, I clearly think we are attracting new customers to the Adobe products and platform. There is no question that as the number of media companies or as the number of publishers are increasing, the Adobe products in many cases are the gold standard for what those publishers use. I think the other thing that is clearly happening in some of those markets both in Asia and in Europe is frankly as the value of intellectual property is increasing, we are clearly finding that the piracy rate is also reduced somewhat in those countries.

Robert Breza - RBC Capital Markets

Great. Thank you. Nice quarter.

Shantanu Narayen

Thank you.

Operator

We'll go next to Brent Thill with Citi.

Brent Thill - Citigroup

Thanks. If you could just characterize your visibility in the second half of this year, there is growing concern that this environment maybe gets worse before gets better. And just in terms of your ability to preserve your margins if we do see a broader slowdown that heads?

Mark Garrett

Hey, Brent. Sure, this is Mark. The beauty of Adobe is we get real-time data from the channel virtually every single week, and it allows us to react to any changes to that sell-through data on a real-time basis. So, we do have the ability to react quickly to any significant changes in any region or world by virtue of this data that we get weekly.

Brent Thill - Citigroup

Okay. And Mark, so you feel that you're going to preserve the margins even if we saw something coming, you would be able to act quick enough on the expense side?

Mark Garrett

We can act quickly on the expense side obviously, Brent, to the extent that it was big. It's much tougher to react to offset any full amount of revenue, but we believe that we can manage the expenses very prudently given any changes in regional economics.

Shantanu Narayen

And Brent, I think, this is Shantanu. I think we have reflected over the many years. We know how to balance between investing for the long-term as well as dealing with any short-term hiccups that might happen.

As Mark said, we get all this data, both on a revenue and expenses perspective, but frankly in many cases these are the times when the strong companies like Adobe actually gets stronger, and given the opportunities that we see, we want to continue to invest in research and development, because we know we'll come out stronger as a result of that.

Mark Garrett

The other thing to keep in mind, Brent is in the second half of the year we have the product launches that we talked about, so that gives us more confidence in the second half.

Brent Thill - Citigroup

You laid the foundation for the next question as you alluded to these new launches, certainly I know you're not going to say specifics, but should we count that they will cut across all categories, or more than narrow focus?

Shantanu Narayen

Well, as you know Brent, I think last year when we talked about our product launches way early, we think that actually both gave our competitors' information as well as potentially impacted sales. What we have also said is you can look at our IR data sheet, which shows some of the historical releases and based on that I think you can see across both the business productivity, business unit as well as the Creative business unit, you can expect to see products coming out. And we're really excited about the new products that are on tap for the second half of the year.

Brent Thill - Citigroup

Thanks.

Operator

We'll go next to John Jares, Boston Company.

John Jares - Boston Company

My question has been asked and answered. Thank you.

Shantanu Narayen

Thank you.

Operator

We'll go next to Yun Kim, Pacific Growth Equity.

Yun Kim - Pacific Growth Equity

Thank you. I saw the mobile business jump up sequentially, which as you mentioned was largely driven by the increase in the handset OEM business. Can you give any update on how Flash Cast business is doing and where do you expect that business tracking to show and also what is your plans for your headcount growth in the mobile group this year?

Shantanu Narayen

Well, we don't breakout headcount growth by each of the business units, so that one is not some information that we'll share. I think with respect to the mobile business, we continue as I said to be excited about the adoption. And I think this year and next year, we'll continue to be just how we make sure that our client platform is available on all devices, from feature phones to smartphones. The revenue that we get right now is primarily the royalty business.

We get some revenue for Flash Cast from the DoCoMo relationship that we've talked about. And we've also talked about the fact that later this year, we expect to see Verizon launch their Flash Cast services with us. And so, remember for mobile the revenue model continues to be not just a royalty but Flash Cast, but in addition to that the fact is that people are using our authoring tools to create content for mobile. So, we still are pretty excited about the opportunity for us in that space.

Yun Kim - Pacific Growth Equity

And then also, quickly with some of your recent efforts, I mean to the online advertising like dynamic placements of advertisements in online PDF documents and maybe even similar announcements coming up for your video products. Can we expect some ad-serving technology and other online advertising technology to be some of your areas you maybe looking into in '08?

Shantanu Narayen

Well, as you mentioned, there are at least two initiatives that we have talked about PDF-based ads that we are having, Yahoo! provide the ads as well as the Adobe Media Player, where any of the media companies can actually provide their own ads that represent forays for us into the advertising environment. The other big opportunity for us continues to be to make sure that Flash for rich media advertising is the format of choice. When you look at rich ads right now and as the CPMs of that rich media will increase. We want to make sure that the ability to author those ads, as well as place those ads continues to be the best format available. So, that's really our initiatives as it relates to advertising right now.

Yun Kim - Pacific Growth Equity

Thank you very much.

Operator

We'll go next to Walter Pritchard, Cowen & Company.

Walter Pritchard - Cowen & Company

I actually just had one question, Mark I'm wondering if you could -- I think you guys talked about over a year ago that the Master Collection might end up being the number three selling bundle. And you did say, the Design Standard, Design Premium or numbers were the top two. I'm wondering if Master Collection had reached the top three in terms of popular bundle?

Shantanu Narayen

Walter this is Shantanu. As it relates, the top two selling continue to be the Design Standard and the Design Premium. Then there are bunch of other collections that are pretty close and that's how I'd describe what we are seeing today for the various products. Long-term, clearly we continue to believe that getting people adopting the master collection represents upside opportunity for us.

Walter Pritchard - Cowen & Company

And could you remind us where that 68% of the suites right now, where was that in the last cycle at this point?

Shantanu Narayen

It has been going up cycle-over-cycle. At the Financial Analyst meeting we had talked about approximately 60%. So, I think we are seeing it move up.

Walter Pritchard - Cowen & Company

Great, thank you very much.

Shantanu Narayen

Thanks.

Operator

We'll go back to Gene Munster, Piper Jaffray.

Gene Munster - Piper Jaffray

Hey, good afternoon. Shantanu if you could talk another kind of macro questions has been asked before, but what your expectations are for kind of the macro environment over the next six months? Is it stable, are you expecting a little bit of a decline, improvement. Just some generic thoughts on that front?

Shantanu Narayen

Well, Gene we are clearly monitoring the economic environment in the US like every other company does and I think we've always said that while we are not immune, we are fortunate and we do have a global as well as a diversified business.

From assumption perspective, we are assuming that basically the economy stays in the current situation, so it's stable and we've said if there is a significant change, then we will reassess the impact, but at this point we're assuming the economy stays the same.

Gene Munster - Piper Jaffray

Excellent, then just a question on Acrobat, the next Acrobat Cycle, should we just assume kind of a typical trajectory after the launch of the upgrade or is acrobat getting to a point where we shouldn't expect those as dramatic spikes earlier on in the cycle?

Shantanu Narayen

Well, first, again, I'll reiterate. We just had a record quarter for that part of the business. So the business continues to be very healthy. The upgrade business tends to come in a little bit in the first quarter, but you are right. We tend not to see a huge spike again that business is primarily new unit business. We are adopting and getting new customers to that platform. So when the next version of Acrobat comes out, yes we would expect to see a slight uplift but not huge.

Gene Munster - Piper Jaffray

Great, thank you.

Operator

The next is Sasa Zorovic with Goldman Sachs.

Sasa Zorovic - Goldman Sachs

Thank you. My first question would be you've mentioned what the currency impact was on a year-over-year basis, 25 million versus 7 million, Euro and Yen. Could you just provide us with the information you have it on a quarter-versus-quarter basis?

Mark Garrett

Yeah, Sasa in terms of this quarter relative to Q4, it's about an $11 million favorable impact, $8 million from the Euro, $3 million from the Yen and that has been factored in to our guidance. It was factored in to our guidance based on what we knew at the end of last year and we factored that in to our guidance going in to Q2 as well.

Sasa Zorovic - Goldman Sachs

So, what specifically did you factor in going due to Q2 regarding the --

Mark Garrett

Based on where rates are today.

Sasa Zorovic - Goldman Sachs

So, specifically they would kind of stay where they are.

Mark Garrett

Correct.

Sasa Zorovic - Goldman Sachs

Okay. Now my second question would be regarding the linearity in the quarter. Have you noticed anything sort of changes when the quarter started towards where it ended or pretty might well sort of inline how the February quarter tends to usually be?

Mark Garrett

That's pretty much the way quarters tend to be.

Sasa Zorovic - Goldman Sachs

Great, thank you very much.

Operator

We'll go next to Ross MacMillan with Jefferies & Company.

Ross MacMillan - Jefferies & Company

Hey, thanks. Most of it might have been answered. Just one for Mark, do you have the backlog number I think you've given that out historically and then your revenues?

Mark Garrett

Yeah, I do the ending backlog is approximately 5% of revenue, keep in mind it's not indicative of future performance and it is factored in to our guidance.

Ross MacMillan - Jefferies & Company

Great, thank you.

Operator

(Operator Instructions) Walter Pritchard, Cowen & Company.

Walter Pritchard - Cowen and Company

He actually just asked the question, I was going to ask. So, I'm said.

Shantanu Narayen

Okay.

Mike Saviage

So operator we'll take one more question then.

Operator

Okay. It looks like our last question will be from Sasa Zorovic.

Sasa Zorovic - Goldman Sachs

Exactly, so my question would be a follow-up regarding to what extent -- sort of as we're looking to the next version of sort of the products that are going to be coming out in the second half as you mentioned, so specifically if we were to look at the next version of Acrobat and CS4, could you indicate to us sort of in what direction could we see as sort of -- I don’t want to go -- of course you can comment specifically on the features, but in the path the integration with Macromedia products or focus on video, what should we kind of focus on in sort of those next products. In generality so you could sort of provide us with a direction.

Shantanu Narayen

Well, Sasa given we haven't talked about, which products I'm not sure how I can give you insight into the features that are available for the new products. The reality is there is no shortage of ideas that we have. We are innovating as well as this company has ever innovated and when you look at some of our major products, as it relates to the creative business, we clearly have the ability to continue to innovate both in terms of Point features as well as in terms of workflow. The reality is when we put together Adobe and Macromedia, we only had a year to do that integration. So the quality and quantity of ideas for the next version of those products greatly outpaced that of the previous version.

When we think about Acrobat and business productivity, we look at what we can do with collaboration and their tremendous ideas available there. For LiveCycle, there is the opportunity to continue to provide great workflow, with mobile as I said support for devices, on video there is the ability to go high-definition, provide digital rights management. And finally with AIR, the ability to really deliver a brand new environment that I think can define how experiences happen on the web, which is what we are incredibly excited about.

So given this is the last question, I mean what I would like to say is, we are really pleased with our Q1 performance. I mean, it's clear that we have a global presence and we have a very diverse business. We were pleased that we reaffirmed our growth targets for the year and provided really strong earning targets moving forward. We are excited about our product launches in the second half and the fact that we are really attracting new customers to the Adobe products and platform and the fundamental trends and strategy that we talked about continue to help us move forward and we are excited about meeting a number of few at our Financial Analyst meeting. So I'll look forward to that.

Mike Saviage

With that, that concludes our call today. Thanks for joining us.

Operator

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may disconnect your phone lines at this time.

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Source: Adobe Systems Inc. F1Q08 (02/29/2008) Earnings Call Transcript
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