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Adobe Systems Incorporated (NASDAQ:ADBE)

F2Q08 Earnings Call

June 16, 2008 5:00 pm 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

Jay Vleeschhouwer - Merrill Lynch

Heather Bellini - UBS

Thomas Ernst - Deutsche Bank

Brent Thill - Citigroup

Philip Rueppel - Wachovia Securities

Robert Breza - RBC Capital Markets

Gene Munster - Piper Jaffray

Adam Holt - Morgan Stanley

Steven Ashley - Robert W. Baird

Sasa Zorovic - Goldman Sachs

Ross MacMillan - Jeffries & Company

Walter Pritchard - Cowen and Company

Andy Miedler - Edward Jones

Operator

Good day, everyone and welcome to the Adobe second quarter fiscal year 2008 earnings conference call. As a reminder, today’s conference is being recorded. At this time for opening remarks, I would like to turn the conference to 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’ll discuss Adobe's second 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 mile targets and our forward-looking product plans, is based on information as of today, June 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 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 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 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 well, with Q2 results exceeding the financial targets we provided at the outset of the quarter. Revenue in the quarter was $886.9 million, above the high-end of our targeted range and representing 19% year-over-year growth. Non-GAAP earnings per share were $0.50, also above the high-end of our targeted range.

It is clear that the product mix and geographic diversity of our business continued to drive our successful results. In the second quarter, we had strong performance across all segments of our business -- creative, enterprise, knowledge worker, mobile, and platform. In fact, we achieved record revenue in our Acrobat, lifecycle, mobile, and platform businesses.

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

Mark Garrett

Thanks, Shantanu. For the second quarter of fiscal 2008, Adobe achieved revenue of $886.9 million. This compares to $745.6 million reported for the second quarter of fiscal 2007 and $890.4 million reported last quarter.

GAAP operating expenses for the second quarter of fiscal 2008 were $543.8 million, compared to $532.5 million last quarter. Non-GAAP operating expenses were $479.5 million, compared to $471.8 million last quarter.

GAAP operating income in the second quarter of fiscal 2008 was $260.2 million, or 29.3% of revenue. This compares to GAAP operating income of $180.4 million, or 24.2% of revenue in the second quarter of fiscal 2007, and $275.4 million, or 30.9% of revenue last quarter.

Non-GAAP operating income in the second quarter of fiscal 2008 was $349.6 million, or 39.4% of revenue. This compares to non-GAAP operating income of $282.1 million, or 37.8% of revenue in the second quarter of fiscal 2007, and $359 million, or 40.3% of revenue last quarter.

Adobe's effective GAAP tax rate for the quarter was 22.7%, and our non-GAAP tax rate was 23.8%. The lower-than-forecasted Q2 tax rates are primarily due to stronger forecasted international profits for fiscal 2008 and lower foreign taxes on those forecasted profits

GAAP net income for the second quarter of fiscal 2008 was $214.9 million compared to $152.5 million reported in the second quarter of fiscal 2007, and $219.4 million last quarter.

Non-GAAP net income was $272.7 million, compared to $223.2 million reported in the second quarter of fiscal 2007, and $273 million last quarter.

GAAP diluted earnings per share for the second quarter of fiscal 2008 were $0.40 based on 542.4 million weighted average shares. This compares with GAAP diluted earnings per share of $0.25 reported in the second quarter of fiscal 2007 based on $603.4 million weighted average shares, and GAAP diluted earnings per share of $0.38 reported last quarter based on $571.3 million weighted average shares.

Non-GAAP diluted earnings per share for the second quarter of fiscal 2008 were $0.50. This compares with non-GAAP diluted earnings per share of $0.37 in the second quarter of fiscal 2007, and $0.48 reported last quarter.

I will now discuss Adobe's revenue in Q2 by business segment. Creative Solutions segment revenue was $527.2 million, compared to $436.6 million in Q2 of fiscal 2007, and $543.5 million last quarter. On a year-over-year basis, this represents 21% growth.

Business productivity solutions segment revenue was $252.8 million, compared to $228.8 million in Q2 of fiscal 2007, and $249.7 million last quarter. On a year-over-year basis, this represents 10% growth.

With business productivity solutions, our knowledge worker revenue was a record $198.4 million in Q2 of fiscal 2008, compared to $184.8 million in Q2 of fiscal 2007, and $195.5 million last quarter. On a year-over-year basis, this represents 7% growth.

The other component of our business productivity segment is our enterprise business. In Q2, enterprise revenue was a record $54.4 million, compared to $44 million in Q2 of fiscal 2007, and $54.2 million last quarter. On a year-over-year basis, this represents 24% growth.

Mobile and device segment revenue was $22.2 million, compared to $12.3 million in Q2 of fiscal 2007 and $15.2 million last quarter. Year over year, this represents 80% growth.

Finally, other segment revenue was $84.7 million, compared to $67.9 million in Q2 of fiscal 2007 and $82 million last quarter. Year over year, this represents an increase of 25%.

Turning to our geographic segments, results on a percent of revenue basis were as follows: the Americas, 43%; Europe, 33%; Asia, 24%. In the Americas, revenue was flat year over year. In Europe, our business remained solid and we achieved record revenue in Japan.

Employees at the end of the second quarter totaled 7,317 versus 7,037 at the end of the first quarter.

Our trade DSO in the second quarter of fiscal 2008 was 33 days. This compares to 39 days in Q2 of fiscal 2007 and 30 days last quarter. In regard to our global channel inventory position, we ended the quarter within company policy.

During the quarter, cash flow from operations was $331.8 million. Our ending cash and short-term investment position was $1.9 billion compared to approximately $1.7 billion at the end of last quarter.

In Q2, we repurchased a total of 15.1 million shares for a total cost of $543 million. Of these shares repurchased in the quarter, 5.2 million shares were against our 50 million share stock repurchase program and 9.9 million shares were against our ongoing stock repurchase program to offset dilution from employee stock programs. In total, we have repurchased 49.5 million shares against the 50 million share stock repurchase program as of the end of Q2.

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

We are targeting a Q3 revenue range of $855 million to $885 million. In addition, we are targeting a GAAP operating margin of approximately 29% and a non-GAAP operating margin of approximately 38.5%. These third quarter targets are consistent with the comments we provided in December when we shared our 2008 targets.

We are targeting our Q3 share count to be 544 million to 548 million shares. For non-operating income, we are targeting approximately $4 million on both a GAAP and non-GAAP basis. For our GAAP effective tax rate, we are targeting approximately 25% and for our non-GAAP effective tax rate, we are targeting approximately 26%. These targets lead to a GAAP earnings per share range of $0.34 to $0.36 per share and a non-GAAP earnings per share range of $0.45 to $0.47.

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 Q2. Our Creative Solutions business had another solid quarter of performance. CS3 penetration into our creative professional customer base continues to mirror the adoption curve we experienced with CS2, with the majority of revenue continuing to be suites based.

At our analyst meeting on May 1st, we highlighted how well CS3 has performed yet showed there remains a significant opportunity to move users from point products to suites and from older versions of Creative Suite to CS3.

In the second half of the year as we prepare for the next major release of the Creative Suite family of products, we will continue to drive customer upgrades to CS3. To that end, we are releasing an update to CS3 in Q3 which includes the new Acrobat 9 product. We believe this will provide a boost to Creative Suite adoption before the next release ships.

Looking forward to our next release of the Creative Suite product family, we delivered new public betas of Dreamweaver, Fireworks, and Soundbooth in Q2. Reaction to these new updates has been positive. PC Magazine stated: “If all the apps are as impressive as the Dreamweaver beta, than Adobe is working its way to one of its best releases in many years.”

We have identified our dynamic media business as a key growth area for Adobe. In Q2, we achieved 79% year-over-year growth with our digital and web video products, and continue to see strong growth in our Flash Media streaming business.

In March, we announced the availability of Adobe Flash Media rights management server, a new scalable content protection solution targeted at broadcast and media companies that use Adobe Flash technology.

At the NAB conference, we launched Adobe Media Player. Based on Adobe Air, our cross-platform media player provides new ways for viewers to discover and interact with their favorite content while offering revenue and brand-building opportunities for content publishers.

Adobe Media Player continues to gain momentum in the industry with new content appearing regularly, from scripts -- the Food Network to Comedy Central’s The Daily Show with John Stewart and The Colbert Report, and new CBS shows like Million Dollar Password and Flash Point.

During Q2, we also announced the Adobe Photoshop Express public beta, a free, imaging rich Internet application. Photoshop express is another milestone in our move into hosted services and extends the reach of our brand and our imaging technology to millions of new users. Walt Mossberg of the Wall Street Journal said Photoshop Express offers “the nicest set of web-based editing tools I have seen. They are sophisticated for a consumer application yet easy to use.”

In our Scene Seven business, we achieved our fourth consecutive quarter of sequential revenue growth since the acquisition last year and continue to believe this hosted services opportunity represents significant growth potential for Adobe in the coming years.

Our business productivity solution segment had a solid quarter. In our knowledge worker business, we once again achieved record quarterly revenue. This was driven by solid Acrobat demand, leading up to the official launch of our Acrobat 9 and acrobat.com.

Acrobat 9 is a major upgrade that transforms the process of creating and sharing electronic documents. It delivers native support for Adobe Flash, the ability to unify a wide range of content in PDF portfolios, and access to real-time capabilities of co-navigating a PDF document with colleagues.

We also introduced acrobat.com, a set of hosted services that includes file-sharing and storage, PDF conversion, an innovative online word processor called Buzzword, and easy-to-use web conferencing capabilities based on Acrobat Connect.

Acrobat.com targets individuals and professionals in small and medium-sized businesses and departments within larger organizations who need tools to work better together. Acrobat.com is a complementary service for Acrobat 9 users, giving them access to a personal workspace in the clouds that can be accessed from virtually anywhere online.

In Q2, we also released a new version of Acrobat Connect Pro, our comprehensive web conferencing and e-learning solution. The new version includes functionality that enriches online communication and collaboration, enabling organizations and schools to offer more engaging rapid [inaudible], interactive virtual classes, and dynamic online meetings.

In our enterprise business, Lifecycle achieved record revenue with 24% year-over-year growth. Customer wins in the government sector during the quarter included the Australian Government Information Management Office, which has standardized on Adobe forms technology for its citizen information and transactional services; the Ohio Department of Jobs and Family Services, which is using Adobe Lifecycle to enable applicants to apply for state services and update their records online; and the Belgian Social Security Department, which is utilizing Lifecycle to create a long-term digital archive of records in PDF A for people with disabilities.

In the commercial sector, wins in the second quarter included Orange France Telecom, France’s largest telecommunications service provider, which is using Lifecycle to automate its processes for setting up mobile contracts as its distribution centers; and Allied Irish Banks, which is utilizing an Adobe forms solution to improve its customer correspondence processes and address global treasury requirements.

In total, transactions greater than $50,000 in Q2 were 131, up from 123 last quarter.

In our mobile business, we achieved record revenue based on strong Flash Lite OEM shipments and a large transaction with a gaming console manufacturer. On May 1st, we announced the Open Screen Project, an initiative with strong industry participation dedicated to driving rich Internet experiences across televisions, personal computers, and mobile and consumer electronics devices.

At the recent BREW conference, Adobe and Qualcomm announced the Brew Mobile Platform will integrate Adobe technology. This greatly expands the capabilities for Brew developers and enables them to create rich applications and web content using Adobe Flash and new platform features.

In our platform business, we achieved record revenue for our Flex Builder product, which is used to build rich Internet applications using Adobe Flash and Adobe Air. Highlights in the quarter also included the pre-releases of Adobe Flash Player version 10 and Adobe Air for Linux. Flash Player 10 includes new expressive features for interactive designers and developers to build richer and more immersive web experiences. Adobe Air for Linux allows developers to extend their use of their desktop applications from Windows and Mac to the Linux platform.

All of these Q2 accomplishments reinforce the fact that we continue to execute well against our strategy and that global demand for Adobe solutions is strong. Our performance in the first half of the year was driven by the combination of solid execution, product mix, geographic diversity, and market trends that continue to provide a tailwind. These factors, combined with major product releases, position us well for a strong second half of fiscal 2008 and accelerated growth into fiscal 2009.

Thank you for joining us today. Now, I will turn the call back over to Mike.

Mike Saviage

Thanks, Shantanu. We have posted several new documents on our investor relations webpage today. They include today’s earnings release and our updated investor data sheet. To access these documents and 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 2627245. Again, the phone number is 888-203-1112, with the ID number 2627245. International callers should dial 719-457-0820. The phone playback service will be available beginning at 4:00 p.m. Pacific Time today and ending at 4:00 p.m. Pacific Time on Friday, June 20, 2008.

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Jay Vleeschhouwer with Merrill Lynch.

Jay Vleeschhouwer - Merrill Lynch

Shantanu, we’ve seen I think good evidence of the long tail effect both for Creative Suite and especially now for Acrobat. The question is to what extent do you think the long tail effect is managed or manageable versus simply having been a fortuitous outcome owing to some market conditions let’s say over the last number of quarters?

Secondly, over the last number of quarters, we’ve heard Adobe use the term services substantially more often than we’ve ever heard in your history before. Could you talk about the kinds of investments you are making in creating the infrastructure and support that you have in place to have more a services based business, such as Photoshop Express, Connect and other new businesses you’ve talked about?

Shantanu Narayen

So Jay, there were two questions; the first was about the fact that both the Creative business and the Acrobat business have continued to perform many quarters after the release and I think it’s a reflection frankly of what we have been saying -- namely the available market opportunity for those products are fairly large. In the case of Acrobat, for example, we continue to see adoption against the over $100 million that we’ve outlined as the available market opportunity for Acrobat. And as we’ve said, we’ve only sold $30 million to date.

The second thing that we are certainly seeing is more adoption of Acrobat within enterprises. That’s being driven by our field organization, so I think those two factors are certainly contributing to the long tail in Acrobat.

And we’ve announced Acrobat 9 and said that we had record revenue in the previous quarter, which we think is a really good accomplishment.

On the creative side as well, as we talk about the available market available for us and the number of creative people who are trying to create content for print, web, video and wireless, we continue to think that’s a large opportunity. And so like with all other product cycles, you see the early adopters move through it quickly. You see larger enterprises take a little bit more time in terms of how they move, maybe one section of a magazine before moving the entire industry over.

And so we are pleased with the CS performance, especially as we also come up on a new version that includes Acrobat 9. And as you see, we’ve also announced new betas which have been very positively received.

So to net it out, I would say it’s a combination of what we’ve been doing in the field organization as well as frankly the large available demand for both of those sets of products.

On the services side, as you say we are investing more in services. You know, we have Scene Seven that’s been a successful business for us. We said we’ve seen a fourth sequential quarter of increase in revenue and Connect Pro on the web conferencing side.

So in the grand scheme of things, it’s not a material investment. It’s fairly small. It’s all factored into the margins that we give but we also believe that our ability to deliver those services, both standalone and as a complement to our desktop applications makes it more attractive to a broader set of customers, which is important for us.

Jay Vleeschhouwer - Merrill Lynch

One last question -- it’s I think fairly clear that with the next release of CS, you’ll likely introduce the version skipping pricing we talked about at the analyst meeting. So does your outlook for the fourth quarter or your comments with respect to accelerated growth in ’09 encompass any specific expectation for the incremental effects of version skipping for upgrades? And for that matter, are you also considering any other new pricing models, perhaps based around time-based or usage-based pricing?

Shantanu Narayen

Well, first I want to reiterate that we continue to be excited about CS3. We continue to think that CS3 is performing well and as you know, Jay, we have not yet announced the next version of the Creative Suite product.

As you point out, we have said that one of the available opportunities for us is the fact that we do not have tiered pricing for people who are not on the current version and we think it’s important to provide an incentive for people to stay on the current version, so that’s something we are definitely exploring for the next version of the Creative Suite. And it’s in the whole area of continuing to tune the business so that we deliver great value to our customers but we optimize the revenue.

And so on that one, you’ll have to stay tuned for our launch announcements.

Mike Saviage

Next question, Operator.

Operator

We’ll take our next question from Heather Bellini of UBS.

Heather Bellini - UBS

Thank you, guys. Shantanu, I was just wondering if you could give us an idea -- you had given us an update at the analyst day, the revenue, the percentage of revenue cycles of -- coming from suites versus a la carte. I was wondering if there was an update to that stat.

And also, as you look ahead to CS4 and your ability to migrate people to suites even more so than you have, where do you think that number could get to?

And then my follow-up question was just what was the foreign exchange impact in the quarter on the revenue line? Thank you.

Shantanu Narayen

Heather, I’ll take the first two. The reason we didn’t update all the suites that we gave at our analyst meeting was that they were substantially the same, so whether it was the CS3 versus CS2 uplift that we’ve seen in revenue to date, the percentage of revenue that was suites-based CS3 versus CS2, the adoption curve that we’ve seen, they are all substantially the same, which is why we didn’t give an update to any of those numbers.

But we are clearly very excited about CS4. When you think about CS4 and everything that we’ve done relative to the performance features, the workflow features, and what I believe are some incredible features that are going into the individual point products, we are super excited. And so in terms of getting people to A, adopt CS4 and then while they adopt CS4 to continue to make sure that they adopt the higher value suite features is clearly part of our strategy.

Video represents a huge opportunity and at the analyst meeting, we had talked about the fact that with CS3 we didn’t have a full cycle in order to deliver the kind of value that we can. And so when the next version of Creative Suite comes out, we certainly -- since it will be a full cycle -- expect to see significant innovation, which we think will lead to good adoption.

Heather Bellini - UBS

Is Design Premium still the most popular suite out of the suite offerings?

Shantanu Narayen

When you look at the suite offerings, you know, the standard, premium, web collection, web premium and master collection are still the top four.

Heather Bellini - UBS

Web premium and master collection are still the top -- or can you just repeat those again? I’m sorry.

Shantanu Narayen

The design standard, design premium --

Heather Bellini - UBS

Yep, I’ve got them now. Oh, and then just the FX impact in the quarter --

Mark Garrett

For Q2, the year-over-year net benefit to revenue was approximately $44 million, most of which would have been factored into our guidance when we provided it.

Heather Bellini - UBS

Great. Thank you.

Operator

We’ll go next to Thomas Ernst with Deutsche Bank.

Thomas Ernst - Deutsche Bank

Good afternoon. Thanks for taking my question. The version 3.3 I believe ships at the end of June for English/French, and end of August for Spanish, if I’ve heard right. Two questions on version 3.3 -- first, do you expect it to be a significant revenue driver here in this quarter? And then looking forward, would upgraders to the 3.3 on any of the versions receive some sort of upgrade protection to any future versions of the Creative Suite?

Shantanu Narayen

Tom, on the first question as it related to the Acrobat shipments, we certainly expect the major languages to ship this quarter, which are English, French, German, and Japanese. And the suites that contain those will probably be updated.

With respect to the price protection, which I think was your second question, what we do is when we announce a new product, until we ship the new product we provide price protection, and then in terms of moving from that particular product to the next generation, that’s what the upgrade pricing is for, frankly. And so that’s how we distinguish between price protection, which is primarily after we announce a product to the time we ship, versus upgrade pricing, which is moving from a prior version to a new version.

Thomas Ernst - Deutsche Bank

Okay, that’s what I thought, and just to be clear then, if you buy version 3.3, you don’t have a free upgrade later or any sort of price protection for the next version yet?

Shantanu Narayen

That’s correct. You are in the same boat as anybody else who bought version 3 of the Creative Suite when you consider the next version of the Creative Suite.

Thomas Ernst - Deutsche Bank

Okay, and just to follow-up from that first part of my question again, any idea how significant this might be for you here in this Q3 and then in next quarter, the 3.3 upgrades?

Mark Garrett

Tom, let me talk about that as it relates to a little bit of color on the quarter for both Q2 and Q3. First, I’d say the year is playing out exactly as we had outlined, all the way back to December. We had a good quarter. We obviously exceeded our targets and we are really pleased with our performance, especially given the North American economy and we are fortunate that we have a really diversified model from a product, a geographic, and a channel perspective. North America was relatively flat year over year but we expect with the Acrobat 9 launch and the CS3 dot release and the education market that we could grow North America sequentially and Europe sequentially in the third quarter, and then we would expect Asia in the third quarter to decline sequentially based on the seasonality that we had this quarter.

So we do expect a bit of an uplift from the dot release next quarter.

Thomas Ernst - Deutsche Bank

Okay. Thank you again.

Operator

Next, Brent Thill with Citigroup.

Brent Thill - Citigroup

Mark, just on North America in Q2, you mentioned it was flat. Was there anything that was unusual that stuck out? I know it looks like Europe and Asia were high 30s.

Mark Garrett

No, Brent, really nothing unusual. I mean, it was flat so obviously that’s a little less than we would prefer but given the diversity of our model, having a strong international presence, Europe did well, Asia did exceptionally well, and again with the dot release and Acrobat 9 we expect North America to increase next quarter.

Brent Thill - Citigroup

Okay. Shantanu, I know you are not going to give timing on CS next but just from the way you think of it internally, are you thinking of a fixed timetable or are you still on a floating date based on the feedback from the beta?

Shantanu Narayen

No, we are pretty much on a fixed timetable, Brent. I mean, I think we have a pretty good sense. You know, the public betas are frankly past the private betas where we have a very select group of customers giving us feedback. And as you know, we’ve done this for many releases right now and have a pretty good sense. The feedback from the early betas has been really positive and so with respect to the strength of the product cycle, we feel comfortable. It’s now just a matter of making sure that we get the products ready to go.

Brent Thill - Citigroup

Thanks.

Operator

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

Philip Rueppel - Wachovia Securities

Yes, thanks. On Acrobat 9, can you give us a little early perspective, what you’ve been hearing from the channel and beta customers? And any change to your commentary both from the analyst meeting and last quarter about just sort of a normal cycle, a slight uplift? Or do you think we could see something better than that?

Shantanu Narayen

So first from the customers, in terms of the feedback, I think they really view this as one of the transformational releases frankly of Acrobat, and in particular the positive feedback that we’ve been receiving is all about the interactivity that’s now possible in PDF by virtue of the fact that we have this native support of Adobe Flash. The new PDF portfolio feature that we’ve introduced has also been receiving quite a bit of positive feedback and the Collaborate Lite in terms of helping people really collaborate in a nice way.

And in addition to that, the fact that we now have both Acrobat working in conjunction with acrobat.com, where you can have storage of files and do more collaboration from a life perspective has also been receiving some great feedback.

So at this point in the cycle, before we release the product frankly it’s the beta feedback that I pay more attention to. The channel, you know, we will make sure that we have enough product in the channel and manage the inventory but it’s really the early customer feedback which is very positive that we pay attention to at this point.

Philip Rueppel - Wachovia Securities

Great, thanks. And then on the mobile, you saw some nice strength there. Is that something that is likely to continue or was that game console manufacturer more of a one-time shot and you expect it to kind of go back to its traditional levels?

Mark Garrett

It’s exactly the latter; so there was a large transaction in the second quarter that is not likely repeatable and we would expect mobile to sequentially decline next quarter.

Philip Rueppel - Wachovia Securities

Great. Thanks very much.

Shantanu Narayen

What I will say is that even though we announced the open screen project, it’s really nice to see that the adoption of Flash Lite on devices continues its accelerating, you know, very much in line with the strategic intent that we had outlined at the analyst meeting.

Operator

We’ll go next to Robert Breza with RBC Capital.

Robert Breza - RBC Capital Markets

Mark, maybe as a follow-up to Phil’s call, as you look at the other segments outside of mobile, any qualitative guidance you could provide would be helpful.

And Shantanu, I was wondering if you could give us an update on the downloads for Air and what you are watching there. Thank you.

Mark Garrett

Sure. So in addition to the geographic color that I provided, like I just said we would expect a sequential decline in mobile. We would expect a slight decline next quarter in creative, which is more of a seasonal decline but we do get some benefit from the dot release that we just spoke about. Creative is continuing to perform exactly as we expected. It is continuing to mirror prior releases, so we are really pleased with how the tail is performing.

On the enterprise side, it will likely be similar to Q2 due to normal Q3 seasonality. And then we would expect another Acrobat increase in the third quarter with the release of A9.

Shantanu Narayen

And Robert, on Air, we continue to be really pleased with what we have seen in terms of the adoption of Air. As we said, we track applications at this point and we are seeing a pretty broad segment of applications from ISVs like business objects, the e-commerce, BMW has done something. There’s a new cricket application for those who like cricket as a sport, as well as enterprise applications from companies are beginning to emerge. And we’ve seen nearly 0.5 million downloads of the tools, which are our tools that are used to create the applications and content that run on Air.

You can also imagine that it’s really impossible to track all of the market activity around Air because these are people who are creating applications but we have seen over 300 applications, so we are quite pleased with both the adoption of the run-time and starting to see good adoption associated with the tools that are required to create these air applications.

Robert Breza - RBC Capital Markets

Great. Thank you very much.

Operator

Mr. Gene Munster with Piper Jaffray.

Gene Munster - Piper Jaffray

Good afternoon. Shantanu, if you could talk a little bit about the point upgrade with CS3, does that impact the timing of CS4?

Shantanu Narayen

No, Gene. The upgrade to CS3 is primarily focused on making sure that our customers get the most current versions of the products that are shipping and in this particular case, as you know, it’s with Acrobat 9.

Gene Munster - Piper Jaffray

Okay. And then just quickly on the backlog side, you guys in the past have disclosed backlog as a percentage of revenue. What was it this quarter?

Mark Garrett

Backlog was a healthy 4% this quarter. That’s from 5% last quarter and again, backlog is not indicative of future performance and it is factored into our guidance, but we were pleased with the 4%.

Gene Munster - Piper Jaffray

Okay, and one last question -- you talked about tiered price in the past. The details on that my guess probably won’t come out until you actually announce CS4. Is that safe to say?

Shantanu Narayen

That is safe to say, Gene -- when we announce the next version of the Creative Suite.

Gene Munster - Piper Jaffray

Okay. Thank you.

Operator

We’ll go next to Adam Holt with Morgan Stanley.

Adam Holt - Morgan Stanley

Good afternoon. A couple of questions about Acrobat 9; with 8, you started to see a little bit of a shift towards the pro SKUs. I was wondering what you expect to see with mix with Acrobat 9 -- how meaningful do you think the pro extended version can actually be and how should we be thinking about the opportunity for average selling prices there?

Shantanu Narayen

Adam, I think it’s a little early to talk about what the adoption of pro extended might be. The reason for pro extended frankly was that we have actually put in features that we think will appeal to our wider audience beyond just the design manufacturers, so some of the new things that we put in pro extended, like the GIS geospatial mapping, the video conversion capabilities, you know, the ability for rich media presentations, we think makes it a better targeted product for a more horizontal set of customers.

But frankly we’ve seen with pro that that was really driving a lot of the revenue in the ASP. It’s still a little early for us to really give guidance around how we expect the mix between standard, pro, and pro extended.

Adam Holt - Morgan Stanley

Okay. If I could just ask a quick follow-up on the platform business, obviously it continues to be quite strong. Are you starting to see a little pull-through from Air or was there something else that’s driving that business?

Shantanu Narayen

Well, Flex Builder did well, Adam, and I think Flex Builder is certainly one of the key applications that we have that is used to create these air applications. But we continue to believe that as you see the next generation rich Internet applications, that that will drive demand for our creative and for our developer tools.

Adam Holt - Morgan Stanley

Terrific. Thank you.

Operator

We’ll go next to Steve Ashley with Robert W. Baird.

Steven Ashley - Robert W. Baird

I would just like to ask a couple of questions on the Creative Solutions business. With the U.S., I think Mark, you said maybe a tick below plan. Was there any segment of that business -- maybe you could comment on the traditional print and publishing segment within that business.

Mark Garrett

No, you know, there’s really nothing I can point to in the U.S. by business that was any different. It was pretty much consistent across the board.

Steven Ashley - Robert W. Baird

And in terms of the underlying kind of desktop platform, we’ve seen strong Mac demand. Have you seen any change in the mix of your Creative Solutions versions, Mac versus PC?

Shantanu Narayen

Both the Mac and Windows continue to be strong drivers of performance in our creative business, Steve.

Steven Ashley - Robert W. Baird

Okay, great. Thank you.

Operator

We’ll go next to Sasa Zorovic with Goldman Sachs.

Sasa Zorovic - Goldman Sachs

Thank you. So my first question would be regarding have you noticed any changes in terms of the demand for the products as the quarter progressed, starting in March and how it ended and maybe even how it extended into June?

Mark Garrett

No, we were very consistent across the quarter in terms of demand.

Sasa Zorovic - Goldman Sachs

Okay. And then my second question would be how are we to think about if we look sort of the overall macro picture and the overall advertising environment and you know, granted you are a lot more sort of tied to the employment advertising, the advertising budgets per se but there are several cross currents there. On one hand, the web going fairly well, not so well on the publishing side and so forth. So how are you sort of specifically seeing that and project that for the growth of CS-next and CS3.3 at this point?

Shantanu Narayen

Sasa, I think the fundamental trends towards the need to create more digital content, I think that remains unabated and so I think at the highest level, we are pleased with the trends associated with more digital content, as well as video. If you look at the amount of video that’s being created, and I think that’s independent of the trends you were alluding to.

So I think when you look at it as it relates to mobile content that’s being created, web content that’s being created, video and increasingly rich Internet applications, that plays to the sweet spot of our particular business.

Mike Saviage

Next question.

Operator

We’ll go next to Ross MacMillan with Jeffries.

Ross MacMillan - Jeffries & Company

Thanks. Just a quick one on Acrobat 9. I noticed that your -- at least some of the foreign language versions were shipping about eight days after English. Can you just remind us -- is that typical with an Acrobat release that we see major foreign language versions ship pretty quickly after the English version? And then just to follow-up was on the Apple iPhone 3G -- any update on Flash support within that device? Thanks.

Shantanu Narayen

So on the first question, we don’t typically give date by date of when we are shipping different language versions of our products. Clearly depending on when in the quarter we ship English, you might see some of the major foreign languages also ship in the quarter. And as I said earlier in my remarks, we do expect to see English, French, German, and Japanese for Acrobat ship in this quarter. And that depends more on quarter boundaries than anything else.

With respect to the iPhone, we are working on it. We have a version that’s working on the emulation. This is still on the computer and you know, we have to continue to move it from a test environment onto the device and continue to make it work. So we are pleased with the internal progress that we’ve made to date.

Ross MacMillan - Jeffries & Company

Great. Thank you.

Operator

We’ll go next to Walter Pritchard with Cowen and Company.

Walter Pritchard - Cowen and Company

Just one question, most of mine have been answered, but Shantanu, you mentioned accelerated growth in fiscal ’09. I know you are not providing fiscal ’09 guidance but should we take those comments literally to mean that you expect fiscal ’09 revenue growth to be above what fiscal ’08 revenue growth is?

Shantanu Narayen

Yes, Walter.

Walter Pritchard - Cowen and Company

Okay. Thank you very much.

Mike Saviage

Operator, we’ll take one more question.

Operator

Our last question will be from Andy Miedler with Edward Jones.

Andy Miedler - Edward Jones

Thank you. I have two quick questions, one relating to if there’s any change in the dollar going forward that’s a detriment to you guys, how can you prepare your business to compensate for that so it doesn’t directly impact the bottom line as much? And second, I assume it’s implicit, given your strong quarter, but can you just give us an update on what you are thinking for the full year ’08?

Mark Garrett

I’ll take the second one first. In terms of all of ’08, we’re not updating our guidance right now because we don’t typically want to give two quarters worth of guidance at once and obviously by default, giving you ’08 guidance would give you Q3 and Q4.

In terms of -- but obviously we are tracking, like I said, exactly on the path that we laid out all the way back to December of last year, so we are really pleased about that.

In terms of the dollar, we do hedge our anticipated cash flow, usually as much as 90% of our net cash flow revenue minus expenses going into a quarter, so we are somewhat protected on the downside should the dollar strengthen dramatically.

Shantanu Narayen

So thank you for joining us, given that was the last question. I am really pleased with the strong Q2 that we had, which exceeded the financial targets we provided in March and we continue to believe that we have a strong market tail wind and that the content for digital content -- the demand for digital content continues to explode. It’s also clear that we are well-positioned, both from a product mix perspective as well as a geographic diversity, and clearly very excited about the upcoming product launches, which should accelerate our growth into 2009. So thank you.

Operator

Ladies and gentlemen, this concludes today’s teleconference. We appreciate your participation. You may disconnect at this time.

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Source: Adobe F2Q08 (Qtr End 5/30/08) Earnings Call Transcript
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