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 2012 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 News Room 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 19th, 2012, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings.
During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in today’s earnings release and on our investor relations website in the Investor data sheet.
Call participants are advised that the audio of this conference call is being broadcast live over the Internet in Adobe Connect, and is also being recorded for playback purposes. An archive of the call will be made available on Adobe’s Investor Relations web site 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.
SHANTANU NARAYEN
Thanks Mike and good afternoon.
Q1 revenue was within our targeted range for the quarter. We also achieved solid Q1 non-GAAP earnings per share, as well as strong cash flow and growth in deferred revenue.
At the outset of this year, we outlined our strategy to double-down in two fast-growing markets: Digital Media and Digital Marketing.
In our Digital Media business, our strategy is to help customers create, publish and monetize their content on any device. Demand is building for our upcoming Creative Suite and Creative Cloud launches, and as a result, Creative Suite revenue was lower than expected in Q1.
In our Digital Marketing business, our strategy is to help marketers measure, manage and optimize their marketing investments for maximum return. Momentum continued with our Digital Marketing Suite during Q1, with year-over-year revenue growth exceeding 30%.
In our Digital Media business, recent research shows our customers are excited about our upcoming launch of Creative Suite and the Creative Cloud. Among creative professional customers and students, we found that over 40% of those surveyed are waiting for the new release to upgrade.
Our upcoming Creative Suite release will include major updates to all of the core CS products, including Photoshop, Premiere Pro, After Effects, InDesign, Illustrator and Dreamweaver. We have created
significant anticipation for the release through a series of “sneak peeks” of great new features. One sneak featured a breakthrough Photoshop innovation called Content-aware Move, which has driven more than a million online views on the YouTube Photoshop Channel.
The upcoming CS release will also advance our HTML5 and mobile content creation and app
development offerings, where we see strong interest to help our customers deal with the complexity they face. All of this is on track for delivery late in Q2.
We continue to extend the creative process to tablets. We recently announced availability of Adobe Photoshop Touch for the iPad. Photoshop Touch, which is also available on Android tablets, offers core Photoshop features as well as new capabilities for creating and sharing images in an app custom-built for tablets. Photoshop Touch is a central component of the Adobe Touch Apps, joining other popular iOS apps such as Adobe Revel and Adobe Ideas. New and updated versions of our six Touch apps will be coming throughout this year.
In conjunction with our upcoming Creative Suite release, we will launch Adobe Creative Cloud which will transform the creative process. Creative Cloud includes all of our key CS desktop products, web services – such as online storage, Typekit for online fonts, Business Catalyst for website hosting and ecommerce, connectivity with our new Touch apps, and powerful collaboration and social community features. With a subscription model, Creative Cloud users will also get frequent product updates and access to new innovative solutions such as Edge and Muse for HTML5 content creation.
We believe Creative Cloud will transform our business model and drive higher revenue growth over time. This will happen through an expansion of our customer base by acquiring new users through a lower cost of entry, as well as keeping existing customers current on our latest release. Success with this model will drive our revenue to be more recurring and predictable. We will continue to offer the
perpetual licensing model as we transition our customers to this new subscription model. Our Digital Publishing solution continued its strong momentum. As of Q1, approximately 600 publishers have now delivered more than 1500 applications for devices like the iPad, generating 16 million downloads of their apps. Using our analytics capabilities that help publishers understand the use of their apps, we recently announced that time spent by users of these digital publications has increased 70 percent over the last six months. We attribute this growth to the more sophisticated and engaging content publishers are delivering, as well as the continued adoption of tablets. We expect this growth to continue – particularly with the inclusion of the Single Edition of Digital Publishing in our Creative Cloud offering later this year, and the upcoming release of InDesign with its innovative Liquid Layout capabilities.
In February we announced the industry’s first fully integrated digital video solution to power TV-like experiences for ad-driven videos via the Web. Code-named Project Primetime, this new solution delivers premium video and ad content consistently across all major platforms, including Apple iOS, Google Android, desktop operating systems and connected TVs.
Primetime is an end-to-end workflow that interconnects Adobe streaming technologies, content
protection, analytics and optimization with our recently acquired Auditude video advertising platform. For Adobe, it places us in the center of helping move premium video content and ad dollars online, and represents a large opportunity across many of our business areas.
Earlier this month we introduced Lightroom 4, a major release of our digital photography workflow solution helping amateur and professional photographers quickly import, manage, enhance and
showcase their images. We lowered the price to broaden the potential user base for this market leading product, and feedback in reviews and social commentary for the new release has been outstanding. On Adobe Labs, we recently introduced Adobe Shadow for Web designers and developers working on mobile projects. This new product enables easy pairing, synchronous browsing and efficient multi-device preview during mobile content creation and mobile app development. Adobe Shadow demonstrates our ongoing HTML5 innovation effort and leadership in the web community, and addresses a critical need of designers and developers dealing with the complexity of digital media on multiscreens.
In Digital Marketing, we closed the acquisition of Efficient Frontier in January. This is a significant milestone as we continue to build out the value we are providing to digital marketers. Efficient Frontier predictively optimizes how to spend marketing dollars across search, display and social media
platforms. It provides an ad buying capability for Facebook, offers real-time bidding for display advertising, and expands our Digital Marketing Suite with a social marketing engagement platform to help customers manage their brand presence across the social web.
In Q1, customer acquisition momentum continued with our Digital Marketing Suite. Key customer wins included Fox, J. Crew, Electronic Arts, Samsung, British Petroleum, Citibank and Kohl's.
This week, we are hosting our annual Digital Marketing Summit in Salt Lake City. To an audience of approximately 4000 – nearly double the attendance last year – we will present our strategy and announce new solutions to lead in the fast-growing categories of social marketing, multi-channel campaign
execution, analytics and personalized experiences.
Later I will have some closing comments. Now, I’ll turn it over to Mark for a more detailed discussion of our Q1 results. Mark.
MARK GARRETT
Thanks Shantanu.
In the first quarter of fiscal 2012, Adobe achieved revenue of 1 billion 45 million dollars. This compares to $1 billion 28 million reported in Q1 fiscal 2011; and $1 billion 152 million reported last quarter. In mid-January, we closed the acquisition of Efficient Frontier and our Q1 results include $9.6 million in Efficient Frontier revenue.
Q1 GAAP operating expenses were $648 million, compared to $617.7 million reported in Q1 fiscal 2011; and $789.7 million last quarter. Non-GAAP operating expenses in Q1 were $571.3 million, compared to $539.5 million reported for Q1 fiscal 2011; and $611.9 million last quarter.
In Q1, Adobe’s effective tax rate was 31.5% on a GAAP basis, and 22.5% on a non-GAAP basis. The GAAP tax rate was higher than our targeted rate primarily due to a one-time charge related to our acquisition of Efficient Frontier. Offsetting this charge were tax benefits related to an extension of a favorable state tax ruling and the resolution of some audits in our favor in Q1. The non-GAAP tax rate was lower than targeted due to the state ruling.
GAAP diluted earnings per share for Q1 fiscal 2012 were 37 cents. This compares with GAAP diluted earnings per share of 46 cents reported in Q1 fiscal 2011, and GAAP diluted earnings per share of 35 cents reported last quarter.
Non-GAAP diluted earnings per share for Q1 fiscal 2012 were 57 cents. This compares with non-GAAP diluted earnings per share of 58 cents in Q1 fiscal 2011, and 67 cents reported last quarter. The mid-quarter addition of Efficient Frontier revenue and costs did not have a material impact on Q1 non-GAAP earnings per share results.
I will now discuss Adobe's results in Q1 by business segment. As a reminder, we adjusted our business segments effective with the beginning of our 2012 fiscal year. Our FY2011 10-K and the updated investor data sheet we provided in January reflect the segment changes.
Digital Media segment revenue in Q1 was $730.3 million, compared to $761.1 million in Q1 fiscal 2011, and $827.3 million last quarter. Creative Suite revenue was lower than expected in Q1 with demand building for our Q2 launch of Creative Suite and Creative Cloud.
Within the Digital Media segment, Document Services revenue was $183.3 million, compared to $184.6 million in Q1 fiscal 2011, and $203.7 million last quarter. Acrobat was in line with our expectations.
Digital Marketing segment revenue in Q1 revenue was $259.9 million, compared to $212.9 million in Q1 fiscal 2011, and $269.8 million last quarter.
Within the Digital Marketing segment, Digital Marketing Suite revenue grew 33% year-over-year, helped by the mid-quarter addition of Efficient Frontier which contributed $9.6 million of revenue in Q1. Excluding EF, Digital Marketing Suite revenue grew 26% year-over-year. LiveCycle and Connect performed better than expected, contributing $85.6 million to Q1 revenue.
Finally, Print and Publishing segment revenue was $55 million, compared to $53.7 million in Q1 fiscal 2011, and $55.1 million last quarter.
Turning to our geographic segments in Q1, results on a percent of revenue basis were as follows: The Americas 48%
Europe 32% Asia 20%
The demand environment remained stable in all of our major geographies.
From a year-over-year currency perspective, FX increased revenue by $7.7 million. We had $10.3 million in hedge gains in Q1 FY12, versus no hedge gains in Q1 FY11; thus the net year-over-year currency increase to revenue considering hedging gains was $18 million.
From a quarter-over-quarter perspective, FX decreased revenue by $5.2 million. We had $10.3 million in hedge gains in Q1 FY12, versus a $3.6 million hedge gain in Q4 FY11; thus the net sequential currency increase to revenue considering hedging gains was $ 1.5 million.
Employees at the end of Q1 totaled 9,963, versus 9,925 at the end of the last quarter.
Our trade DSO was 45 days, which compares to 47 days in the year-ago quarter, and 50 days last quarter.
During the quarter, cash flow from operations was $314.4 million. Our ending cash and short-term investment position was $2.8 billion, compared to $2.9 billion at the end of Q4. The decline was
primarily due to our acquisition of Efficient Frontier. Our ending deferred revenue balance increased by $17 million to $549 million.
In Q1, we repurchased approximately 1.8 million shares at a total cost of $53 million. Entering Q2, $225 million of stock repurchase authority remains against the $1.6 billion stock repurchase
authorization announced in July of 2010.
This concludes my discussion of our results. I would now like to discuss our financial targets.
In Q2, we are targeting a revenue range between 1 billion 90 million and 1 billion 140 million dollars. This factors a full quarter of Efficient Frontier revenue, the revenue tail for CS5.5 in advance of CS6, and delivery of CS6 and Creative Cloud late in Q2.
At the midpoint of the Q2 targeted range, we expect our Digital Media segment to grow sequentially with the launch. In our Digital Marketing segment we expect Digital Marketing Suite revenue to grow sequentially, with Efficient Frontier contributing approximately $15 million in Q2, and legacy enterprise product revenue declining sequentially by approximately $30 million. We expect Print & Publishing to be relatively flat.
We are targeting a Q2 GAAP earnings per share range of 37 cents to 43 cents per share, and a Q2 non-GAAP earnings per share range of 57 cents to 61 cents.
In addition, we are targeting our Q2 share count to be 502 million to 504 million shares. We are targeting operating expense to be between $19 million and $21 million on both a GAAP and non-GAAP basis. We are targeting a Q2 non-GAAP tax rate of 23.5%, and a non-non-GAAP tax rate of 22.5%.
For the full year, we are increasing our annual revenue growth target to a range of six percent to eight percent to reflect the addition of Efficient Frontier, and approximately $60 million to $80 million of revenue.
By quarter, we expect Q3 revenue to increase sequentially from Q2 due to a full quarter benefit from the creative products which ship late in Q2. We would also expect Q4 revenue to increase sequentially from Q3 due to normal Q4 seasonality.
With the acquisition of Efficient Frontier, our full year GAAP diluted earnings per share targeted range moves to $1.63 to $1.73, and our non-GAAP EPS diluted earnings per share targeted range increases to $2.38 to $2.48.
SHANTANU NARAYEN
Thanks Mark.
Our vision at Adobe is to change the world through digital experiences.
In Digital Media, we believe our upcoming CS and Creative Cloud releases will transform the creative process and create a new inflection point for revenue growth for the next several years.
In Digital Marketing, we are building the foundation for a high-growth SaaS business with the most compelling value proposition in the industry. We continue to execute well against our objectives in this space, and the next couple of days at our Digital Marketing Summit in Utah will be another proof point that this business will positively impact our growth.
Adobe is well positioned in these two large markets and we are confident in our ability to execute against that strategy.
MIKE SAVIAGE
Thanks Shantanu.
Before we start Q&A I want to remind everyone about the Adobe Digital Marketing Summit this week. We’re looking forward to seeing all those who signed up to attend our annual conference, the largest of its kind for digital marketers. The first day general session keynote will occur on Wednesday and be webcast on summit.adobe.com for those unable to attend.
In regard to today’s earnings report, we have posted several documents on our Investor Relations web site – including a copy of the script containing our prepared remarks for today’s call. To access these documents and the other investor-related information, go to www.adobe.com/ADBE.
For those who wish to listen to a playback of today’s conference call, a Web-based Adobe 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 #6660442. Again, the number is 888-203-1112 with ID #6660442. International callers should dial 719-457-0820. The phone playback service will be available beginning at 4pm Pacific Time today, and ending at 4pm Pacific Time on Thursday March 22nd, 2012.
