Adobe Systems Inc ADBE
Q3 2010 Earnings Call Transcript
Transcript Call Date 09/21/2010

Operator: Good day, everyone, and welcome to the Adobe System's Q3 Fiscal Year 2010 Earnings Conference Call. As a reminder, today's call is being recorded.

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

Mike Saviage - VP, IR: 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 third quarter fiscal year 2010 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 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, September 21, 2010, 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 and Adobe Connect, and is also being recorded for playback purposes. An archive of the call will be made available on Adobe's Investor Relations' website for approximately 45 days, and is the property of Adobe Systems. The audio and archive may not be re-recorded or otherwise reproduced or distributed without prior written permission from Adobe Systems.

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

Shantanu Narayen - President and CEO: Thanks Mike, and good afternoon. In Q3, we achieved record revenue of $990.3 million with non-GAAP earnings per share of $0.54. We had strong results across all our major business lines and the increase in revenue resulted in strong profit margins and earnings, which exceeded our target ranges.

I'll spend a few minutes discussing Q3 business highlights then Mark will provide additional details about the quarter and our financial targets. Following that I'll provide some closing comments and we'll take your questions.

In our Creative Solutions business, we're enabling publishers, creative agencies and a broad spectrum of designers and developers to bring their content to the exploding number of screens. Customer feedback for CS5 continues to be overwhelmingly positive. Momentum continued in Q3, which helped to maintain the 15% growth cycle to-date performance versus CS4. Our strategy to drive more Suites adoption continues to succeed, 71% of the CS5 product family revenue we achieved in Q3 was Suites-based.

As we move from the early adopters into large enterprise sales, we are seeing the expected increase in CS5 volume licensing and larger transaction sizes. Customers such as Omnicom and Target entered into multiyear licensing agreements for CS5 during Q3. In addition, we achieved record revenue with Master Collection.

Other creative highlights include record revenue for Adobe Lightroom, the launch of a new Flash Media Server and momentum with our new CS5 video editing tools. Lightroom Version 3 significantly enhances its capabilities for digital photographers with improved performance and workflow features.

We introduced Flash Media Server 4 at the IBC conference earlier this month to meet the needs of content owners who want to deliver high quality, network efficient media experiences to reach the broadest possible audience across screens. Premiere Pro maintained its position as the market leader for professional video editing, including adoption of 2,000 seats at the BBC during the quarter.

In our Omniture business, we continue to broaden our value proposition to marketers, advertisers and publishers through the Online Marketing Suite and its visitor acquisition and conversion capabilities. Omniture bookings continue to be strong, with solid enterprise retention rates. Customer wins in the quarter included Dell, Guess, and Home Depot.

In our Acrobat business, we continue to focus on enabling knowledge workers and enterprises to collaborate across critical document workflows. Enterprise licensing was strong in Q3, demonstrating that Acrobat and PDF continue to be a mission-critical desktop standard for large enterprises and governments. We are on track to deliver a new version of Acrobat late this quarter.

In our Enterprise segment, our value proposition for customer experience management is gaining traction. Through our LiveCycle solutions, enterprises are able to drive adoption of self-service across every screen in the customer's life, and provide customer-facing employees the tools and insight they need to deliver better service.

Enterprise revenue, which includes Connect and LiveCycle, had a record quarter with significant wins in the government and financial services markets, including the Pennsylvania Department of Public Welfare, Credit Agricole, and Daiwa.

In July, we announced our intent to acquire Day Software, a leading provider of Web content management solutions. The addition of Day adds a key piece to our vision of providing comprehensive solutions to create, manage, deliver and optimize content and represents a large growth opportunity. We are on track to close the acquisition late this quarter.

In our Platform business, we achieved significant milestones in the quarter resulting in great adoption and momentum for Flash Player 10.1. Many smartphones, tablets and TVs are supporting the new Flash Player in the marketplace, including models from Google, Motorola, HTC and Samsung.

In addition, we are working with strategic partners such as RIM, HP/Palm and Nokia to enable Flash on their platforms. Devices from Dell and LG and many other OSP partners will also soon be supporting Flash Player 10.1. This broad adoption is enabling Flash designers and developers to author their content and applications using our CS5 tools.

Now, I'll turn the call over to Mark for more commentary on our financial results.

Mark Garrett - EVP and CFO: Thanks, Shantanu. For the third quarter of fiscal 2010, Adobe achieved record revenue of $990.3 million. This compares to $697.5 million reported in Q3 fiscal 2009 and $943 million reported last quarter.

Our Q3 revenue includes $91 million in Omniture revenue, but excludes $5.2 million in deferred Omniture revenue in accordance with business combination accounting guidelines. We entered the third quarter with approximately 7% of reported Q2 revenue and shippable backlog and we exited the third quarter with minimal shippable backlog.

Q3 GAAP operating expenses were $589.2 million compared to $464.9 million reported in Q3 fiscal 2009 and $607.9 million last quarter. Non-GAAP operating expenses in Q3 were $524.7 million compared to $409.9 million reported for Q3 fiscal 2009 and $520.2 million last quarter.

GAAP operating income in Q3 fiscal 2010 was $302 million or 30.5% of revenue. This compares to GAAP operating income of $167.6 million or 24% of revenue in Q3 fiscal 2009 and $227.3 million or 24.1% of revenue last quarter.

Non-GAAP operating income in Q3 fiscal 2010 was $384.9 million or 38.9% of revenue. This compares to non-GAAP operating income of $237.1 million or 34% of revenue in Q3 fiscal 2009 and $334.5 million or 35.5% of revenue last quarter.

A combination of strong revenue less variable marketing expense than Q2 and a continued focus on cost control allowed us to deliver significant margin upside in the quarter.

Adobe's effective GAAP tax rate in Q3 was 22.5% and the non-GAAP tax rate was 24.5%. Q3 GAAP net income was $230.1 million compared to $136 million reported in Q3 fiscal 2009 and $148.6 million last quarter. Non-GAAP net income in Q3 was $284 million compared to $186.1 million reported in Q3 fiscal 2009 and $234.2 million last quarter.

GAAP diluted earnings per share for Q3 fiscal 2010 were $0.44 based on 523.2 million weighted average shares. This compares with GAAP diluted earnings per share of $0.26 reported in Q3 fiscal 2009 based on 531.8 million weighted average shares and GAAP diluted earnings per share of $0.28 reported last quarter based on 533.3 million weighted average shares.

Non-GAAP diluted earnings per share for Q3 fiscal 2010 were $0.54. This compares with non-GAAP diluted earnings per share of $0.35 in Q3 fiscal 2009 and $0.44 reported last quarter. Both GAAP and non-GAAP EPS include approximately a $0.01 benefit from a mark-to-market foreign currency hedge in connection with the Day Software transaction.

I'll now discuss Adobe's results in Q3 by business segment. Creative Solutions segment revenue was $549.7 million compared to $400.4 million in Q3 fiscal 2009 and $532.7 million last quarter. Comparing similar periods of availability, CS5 revenue continues to exceed what we achieved with CS4 by approximately 15% and is only slightly behind what we achieved with CS3.

The suite rank order by revenue was consistent with prior periods. Design Premium, Design Standard and Master Collection remain the best selling suites. CS5 products containing Flash authoring and output as a product component continue to perform well with revenue growth of 20% version-over-version to-date.

Although our overall creative business was strong in Q3, our education business in the U.S. was below expectations, as was our overall creative business in Japan.

Digital Enterprise Solutions Q3 revenue was $256.8 million compared to $210 million in Q3 fiscal 2009 and $232.7 million last quarter. Within Digital Enterprise Solutions, Knowledge Worker revenue was $162.6 million, compared to $138.1 million in Q3 fiscal 2009, and $156 million last quarter.

Although it's been approximately two years since Acrobat 9 shipped, we achieved year-over-year revenue growth of 18% in Q3. Enterprise adoption and weekly run-rates of Acrobat licensing and shrinkwrap revenue remained solid during the quarter despite normal Q3 seasonal weakness.

Enterprise revenue was $94.2 million, compared to $71.9 million in Q3 fiscal 2009, and $76.7 million last quarter. This represents strong year-over year growth of 31% for LiveCycle and Connect, and demonstrates the Enterprise segment is becoming a more material part of our financial performance.

In our Omniture segment, we achieved $91 million in reported revenue, compared to $83.5 million reported last quarter. Omniture transactions were steady at 1.26 trillion in Q3, consistent with transactions in Q2 and up 10% on a year-over-year basis for the equivalent period of time last year. Omniture revenue diversification continued, with optimization products contributing 44% of Omniture revenue, demonstrating the value proposition of the entire Online Marketing Suite is resonating with customers.

Platform revenue in Q3 was $40.7 million, compared to $44.9 million in Q3 fiscal 2009, and $45.4 million last quarter. The decline was primarily due to lower toolbar distribution revenue.

Finally, Print and Publishing segment revenue was $52.1 million, compared to $42.2 million in Q3 fiscal 2009, and $48.7 million last quarter.

Turning to our geographic segments, results on a percent of revenue basis were as follows.

The Americas 51%; Europe 29%; Asia 20%. With the exception of some weakness in Japan in Q3, we experienced stability in our business across all the other major geographies during the quarter.

From a currency perspective, we had a hedging gain of $13.2 million in Q3 versus a de minimis gain in Q3 last year. Year-over-year, FX reduced revenue by $13 million, so there was no net year-over-year currency impact to Q3 revenue.

Quarter-over-quarter, FX reduced revenue by $4.9 million, but we also had hedging gains of $6.2 million in Q2, so the net sequential currency increase to revenue factoring the net hedging gain was $2.1 million.

Employees at the end of Q3 totaled 8,715, versus 8,541 at the end of the last quarter. The increase in headcount was primarily in R&D in lower cost geographies, as well as in sales.

Our trade DSO was 45 days, which compares to 37 days in the year-ago quarter, and 42 days last quarter.

Our global channel inventory position at the end of the quarter was within company policy.

During the quarter, cash flow from operations was $291 million. Our ending cash and short-term investment position was $2.6 billion, compared to $2.6 billion at the end of Q2.

Deferred revenue in the quarter increased by $16.6 million in the quarter to a total of $420.9 million. The increase in deferred revenue came from growth in enterprise maintenance and support, as well as Omniture hosted services, and more than offset the typical reduction to deferred revenue following the CS5 launch in Q2.

In Q3, we repurchased approximately 14.9 million shares at a total cost of $432.4 million. Entering Q4, $132.9 million remains outstanding on the $400 million stock repurchase prepayment we made in July.

This concludes my discussion of our financial results. I would now like to comment on our financial targets for the fourth quarter of fiscal 2010.

We are targeting a Q4 revenue range of $950 million to $1 billion dollars, with our Q4 revenue expectations by business segment as follows; we believe Creative revenue in Q4 will be flat to slightly down from revenue achieved in Q3. We expect our Enterprise and Omniture segments to grow sequentially in Q4. We expect Knowledge Worker and Platform to be flat sequentially; and we expect Print & Publishing to decline slightly.

Our expectation for our Creative segment in Q4 factors in weaker-than-expected Q3 results in our Creative business in Japan and in the U.S. education market. For margins, we are targeting a Q4 GAAP operating margin range of 27% to 30%, and a non-GAAP operating margin range of 37% to 38%.

We are targeting our Q4 share count to be 516 million to 520 million shares. We are targeting non-operating expense to be between $14 million and $19 million on both a GAAP and non-GAAP basis. For our Q4 GAAP and non-GAAP effective tax rates, we are targeting approximately 24.5%. These targets lead to a GAAP earnings per share range of $0.35 to $0.41 per share, and a non-GAAP earnings per share range of $0.48 to $0.54.

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

Shantanu Narayen - President and CEO: Thanks, Mark. With another solid quarter in Q3, we're on track to deliver record revenue in fiscal year 2010. More importantly, our success this year is being driven by strong execution across all of the key growth areas of our business, including Creative, Omniture and Enterprise.

Adobe is at the center of the digital content revolution. Using our solutions, customers can create, deliver, optimize and monetize their content and applications across platforms, OSs and devices. No company is better positioned to address the complexity of delivering and monetizing content in a multiscreen world than Adobe, and we remain committed to our goal of achieving $5 billion in revenue by 2012. At our Analyst Meeting next month, we look forward to laying out our strategy and plans to drive our growth in the coming years.

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

Mike Saviage - VP, IR: Thanks, Shantanu. Before we begin Q&A, I'd like to cover a few housekeeping items. Adobe MAX in Los Angeles is coming soon. Bringing together thousands of Adobe users, developers and partners, MAX will occur during the week of October 25. As part of MAX, we are hosting our Financial Analyst Meeting on Wednesday, October 27. Invitations have gone out and we encourage you to attend MAX on Monday and Tuesday in addition to coming to the Analyst Meeting on Wednesday.

The Analyst Meeting will consist of a half day of presentations starting in the morning, and ending with a lunch that will include Adobe management. The MAX agenda on Monday and Tuesday includes keynote presentations each morning, educational sessions during the day, special events at night, and access to partner exhibits and technology demonstration pavilions. You can learn more about MAX at

As we mentioned last quarter, we now make available several RSS feeds that you can subscribe to on the Investor Relations page of Use your RSS reader to receive notice of the latest Adobe press releases and corporate blogs, and be advised when new documents are posted to the IR website. Adobe utilizes these Web delivery capabilities as a means to communicate material information to the financial community. For reference, we've posted these URLs in the Connect archive of today's call. These RSS feeds replace the email press release service that we plan to phase out in the coming weeks.

In regard to today's earnings report, we have posted several documents on our Investor Relations Web page today, 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

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 later today. Alternatively, you can listen to a phone replay by calling 888-203-1112. Use conference ID number 8637849. Again, the phone number is 888-203-1112 with ID number 8637849.

International callers should dial 719-457-0820. The phone playback service will be available beginning at 4 PM Pacific Time today and ending at 4 PM Pacific Time on Friday, September 24, 2010.

We'd now be happy to take your questions. In addition to questions that come in from those participating on the live phone calls, we've also enabled a question pod in the Connect session. So those on the Connect session feel free to send in your questions and we'll try to take a few.

Operator, we'll take the first question from the phones.

Transcript Call Date 09/21/2010

Operator: Brent Thill, UBS.

Brent Thill - UBS: You are entering only the second full quarter of CS5, why guide down flat to down, and I guess if you could cover what happened in the quarter. You mentioned the U.S. education and Japan business was weak. What were the issues? Are those short-term issues or is there something deeper going on?

Shantanu Narayen - President and CEO: Overall, when we look at CS5, we continue to think it performs well and there really is opportunity to drive customer adoption, greater penetration, as well as up selling to the higher value suites. As you know, the CS5 business, the creative products, it really is sold to a large and diverse customer base. When I look at the business results for Q3, suites continued to do well. We were driving higher value suites with 71% and adoption of Master Collection was also good. In fact, we drove revenue there. When we see individual customers, these are freelancers who are using the product. We've driven actually record revenue again for that segment through, so clearly individuals are adopting the product. The Licensing business, which is an increasingly important part of the business, also continued to perform well. That's helping us drive better margins as well as getting commitment from our customers to stay current. In the large deals that we drive for the CS business that also continued to do well for us. It was a good source of revenue. We were driving multiple deals in the millions of dollars. In fact, the largest deal in the quarter was over $20 million, but we certainly recognize that over multiple years. In terms of the areas of concern, when we look at the business, as you know Japan is our second largest market and we did experience some weakness in that. We factored that into our guidance for Q4. We're not sure frankly whether it'll come back and Q4 or we might see the traditional strength that we see at the end of the Japanese fiscal year, which is more like February or March of next year. So that's what happened in Japan. With respect to education, education is our largest vertical in terms of the CS business. Q3 and early Q4 is really the back-to-school season in the U.S. Revenue in Q3 grew, but it was a little bit lower than our expectations, which is why we're factoring that also into our guidance for Q4. We're taking a cautious approach to the guidance. So net, net, I would say, we continue to be bullish about CS5, customer reception has been good. We have to drive revenue by marketing the new features, focusing on the licensing customers, but we did see some weakness in Japan and education.

Operator: Steve Ashley, Robert W. Baird.

Steven Ashley - Robert W. Baird: I'd just like to follow-up on Brent's question. I'm wondering if you could quantify in dollars and maybe not exact dollars, but how much was the variance in the education business in Japan in the third quarter versus what you'd expected?

Shantanu Narayen - President and CEO: Steve, the education business is the largest vertical, as I said earlier. It's a material part of our business. In terms of the exact dollars amount, we are not going to share that with you, but that was the area that was clearly below our expectations in addition to the Japanese business in Creative Suite, and that's why we factored the performance in Q3 and our expectations of Q4 revenue in the Creative Suite into the targets that we issued for Q4.

Steven Ashley - Robert W. Baird: If we took education in Japan off the table, would the business for Creative Solutions be up sequentially in the fourth quarter?

Shantanu Narayen - President and CEO: As we look at the revenue for Q4, yes, we continue to believe that – I mean I'll put it another way, if the question is where does CS5 revenue go? We think it's still early in the cycle, we don't think the business has seen the revenue potential that it can and so we are going to continue to drive the revenue.

Operator: Philip Rueppel, Wells Fargo Securities.

Philip Rueppel - Wells Fargo Securities: Yes. A couple of questions. First of all, just a final follow-up on the education and Japanese segment. Do you sense that you are losing share or has the competitive environment changed at all or is this really just an economic and/or creative professional issue? Second of all, as we move into the Acrobat cycle, is there any reason that Acrobat 10 cycle would be any different than Acrobat 9 or earlier and do you expect to see some strength there early on in its product cycle?

Shantanu Narayen - President and CEO: So two questions, there. The first one, let me talk about the CS business in each of the two segments. No, we don't think we're losing market share in either one of those segments to competitors and so specifically, I think as it relates to the Japanese market, as we all know, the economy there has continued to be uncertain in the Japanese market. With education, the business is actually growing. We think that the U.S. back to school environment this time was a little bit weaker, overall. I think others have also expressed that and so we factored that into our targets, but the overall Adobe business in education continues to be a significant growth opportunity for the Company With respect to the Acrobat question, first, Acrobat is going to be there late in Q4. As you know, we've seen nice growth for Acrobat, multiple years after the product's been released. It does not have the traditional pop, so to speak, in revenue like we see in the Creative business. So we continued to expect to see that. We would see some customers upgrade, but that tends to happen over successive quarters rather than right upfront.

Operator: Phil Winslow, Credit Suisse.

Philip Winslow - Credit Suisse: Just a couple of quick questions. First is a housekeeping item. G&A, we saw that pop up a bit here quarter-to-quarter. Was there anything just one time in that that we shouldn't expect for Q4. Also, Shantanu, I just wanted to get your perspective on this headcount hiring. Obviously, we saw it up again quarter-over-quarter after your last call. You all mentioned that you are going to be continuing to invest. Anything changed your expectation there and where should these heads be going. Where should we think about the hires going in?

Mark Garrett - EVP and CFO: On the OpEx side, what you saw is an increase in G&A due to our charitable contributions, which we do every year. So, yes, that is approximately $10 million one-time impact in the third quarter.

Shantanu Narayen - President and CEO: With respect to your second quarter on headcount hiring, I think we said in the prepared remarks that it was primarily in R&D as well as in the field organization. One of the things as you continue to look at our business you'll see the success that we've been getting with respect to our Enterprise business. Our Enterprise segment had record revenue. The Omniture business continues do well, and booking, clearly, outpaces even the revenue growth that we are representing to you in the results. So, in the field organization, as we continue to deliver mission critical, you will continue to see us invest because that's what going to drive profitable revenue for us. In R&D, we continue to be prudent about hiring and hiring in the higher priority projects for the Company.

Operator: Michael Olson, Piper Jaffray.

Michael Olson - Piper Jaffray: Just one quick one regarding the Apple stuff allowing apps developed with Adobe tools to be used on their devise. Other than being a good headline that helps dissipate some of the clouds that are on that issue, do you believe it actually changes the demand for Adobe Creative products?

Shantanu Narayen - President and CEO: Mike, what we did see was that the day Apple announced the removal of the licensing restrictions that a number of people who had created products using our tool submitted that to the Apple Store and were approved, I think it just continues to reflect the opportunity which we have with our tools, which is to help designers and developers continue to develop their applications and content in our tool and repurpose it to multiple different output media. In the short run, I would say the impact was muted.

Operator: Adam Holt, Morgan Stanley.

Adam Holt - Morgan Stanley: I have two quick questions. You all have said in the past that there may be reasons to believe that this cycle will be a little bit different than previous cycles, I'm talking about CS5, in that there wasn't the same pent-up demand that we saw for CS3. As you are now a little bit deeper into the cycle, is there reason to believe that we may see a little bit more of a stronger cycle a little bit later in the timeframe than we might have seen with a cycle like CS3?

Shantanu Narayen - President and CEO: Adam, first, I think if you look at the install base that we have right now for our Creative products, that's certainly growing. We want to continue to drive adoption of CS5 into that entire install base. As is customary at this point in the cycle, we see licensing and larger enterprise adoption of CS continue. So we continued to be optimistic about them adopting CS5 as we move along. Also traditionally, as you know, the Acrobat product does have significant value for the Creative custom line. So, when the next version of Acrobat comes out and we update the Creative Suite at some point in the future to include that, we expect to see that that will continue to also have value for our Creative customer. Finally, I think all the additions that we've been adding for multiple screen as well as HTML support, the multiscreen problem is something that every single publisher talks to us about. You've seen a number of different tablet devices emerge. Samsung introduced one, I think, earlier this week with Flash support. Every publisher we talk to wants us to continue to help them author content and repurpose it across multiple devices. So, all of that, and overall, I think the economy continues to be stable apart from the weaknesses that we highlighted, all of which give us confidence for the Creative business moving forward.

Adam Holt - Morgan Stanley: If I could discuss, a quick follow-up for Mark, I guess along that line. I don't want to get ahead of myself, but as we're thinking about seasonality into the first quarter and the second quarter of next year, is there any high-level commentary that you can provide us at this point?

Mark Garrett - EVP and CFO: Not at this point, Adam. Obviously, when we have Analyst Day, we'll give you some more color into that, but I can't do that today.

Operator: Walter Pritchard, Citi.

Walter Pritchard - Citi: Two questions – actually one. Mark, just any commentary on the impact of Day next quarter or in the current quarter? It sounds like closely in the quarter, but just wanted to clarify that. Then, also, it looks like you had a better deferred revenue quarter than you have historically in the August quarter, I'm wondering what the driver was there and if you've seen any conversion of demand come out in enterprise licensing which may flow through there?

Mark Garrett - EVP and CFO: So, depending on when Day closes, like you said, it will be late in the quarter, there will be some minimal impact to revenue and some minimal impact to OpEx, both in terms of their OpEx as well as expenses for the transaction, but it's not significant. In terms of deferred revenue, we were really pleased with deferred revenue up $17 million. It's primarily driven by maintenance support and upgrades in the Enterprise business as well as good performance in Omniture, which drives a lot of deferred revenue for us. Then, those two are partially offset by the fact that the free of charge upgrade that we had from CS4 gets released out of deferred revenue as we ship the product this quarter. So that pulls deferred revenue back down and that's all netted in that $17 million increase.

Walter Pritchard - Citi: That's done now, Mark, the pull down of deferred from the free upgrade?

Mark Garrett - EVP and CFO: Yes, that's right.

Operator: Brad Zelnick, Macquarie.

Brad Zelnick - Macquarie: Mark, aside from the issues that we talked about in Japan and education in the U.S., in terms of macro indicators that you've said you will look to, you will look at unemployment, GDP growth and marketing spend and that along with PC shipments, if you look at your performance of the CS business this quarter, has any of that broken the correlation that you would expect and what are your expectations along these lines in your guidance?

Mark Garrett - EVP and CFO: No, it has broken any of the correlations that we expect. I think some of that, at least in the Japan economy, is giving us some caution and Shantanu talked about that. U.S. and Europe have done well and the rest of Asia has done well, but we still are not feeling like we are out of this recession completely and we're still somewhat cautious about our go-forward revenue in the short term until we see that we're truly out of this.

Brad Zelnick - Macquarie: Can you just remind us, I don't know if I caught the shippable backlog number?

Mark Garrett - EVP and CFO: It's minimal. So, the way you should think about backlog again is, at the start of every quarter, we factor last quarter's ending backlog into the guidance for the next quarter. So the Q3 targets were based on Q2's ending backlog and the Q4 targets are based on the fact that Q3 has minimal backlog when we exited.

Operator: Sarah Friar, Goldman Sachs.

Sarah Friar - Goldman Sachs: Shantanu, on the Enterprise side of the business, on the Business Productivity Solutions area, you have a pretty strong sequential growth rate and then you are guiding for the typical seasonal sequential uptick as well. Other than just the spending environment improving through this year, what are the other changes you are doing from either go-to-market standpoint or product bundling standpoint that can continue to drive an uptick in that Enterprise side of your business?

Shantanu Narayen - President and CEO: So, Sarah, we were very pleased with the business that we saw in the Enterprise segment – across all of our segments actually, the Creative segment, the Omniture segment, as well as in the Enterprise. In the Enterprise, as you know, we've really been focused on helping enterprises and governments automate their business processes, as well as deliver self-service to customers. What we see frankly is it's becoming a fairly well established enterprise category. People call it customer experience management and it's clear that our solutions with LiveCycle are resonating with these customers. We've talked about at previous analyst meetings, customers who are spending multiple million dollars to really completely revamp their customer experience portals. We think Day adds to that, so we are very excited the Day acquisition, both as it relates to the LiveCycle business, as well as with content publishing to the Creative and Omniture business. I would just say that our solution accelerators that we've been delivering, both directly as well as with our partners right now, we have a healthy partner ecosystem of systems integrators, it's starting to have the impact. So, we're very pleased with it and we continue to think that that's a growth opportunity for us. When I think about the Enterprise and specifically the Licensing business in the Enterprise, that's growing at 20% plus and we continue to expect that that will grow for us as a business.

Sarah Friar - Goldman Sachs: Just one housekeeping item. Mark, there is no Day guidance in your guidance right now, correct?

Mark Garrett - EVP and CFO: That's correct, other than the fact that there will be some impact to operating expenses. So, operating expenses next quarter will go up marginally because of Day, but that's it.

Sarah Friar - Goldman Sachs: So, no top line impact though?

Mark Garrett - EVP and CFO: Nothing is included in our guidance, no.

Operator: Heather Bellini, ISI.

Heather Bellini - ISI: Mark, I had a question. This cycle seems to be playing out in a way like CS3, which I believe back in – on the August '07 call, you mentioned the fact that you expected sales for Creative Suite to plateau, looking out from August to November. I guess the things you guys also talked about then was just that you thought that the cycle would have a long tail. I'm wondering if you could give us some corollary to what we're seeing today? The second question would be, on the last quarter call you mentioned, you were hiring in advance of demand, and it seems like at least in Japan and the U.S. educational market, the demand environment might have changed somewhat. So, I'm just wondering if you still have to have the same growth in headcount going forward that you might have factored in?

Mark Garrett - EVP and CFO: Heather, so on the Creative cycle and Shantanu might want to add on, it's very early. Like Shantanu said, we still believe there's a lot of major enterprises that will upgrade as we power through this cycle. We still have the opportunity to do more in Japan, despite the fact that we had a little bit of a tougher quarter this quarter. Education could certainly come back. So we still believe, it's very early and way too soon to call, whether it's going to be different than say CS3 as a cycle. In terms of hiring, yeah, we are still hiring in front of demand. The hiring from a sales perspective is more around the Enterprise and a little less so around the Creative space, so it's a little bit more around the LiveCycle space, the Omniture space, the Connect space, and a little less around the Creative space.

Shantanu Narayen - President and CEO: Heather, maybe a little bit more color then on the CS business itself. We're seeing the same patterns that we saw in previous cycles, which is, now we're seeing primarily full units driving the business. So that's consistent with the upgrade revenue coming in the early quarters and then migrating to the full units driving our revenue. We're also continuing to see that whether you think CS4 or CS3, the cycle continues. It continues to be strong right through the cycle, with CS4 clearly being weaker than CS3 as a result of the economic climate. But nothing in those patterns would seem to suggest that it will be different with CS5, even though, as Mark said, it's early in the cycle.

Operator: Ross MacMillan, Jefferies & Company.

Ross MacMillan - Jefferies & Company: Mark, if I look at the product backlog numbers and I adjust, if you will, the CS revenue numbers using the majority of that change in product backlog, that was a pretty precipitous decline in the August quarter from, if you will, a net new revenue perspective. I've heard you talk about Japan and education, but I was curious, is there anything else going on structurally? I guess what I'm driving at is, traditionally, you have a certain mix of people that pay full price, if you will, as opposed to upgrade price, and I was curious whether in a tougher economic environment you're seeing customers making different decisions and whether there is any change for example in the mix between full price and the lower upgrade price?

Shantanu Narayen - President and CEO: No, Ross, I can take that. With respect to the patterns that we've seen for customer adoption of CS5, there really has been no difference between full and upgrades. As you know, we do have the version pricing now different based upon people who upgrade from CS4 versus the previous versions. I think that's a pattern that you will continue to see us adopt moving forward. But no, it continues to be that people are adopting the product and pricing – or full versus upgrade is not different from previous cycles.

Ross MacMillan - Jefferies & Company: So, really when I look at the number again on CS, it's really just those two elements, Japan and education. Could you size maybe those two elements within the revenue stream? Are they as much as 25% or more?

Mark Garrett - EVP and CFO: We talked about that earlier on the call. We really can't size that for you guys, but those are the only two areas that we saw any particular weakness.

Operator: Dan Cummins, ThinkEquity.

Daniel Cummins - ThinkEquity: I too wanted to ask about your biggest product category and your biggest vertical. It's been our sense that you've gotten a lot of nice growth in recent years in the K-12 market. I'm curious if some of the weakness is particularly there and how much you put to budgeting issues versus potential iPad substitution and planning horizons being on hold?

Shantanu Narayen - President and CEO: No, I think when we look at the education market we do break that up internally between the K-12 market, the university market, as well as, frankly, student and faculty and administration. We think it has much more to do with the spending environment in back-to-school in the U.S. education market than it has to do with any other product adoption at this point. In terms of what's being taught in the curriculum, whether it's Photoshop, Dreamweaver or Flash Professional, they continue to be a core part of the curriculum in most of the schools that we've been associated with.

Operator: Kash Rangan, Merrill Lynch.

Kash Rangan - Merrill Lynch: Shantanu, I look at the high end of the guidance for the upcoming quarter, somewhat flat sequential. I also look at your long-term guidance for fiscal '12, which implies about 13%, 14% revenue growth rate compounded. I'm just curious, how should we think about the drivers of your CAGR over the next couple of years, compound annual growth that is? How much of that is factoring in an improvement in macroeconomic conditions, whatnot, and how much of that is product specific? Maybe if you can give us some color on the different growth sectors for the Creative business and the rest, what's really driving that confidence in your $5 billion revenue target, that will be great?

Shantanu Narayen - President and CEO: Kash, certainly, we will spend a fair amount of time at the Analyst Day as well talking about it, but let me give you some color into that right now which is when we think about the large growth opportunities for us as a Company, we think there are three of them. The first one is continuing to help our content authors. Those who are actually in the business of content, helping them create, optimize, distribute and monetize their digital content. These are designers, developers, digital media professionals and folks in ad agencies, media companies and publishers. The big ask that we are hearing from these customers is in addition to helping them express their creativity, frankly, to help them with the business of publishing. There has been more interest in Adobe Solutions as that business is being transformed with the emergence of new devices and the movement online. So, in addition to our tools being able to deliver services and complete solutions to the creative community, we think is a growth opportunity for the Company. The second one we touched on with respect to the enterprise line of business, especially with front office functions, enabling them to optimize their information-intensive customer-facing processes. It's the area that we call customer experience management. These are selling to business, P&L owners, as well functions such as marketing and customer service. That's the LiveCycle, the Day business, which is reported in our Enterprise segment, as well as Connect. Third, growth opportunity continues to be with online marketers. We're very well positioned. Every business is moving online, and so enabling these businesses to measure and maximize their digital marketing investment continues to be an opportunity, but you'll hear us talk a lot more about that at the analyst meeting, as well as how we expect to go after each of those three opportunities. Clearly, we'll continue to deliver these by leveraging our technology platforms.

Kash Rangan - Merrill Lynch: Shantanu, I don't know if you can comment at all on which of these three initiatives you see as a bigger growth driver? You translate that into the three product categories, which ones do you think are going to grow faster than the other, if you can rank order growth rates for us?

Shantanu Narayen - President and CEO: Well, in terms of the growth rates. Clearly, when you think of the fact that the online marketers in the Enterprise line of business are starting from a smaller base, it's a bigger revenue growth opportunity for us. I talked about the fact that the Enterprise business was growing licensing over 20% and so those two are larger opportunities from a percentage CAGR. On the other hand, the content authoring opportunity still represents a larger opportunity for us overall, given the size and materiality to our business.

Operator: Chad Bartley, Pacific Crest Securities.

Chad Bartley - Pacific Crest Securities: Two questions. First, in terms of Asia revenue falling about 6% sequentially this quarter, what does your guidance assume in Q4? Can you give us any thoughts on similar decline or maybe steeper decline? As you think about longer term operating margins, I think, previously you've talked about roughly 36%, Q3 was higher at 39%, Q4 guidance is higher at 37% to 38%, so should we think about a higher long term operating margin for you?

Mark Garrett - EVP and CFO: So, from a geographic perspective, as you look at Q4, we would expect roughly that North America would grow sequentially Q3 to Q4, we would expect EMEA to be flat to slightly up and then we would expect Asia to be down sequentially, driven primarily by what we are seeing in Japan. From a margin perspective, if I back up, historically, as we've said time and time again, when we overachieve on revenue, we are likely going to deliver upside in margin and in earnings per share and that's exactly what you saw in Q3. Given what we've done in Q3 and given the guidance that we put out there for Q4, margin, if you kind of took the high and low of our range for the fourth quarter, ends up somewhere between 36 and 36.5%. What we had said actually was that margins in 2011 and 2012 would be roughly where they are for 2010, and we still believe that. It is a little higher than when we had started this conversation, but we still believe that that will hold true. So margins, as you look out and model the business out, for now I would use 36% to 36.5%, which is were the guidance will put you.

Operator: Blair Abernethy, Stifel Nicolaus.

Blair Abernethy - Stifel Nicolaus: Just a quick question on Omniture. Mark, I was just wondering, do you have an apples-to-apples revenue growth on the business, Q3 to Q3 last year? I know you didn't own it for the full quarter last year.

Mark Garrett - EVP and CFO: I don't, because their calendar was different, so it gets kind of messy. So I am sorry, but I don't.

Blair Abernethy - Stifel Nicolaus: A couple of maybe insights, Blair, into the business, when we look at the annual contract value, which is the way we look at it internally, we're ahead of our plan that we had set for ourselves at the beginning of the year. Clearly, the brand of Adobe is helping us continue to drive deeper penetration. When we look at the percentage of revenue for SiteCatalyst versus the overall Online Marketing Suite, we're seeing more customers adopt the Online Marketing Suite, which is clearly in line with where we want to take that business. We're also seeing mobile as a percentage of the transactions that are now tracked, continuing to see an increase. Clearly, customers there are talking about having us help not just with the core websites, but also with mobile and video as two different media types. And I think while Mark talked about the number of transactions being relatively flat, its such a large number, I think there was a 4 billion increase in the number of transactions, but when you reported in trillions, it appears like its relatively flat. So, all the internal metrics that we have for the Omniture business are healthy and positive.

Blair Abernethy - Stifel Nicolaus: Just to follow that, in terms of your investment in sales headcount, how is the Omniture investment looking versus the Enterprise side?

Shantanu Narayen - President and CEO: We are investing in both of those businesses. As I said; (ACV) measurement is ahead of plan which is a good sign for us. As you know, you don't see that necessarily in the quarter to-date, because what you see in the quarter is just revenue of folks who are committed, but the bookings is healthy.

Operator: Sasa Zorovic, Janney Montgomery Scott LLC.

Sasa Zorovic - Janney Montgomery Scott LLC: So, my question would be specifically, going back to education in Japan is what can you specifically do about that? So, on the education side, now let's say that the first month of the fourth quarter is behind us, it doesn't mean that the back-to-school is now over, so we will now need to wait for next year for that to catch up. For Japan, for both of these, really, what are some pricing, packaging, type of bundling that you could potentially do in order to revive that and counter this weakness that you are encountering in this vertical and this geographic market? So, what are the specific things that you are undertaking in order to turn the business – those two businesses around?

Shantanu Narayen - President and CEO: So, Sasa, let me give you some insight into both of those business. Certainly, with the education market, we are focused a fair amount on making sure that we continue to drive enterprise-wide license agreements with large institutions. That's something that we've been focused on as a business and we will continue to work with the larger enterprises. Clearly, the funding environment impacts some of that, but it doesn't mean that we change our focus in terms of getting large customers to adopt the entire Creative product. So you will continue to see us focus on that. Student pricing, we have focused a fair amount on student offerings in the education segment to large success. As kids go back to school in the education season, we will continue to focus on that as well. As it relates to the Japanese market, if you go back up previous cycles as well, sometimes where we've seen the real surge in revenue for our products tends to be more aligned with the end of their fiscal year rather than necessarily just the launch quarter in which we introduced our products. So, we will continue to focus even in the Japanese market of working people through the entire cycle from awareness to purchase. So it just means more focus on the sales and marketing efforts in both of those segments to demonstrate the value proposition.

Sasa Zorovic - Janney Montgomery Scott LLC: My quick follow-up would be regarding the linearity. So, when you saw the weakness in Japan, was it that cause of – progressing through the quarter or was there an acceleration or deceleration of it? Similarly on the U.S. and European side of the business, are you then also – has it been linear through each week, 13th of the quarter roughly, or has it been maybe like a pickup now that we've – towards the end of the quarter?

Mark Garrett - EVP and CFO: On both Japan and the rest of the world, it's been pretty consistently linear throughout the quarter.

Mike Saviage - VP, IR: So we're coming up on the close of our call. Why don't we take a couple of questions from the Connect session? The first, we've had several questions asking about the status of the share repurchase programs, so if you can just remind them of the numbers there?

Mark Garrett - EVP and CFO: Again, we repurchased 14.9 million shares in the quarter for a total of $432 million. At the start of the quarter, we had 165 million in open share contracts from our previous authority, and at the end of the quarter, those were all spent. Against the bigger program, if you remember, we announced a $1.6 billion program. We spent $400 million against that. So we still have $1.2 billion of authority remaining for share repurchase throughout 2012.

Mike Saviage - VP, IR: Finally, last question. There is a question around the status of the PC repurchased market and is that affecting our thoughts on guidance or outlook going forward?

Shantanu Narayen - President and CEO: We look at all of the data that we have. As Mark said, again, at the beginning of the quarter, we've certainly seen success with Windows 7 relative to previous Windows cycles. While there isn't a strong correlation, we continue to believe that people are adopting the new versions of Windows and Mac, and when they do that, they do tend to acquire software associated with it. So, maybe in summary then, again, when we look at our business, it's clear that we have driven significant revenue growth in 2010 and we are executing well against our strategic objectives and exceeding the quarterly financial targets that we've issued. While there are couple of speed bumps that we've seen in the short run as it relates to the creative business, when we think of the explosion of digital content devices and the movements of businesses online, we continue to believe that it's a massive opportunity for Adobe and one in which we are uniquely positioned to win. We look forward to sharing a lot more with you at our upcoming MAX Conference as well as the Analyst Conference. Thank you for joining us today.