Adobe Systems Inc ADBE
Q4 2011 Earnings Call Transcript
Transcript Call Date 12/15/2011

Operator: Good day, everyone, and welcome to the Adobe System's Q4 Fiscal Year 2011 Earnings Conference Call. As a reminder, today's conference 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 of 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 fourth quarter and fiscal year 2011 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, December 15, 2011, 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. I am excited to report, we delivered record revenue of $1.152 billion in Q4. This performance helped us achieve record revenue of $4.216 billion in fiscal year 2011, which represents 11% annual growth.

Our Q4 results demonstrate we are executing exceptionally well against our strategy. We achieved quarterly revenue with 14% year-over-year growth; five quarters in a row with more than $1 billion of revenue; with strong profit and cash flow results for the year.

We accomplished these milestones while putting in place a long-term strategy that will solidify our leadership position in two fast-growing markets. Our strategy centers on our unique capability to help customers make, manage, measure, and monetize their digital experiences. Customers are asking for our help in accelerating their digital businesses, and we're doubling down in areas where digital content is mission-critical, digital media and digital marketing. We have organized Adobe to focus on these opportunities and we're investing to win in each area.

After I recap some of the accomplishments we achieved during the year, I'll turn it over to Mark for more details on our financial performance in the quarter and the year. Later, I'll close with a summary of our priorities in 2012 and then we'll take your questions.

This was a big year for innovation in our Digital Media business, which delivers solutions that allow customers to create, publish, promote and monetize their content on any device. We introduced the latest version of our flagship desktop product, CS5.5, which achieved strong revenue during the year. We introduced brand new applications such as Edge and Muse that leverage advances in HTML5, while continuing to push the envelope of the expressive Internet with Flash Player and AIR.

As part of our HTML strategy, we acquired Nitobi, maker of PhoneGap, to allow our customers to not only deliver interactive content for browsers, but also make those experiences available as standalone mobile applications. We announced Creative Cloud, a comprehensive subscription offering that reimagines the creative process. Subscribers will have access to our creative desktop tools, touch applications, creative and publishing services and a strong community. We introduced several new touch applications for use on tablets, including Photoshop Touch, Proto, Debut, Collage and Ideas. We will offer cloud services based on our Digital Publishing and Business Catalyst solutions as well as Typekit, a web font service that we acquired.

Creative Cloud membership will be launched in fiscal 2012 to coincide with the next release of our CS products. We will aggressively acquire new users as well as help customers migrate from all CS versions to the latest releases of our products.

We are successfully targeting publishers who wish to monetize their digital content through our solution offerings. Our Digital Publishing solution enables creation, distribution and monetization of digital content through app stores and newsstands services. To-date, our Digital Publishing customers have delivered more than 1,200 titles and with our new single edition, we will broaden the base to smaller publishers.

Video monetization is a nascent but high growth opportunity. With CS Production Premium, our Adobe Pass solution for TV Everywhere and our acquisition of Auditude, we now have a comprehensive creation to playback offering for video distribution and video add delivery.

Document Services continues to be a growth opportunity and we're expanding our Acrobat franchise through the delivery of new document services in the cloud. Our acquisition of EchoSign, a leading web-based provider of electronic signatures and signature automation, enhances our document exchange capabilities and will be a key part of our goal to increase the value of Acrobat in the document assess, review and approval processes.

In Digital Marketing, our mission is to be the standard for the way digital marketing and advertising is created, managed, executed and optimized. We are focused on four strategic areas to drive growth in this business.

The core of our Digital Marketing Suite is our analytics and reporting offering. SiteCatalyst is the leading enterprise solution for measuring web traffic across PC and mobile devices. We introduced SocialAnalytics to extend this offering and enable our customers to measure the impact of their social media campaigns. We have seen strong interest and adoption of this product since its launch a few months ago.

Our second area of investment is personalized engagement where we offer a Web Experience Management solution, which combines our Day and Digital Marketing Suite products. Our goal is to deliver an integrated offering, which helps marketers deliver personalized web experiences and increase conversion rates. We're already driving explosive growth in this category; revenue for Day doubled year-over-year.

Our third area of focus is multi-channel campaign execution, helping digital marketers understand what's working across all their marketing channels so they can optimize their spending and attract new customers. We're focused on search, social and display advertising areas where we continue to see strong customer need.

The final area is media monetization, which is focused on helping publishers sell their available ad inventory for higher rates. Early this year, we acquired Demdex, which gives us a data management platform that provides real-time audience segmentation and connects that audience data to systems advertisers use to buy inventory.

With our recent acquisition of Auditude, we can expand our monetization capabilities, especially in the high growth video advertising segment.

Late in Q4, we announced our intent to acquire Efficient Frontier, a leader in digital ad buying and optimization. The acquisition, which we expect will close later this quarter, will add multichannel ad campaign forecasting, execution and optimization capabilities to our existing digital marketing suite.

More specifically, Efficient Frontier strengthens our digital marketing offering in several key areas. In social marketing, Efficient Frontier brings a social ad buying capability for Facebook, and we expect synergy with our existing Facebook ad buying functionality in our SearchCenter+ product. They also bring a social marketing engagement platform to help customers build, manage, monitor and measure their brand presence across the social web. We will augment this social engagement capability with our SocialAnalytics product to provide an analytics solution that moves beyond social monitoring to tie social media to business results.

In search marketing, Efficient Frontier extends our SearchCenter+ solution with a complementary search portfolio optimization system. In display marketing, Efficient Frontier has a real-time bidding system to enable our digital marketing customers to increase ad performance on major display inventory sources. In multi-channel optimization, Efficient Frontier enables marketers to take the guesswork out of how to spend marketing dollars across search, display and social media platforms by optimizing bids and allocating budget across all these digital channels for maximum ROI.

Our digital marketing opportunity is exciting not only because of its strong performance this year, but also for its strategic value as a software as a service business. We believe we're in the sweet spot for growth as the demands on marketers continue to gain an urgency and complexity. As a result, we expect this business to drive a billion dollars of SaaS-based revenue in the coming years.

In summary, 2011 was a great year for Adobe, financially and strategically. Now, I'll turn it over to Mark for a discussion of our financial results. Mark?

Mark Garrett - EVP and CFO: Thanks Shantanu. Our earnings report today covers both Q4 and fiscal year 2011 results. I will first comment on our full year fiscal 2011 results. Adobe achieved revenue of $4.216 billion in the year compared to $3.8 billion in fiscal 2010. This represents 11% year-over-year growth, exceeding the 10% growth target we gave at the outset of the year.

In addition, we generated $1.5 billion in cash flow during the year; we committed $695 million towards share repurchases; and we made several strategic acquisitions that position Adobe to be the market leader in digital media and digital marketing, two large and growing markets that complement one another.

Our success in fiscal 2011 demonstrates significant progress against our goal to transform our business. As we enter fiscal 2012, we do so as one of the largest providers of cloud-based software in the world. This has helped grow our recurring revenue to approach 20% of total revenue, and with additional business model changes we are implementing, we expect this percentage to double within the next three years.

GAAP operating income in fiscal 2011 was $1.099 billion compared to $993 million in fiscal 2010. GAAP operating margin for the year was 26.1%, the same as it was in fiscal 2010.

Non-GAAP operating income in fiscal 2011 was $1.587 billion, compared to $1.393 billion in fiscal 2010. Our non-GAAP operating margin was 37.6% in fiscal 2011, compared to 36.6% in fiscal 2010.

Adobe's annual GAAP net income was $833 million in fiscal 2011, compared to $775 million in fiscal 2011. Adobe's annual non-GAAP net income was $1.183 billion in fiscal 2011, compared to $1.16 billion in fiscal 2010.

GAAP diluted earnings per share in fiscal 2011 were $1.65, compared to $1.47 in fiscal 2010. Non-GAAP diluted earnings per share were $2.35 in fiscal 2011, compared to $1.93 in fiscal 2010 representing 22% year-over-year growth.

Now I will discuss our Q4 results. In the fourth quarter of fiscal 2011, Adobe achieved revenue of $1.152 billion. This compares to $1.008 billion reported in Q4 fiscal 2010; and $1.013 billion reported last quarter.

Q4 GAAP operating expenses were $789.7 million, compared to $613.8 million reported in Q4 fiscal 2010; and $634.4 million last quarter. Non-GAAP operating expenses in Q4 were $611.9 million, compared to $535 million reported for Q4 fiscal 2010, and $560.1 million last quarter. GAAP operating income in Q4 fiscal 2011 was $246.1 million, or 21.4% of revenue. This compares to GAAP operating income of $286.9 million, or 28.5% of revenue in Q4 fiscal 2010, and $274.1 million, or 27.1% of revenue last quarter.

Non-GAAP operating income in Q4 fiscal 2011 was $444.5 million, or 38.6% of revenue. This compares to non-GAAP operating income of $384 million, or 38.1% of revenue in Q4 fiscal 2010, and $366.1 million, or 36.1% of revenue last quarter.

In Q4, Adobe's effective tax rate was 25.5% on a GAAP basis and 22% on a non-GAAP basis. The GAAP rate was higher than targeted due to the acquisitions of Typekit and Auditude in the quarter.

GAAP diluted earnings per share for Q4 fiscal 2011 were $0.35. This compares with GAAP diluted earnings per share of $0.53 reported in Q4 fiscal 2010, and GAAP diluted earnings per share of $0.39 reported last quarter. Non-GAAP diluted earnings per share for Q4 fiscal 2011 were $0.67. This compares with non-GAAP diluted earnings per share of $0.56 in Q4 fiscal 2010, and $0.55 reported last quarter.

I will now discuss Adobe's results in Q4 by business segment.

Creative and interactive solutions segment revenue in Q4 was $437.2 million compared to $404.8 million in Q4 fiscal 2010, and $417.9 million last quarter. Digital media solutions Q4 revenue was $186.4 million, compared to $165.9 million in Q4 fiscal 2010, and $151.1 million last quarter.

In Q4 we achieved the highest quarter of CS revenue during the current CS5 release cycle, driven by record volume licensing with enterprise customers and strong Adobe.com sales. We also continued to attract new customers with our CS5.5 subscription offering, with 40% of subscribers being first time CS users. In addition, our digital imaging and digital video products achieved strong results in Q4.

Digital enterprise solutions revenue was $342.4 million in Q4, compared to $273.3 million in Q4 fiscal 2010, and $270.4 million last quarter. Within digital enterprise solutions, Knowledge Worker revenue was $201.7 million, compared to $169.9 million in Q4 fiscal 2010, and $174.6 million last quarter. Acrobat revenue was the highest we've achieved in a non-launch quarter in its history. This performance was driven by strong Q4 enterprise licensing. For the year, Knowledge Worker revenue grew 13% when compared to fiscal 2010.

Enterprise segment revenue was $140.7 million, compared to $103.4 million in Q4 fiscal 2010, and $95.8 million last quarter. This growth was driven by strong licensing of our Day Web Experience Management offering, and record revenue in the government vertical.

Omniture segment revenue in Q4 was $131.1 million compared to $109 million reported in Q4 of fiscal 2010, and $118.2 million last quarter. Our digital marketing sales team finished a strong year with an outstanding quarter. In Q4, the team closed more than 20 contracts with an annual contract value greater than $500,000. This exceeds the number of contracts greater than $500,000 that Omniture closed in all of 2009.

Driving this performance is increasing demand for multiple products within the Digital Marketing Suite. We continue to diversify our overall Omniture revenue. Our core offering, Site Catalyst, now accounts for 49% of our overall Digital Marketing revenue. We are driving growth in conversion and multi-channel analytics products, and have made some key acquisitions this quarter to further expand our offering.

Omniture enterprise renewal rates remained strong at 95% in the quarter. On 'Cyber Monday', we saw our single highest day of transactions ever. Mobile transactions increased to 13% of our transactions in the quarter, up from 11% last quarter and 7% in Q2.

Finally, Print and Publishing segment revenue was $55.1 million compared to $55 million in Q4 fiscal 2010 and $55.6 million last quarter.

Turning to our geographic segments in Q4, results on a percent of revenue basis were as follows; the Americas, 48%; Europe, 33%, Asia 19%. We experienced strong demand in all major geographies during Q4.

From a year-over-year currency perspective, FX increased revenue by $12.1 million. We had $3.6 million in hedge gains in Q4 fiscal 2011 versus a $0.7 million hedge gain in Q4 fiscal 2010; thus the net year-over-year currency increase to revenue considering hedging gains was $15 million.

From a quarter-over-quarter perspective, FX decreased revenue by $9.5 million. We had $3.6 million in hedge gains in Q4 fiscal 2011 versus no hedge gain in Q3 fiscal 2011; thus the net sequential currency decrease to revenue considering hedging gains was $5.9 million.

Employees at the end of Q4 totaled 9,925 versus 10,041 at the end of the last quarter. The decrease was almost entirely due to the departure of interns in the quarter. The impact of our Q4 reduction in force will occur in Q1.

Our trade DSO was 50 days, which compares to 50 days in the year ago quarter and 50 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 $497 million. Our ending cash and short-term investment position was $2.9 billion, compared to $2.7 billion at the end of Q3. Deferred revenue increased by approximately $48 million in the quarter to a total of $531.7 million.

In Q4, we repurchased approximately 2 million shares at a total cost of $50 million. For the year, we repurchased approximately 21.8 million shares at a total cost of $695 million. Entering Q1, $305 million of stock repurchase authority remains against the $1.6 billion stock repurchase authorization announced in July of last year.

This concludes my discussion of our results. I would now like to discuss our financial targets, beginning with our fiscal 2012 annual targets. We continue to target 4% to 6% revenue growth in fiscal 2012. As we discussed at our financial analyst meeting in November, 2012 is a transition year and our revenue growth target factors, our reduced focus on certain product lines, which we expect to impact our revenue by approximately $150 million in the year. It also factors the potential impact from migration to our Creative Cloud subscription offering.

By quarter, we expect revenue in Q1 to decline sequentially due to seasonality. We expect revenue in Q2 to increase sequentially due to the planned launch of our new creative products. We would also expect Q3 and Q4 to follow normal historical patterns, with a sequential decline in Q3 due to normal summer seasonality followed by a strong Q4. We are targeting a fiscal 2012 annual GAAP earnings per share range of $1.70 to $1.83 per share, and a non- GAAP earnings per share range of $2.37 to $2.47.

In Q1, we are targeting a revenue range between $1.025 billion and $1.075 billion. At the midpoint of the Q1 targeted range, roughly half of the expected sequential decline Q4 is from our decision to reduce focus on certain product lines. The other half of the expected sequential decline is due to normal enterprise and hobbyist product seasonality.

We are targeting a Q1 GAAP earnings per share range of $0.37 to $0.43 per share, and a Q1 non-GAAP earnings per share range of $0.54 to $0.59. In addition, we are targeting our Q1 share count to be 500 million to 502 million shares. We are targeting non-operating expense to be between $19 million and $22 million on both a GAAP and non- GAAP basis.

We are targeting a Q1 GAAP and non-GAAP tax rate of 23%. The expiration of the R&D tax credit this week impacts our tax rates by a full percentage point as we enter fiscal 2012.

Our planned acquisition of Efficient Frontier is not factored into these targets. Assuming we close the transaction as planned later this quarter, we would expect the acquisition to add between $60 million and $80 million to our annual revenue in fiscal 2012. It would also result in the use of approximately $400 million of our domestic cash, and add approximately 350 employees to our headcount. We expect the acquisition to be slightly accretive to non-GAAP earnings for the year.

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

Shantanu Narayen - President and CEO: Thanks Mark. Our vision at Adobe is to change the world through digital experiences. Over the last few years we've laid the groundwork for the future of the Company through product innovation, acquisitions and business model changes. We now believe it's time to double down and accelerate our growth in the two areas where we see the largest market opportunities; Digital Media and Digital Marketing.

The goal of our Digital Media business is to revolutionize the creative process. We believe our Creative Cloud offering will deliver a comprehensive set of creative tools, applications and services that will take content creation to the next level, and bring hundreds of thousands of new customers to Adobe.

In the exploding Digital Marketing category, our goal is to be mission-critical to digital marketers by transforming how they manage, measure and optimize their marketing campaigns. In doing so, we expect to build a billion-dollar SaaS business. Both of these opportunities will drive a more significant recurring revenue stream, increasing the predictability of our business, delivering strong cash flow, and increasing our growth potential over the long term.

We have successfully transformed Adobe several times in the past and I speak for the entire management team and employees when I say that we're completely energized by this next chapter for the Company.

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

Mark Garrett - EVP and CFO: Thanks Shantanu. Before we start Q&A, I want to make sure everyone is aware of the Adobe Digital Marketing Summit that's coming up in March. Our annual conference, the largest of its kind for digital marketers, will be held in Salt Lake City on March 21st and 22nd. These dates follow our Q1 earnings date on March 20th.

We are offering a special registration price for Wall Street professionals to attend and are hosting a reception with Adobe management for Wall Street attendees. An invite for this event with the registration information will be sent out this week. You can also email Adobe Investor Relations at ir@adobe.com if you would like information on the event and how to register. There is probably no better way for you to learn more about Adobe's fastest growing business and we hope to see you there.

Consistent with the strategy we discussed at our analyst meeting and the way we operate the Company, we will adjust our business segment reporting in fiscal 2012 beginning with our Q1 results. We are merging our Creative and Interactive, our Digital Media and our Knowledge Worker segments into one reported segment next year called Digital Media Solutions. We are also merging our Omniture segment with our Enterprise segment into a new reported segment called Digital Marketing Solutions.

Our Print and Publishing segment remains as it was last year. In addition, we intend to provide supplementary business segment information to help the financial community understand the strategic and business model decisions we are making. These updated business segments are outlined in the investor data sheet that we've made available on our Investor Relations website today. We will also provide historical segment reporting based on these new classifications in late January.

In regard to today's earnings report, we have posted several documents on our Investor Relations website, 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 number 6996442. Again, the number is 888-203-1112 with ID number 6996442. 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 Tuesday, December 20, 2011.

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

Transcript Call Date 12/15/2011

Operator: Brad Zelnick, Macquarie Securities.

Brad Zelnick - Macquarie Securities: Nice quarter. I think many investors were fearful that Adobe customers would hesitate to purchases ahead of CS cloud and subscription pricing. So, the question I have is, it clearly doesn't appear that that occurred in the quarter, but specifically, if you think of the business along the lines of enterprise versus everything else, your comments would imply that enterprise was quite strong, there was a lot of activity there. Can you maybe talk about hesitation that you might have seen and whether or not budget flush going into yearend was any stronger than you would typically see in the Q4?

Mark Garrett - EVP and CFO: Brad, why don't I take that call? Clearly, we think it was a really quarter as well and it was across really all of our segments as well as all of our geographies. When we look at the creative business specifically, the strength was not just in the enterprise with licensing, but it was also a really strong through all of our other channels; Adobe.com where we continue to see more costumers want to have relationship with us was strong. So, all across the board, I would say the team really executed well. We had gone into the quarter, letting you know that we had a healthy pipeline and the team executed against all of the opportunities that we had ahead of us.

Brad Zelnick - Macquarie Securities: So, you wouldn't say that you saw any unusual pent-up demand or rather hesitation ahead of the new product releases, specifically this major transformation with subscription pricing?

Shantanu Narayen - President and CEO: No, I wouldn't say that. I think the customers that we talk to about what's coming down the pipe are also interested. At the analyst meeting we told about all of the new things that were coming with respect to HTML offering, as well as on the imaging side, we are going to have a Photoshop release after many years, as well as everything to do with the video products. So, we are excited about the way we ended the year, but that doesn't in any way reduce our excitement about what's to come in 2012 and beyond.

Mark Garrett - EVP and CFO: The other thing I would add to that is that you probably saw we had a promotion to get people to upgrade to 5.5 so they are eligible to upgrade to 6 and that's been very successful as well, which will bode well for CS6 also.

Brad Zelnick - Macquarie Securities: Mark, if I could ask one quick follow-up. You typically gives us directional guidance on each of your segments. Can you maybe give us kind of insight as we model Q1?

Mark Garrett - EVP and CFO: For Q1, I think you should expect every segment would be sequentially down given the strength in Q4 and the seasonality that we saw in Q4 and as we move more and more into the enterprise, you are going to see us be more seasonally like an enterprise company, which would be a sequential drop in the first quarter.

Operator: Brent Thill, UBS.

Brent Thill - UBS.: Obviously, we are all getting hit with the Europe question, so I know it will come up, if you can maybe just address what you are seeing in their pipeline? Obviously, you ended with great double-digit growth and I wanted to follow up with a quick follow-up.

Mark Garrett - EVP and CFO: I got to say, Brent, we had a phenomenal quarter in Europe. It really made up for a few quarters in the year that were a little lighter. They finished really strong, we had a good pipeline going into Q4, that was part of the guidance that we had laid out, and frankly, we probably did a little better than we even thought. So, it was a very good quarter, great execution by the Europe team.

Brent Thill - UBS.: Okay, but nothing in the pipeline that suggests that that is decaying?

Mark Garrett - EVP and CFO: No, nothing.

Brent Thill - UBS.: One quick follow up that question we're getting. I realize in your guidance for next year, you're guiding for mid single-digit growth. There are some big what-ifs as it relates to what percent of the customer base goes to perpetual, what percent goes to subscription, and I'm assuming that you're not going to give us your mix in terms of what you're modeling, but can you just give us a sense of –I would assume that you hopefully did put a fair amount towards subscription. Any color you can give us would be helpful.

Shantanu Narayen - President and CEO: As it relates to CS specifically and the launch that we expect, you have to remember that the launch is going to be really in the second half of the year as it relates to subscriptions. At the Analyst Meeting, we guided overall that the Digital Media business would be something like 5% to 7% growth. So, we're going to certainly start to see subscriptions accelerate after that because while we have a subscription offering right now, the subscription offering changes quite a bit. From our point of view, we certainly have our models. We look at it and say – and I've got this question a lot from investors – if the current model and people don't move as quickly, then you'll see the growth as it relates to the pent-up demand for all of the innovation that we have provided in CS6. If more people move to it, it means that we've been more successful with getting people loyal to this new mechanism of delivering software. So, again, we're really focused right now in making sure that that experience with the launch in Q2 is as powerful as possible and we'll continue to make sure we provide transparent data once the launch happens.

Mark Garrett - EVP and CFO: Brent, just to clarify and make sure you got that, the launch is still in Q2, the impact of the launch though will be primarily a second half impact.

Operator: Walter Pritchard, Citigroup.

Walter Pritchard - Citigroup: Your Digital Media business especially was really strong this quarter and I'm just wondering if you could help us kind of picture what the source of that strength was? I know you got some share gains on the video side and you've got the hobbyist products sales this quarter, but any color there would be helpful.

Shantanu Narayen - President and CEO: Walter, I think you actually got some of the key highlights. I mean, certainly the hobbyist products we launched, so we see that traditional uptick and that did well. Video we continue to see significant both market share gains as well as growth and the enterprise licensing part of that business where people are adopting the entire creative platform that's something that again, the field organization works towards that the entire year. That came in really very strong at the end of the year.

Walter Pritchard - Citigroup: Then, Shantanu, I'm wondering now with kind of a month or two more in data and kind of research around the Creative Cloud, a follow-up to Brent's question around any additional insight you have as to how you may see customers move or anything new in there from your own research.

Shantanu Narayen - President and CEO: I think it's going to be a phased approach Walter. When we release the product in Q2, I think you'll see a lot of individuals adopt the product right off the bag with freelancers, the goals associated with that is to make sure the entire experience of the membership and downloading of our desktop and touch applications and the core services that we provide is a really great experience. We will then start to roll that out with the channels help to small and medium businesses, as well as larger enterprises. Like you see in a traditional creative suite launch, I would expect the individual users to adopt it first, and then for us to start rolling that out across the other segments, including education later in the year.

Walter Pritchard - Citigroup: Mark, just quick one on backlog, I know you talked that it is not significant and that your business was changing a bit to maybe there will be no backlog anymore. Any color there on where backlog stood at the end of November?

Mark Garrett - EVP and CFO: You just hit the nail on the head. Like I said throughout this year, we have changed the way we manage the business. We manage the channel much tighter now. So, you won't see backlog from us going forward and that holds true this quarter.

Operator: Steven Ashley, Robert W. Baird.

Steven Ashley - Robert W. Baird: Shantanu could I take the same question that both Brent and Walter have asked and asked it in a different way, and it just has to do with the future, when you offer the subscription offering. If we look at the customer base that's on CS5 and CS5.5 and then we look at the older customers, do you expect their behavior to be different as in terms of moving to subscription? Would you expect the older group to be more aggressive adopters of the subscription than the younger or people on the more recent versions?

Shantanu Narayen - President and CEO: Steve, I think in terms of color for how we expect adoption of the subscription, targeting new users continues to be a key area of focus. Among existing users, I think you're right that some of what we have called version skippers in the past, maybe the earlier adopters of the subscription services. We also have tremendous amount of loyalists who we expect will continue to see the benefits of the subscription. So, I would say new users and the older versions will probably adopted quicker than people who've been current with every version.

Steven Ashley - Robert W. Baird: Knowledge Worker was really nicely strong this quarter, up 19% year-over-year. Can you to us maybe about the drivers in that business and how we should think about the growth going forward?

Shantanu Narayen - President and CEO: I think what we are seeing in that business Steve is that PDF as a format and frankly all document services just continue as things move from paper to electronic. PDF is a great format for that, whether it's for archival, whether it's for information, dissemination. I think you're seeing one of the major mobile platforms support PDF. So the Acrobat business in terms of file dissemination continues to be very strong. The newer document services that we are providing as well continue to also see traction. I would say specifically the strength in the quarter again was good performance within enterprises, as enterprises standardize on Acrobat across all of their desktops in order to be able to reliably and frankly securely share information. We continue to be excited about the electronic signatures opportunity as we are getting up to close to 1 million contracts, where people are touching this. We think that's a nice disruptive opportunity that plays into our strength both with document services and reader proliferation. So good quarter there.

Operator: Mark Moerdler, Sanford C. Bernstein.

Mark Moerdler - Sanford C. Bernstein & Co., LLC.: Two quick questions. The first one is, obviously, buyback was minimal this quarter and it looks like you are guiding based on the number of shares to not much buyback next year. What's the driver? Since this last year you have been doing a lot more buyback. The second question, can you give more color on why the big increase in the deferred? Is this because of early success of subscription or is there something else going on here?

Mark Garrett - EVP and CFO: We continue to believe that the best way to return cash to shareholders is in the form of share buyback, and we're continuing to work our way down the authorization that we put in place a while ago. We only have about 300 million left on that actually. The reason the buyback is maybe a little bit more muted now is as I've said in the past, we have a significant offshore cash balance, and I obviously can't use that to buy back stock. So, we balance the use of offshore cash between both M&A and share buyback. So, when I have excess U.S. cash, it goes towards share buyback, but first comes M&A if you kind of go down the pecking order, and that's why it was a little bit lower this quarter. You saw that we bought Efficient Frontier and I mentioned in my prepared remarks that that was about a $400 million use of onshore cash. Yes, as we guide roughly flat on the share count, we don't guide towards any particular buyback, because that's more opportunistic. As it relates to deferred, it's made up of two things, it's made up of primarily the Omniture deferred revenue balance because that is a SaaS business as you know, and it's also made up of enterprise maintenance, and those two things were the bigger drivers in the increase in deferred this quarter. The subscription side of the business doesn't kick in until really the second half of next year as we discussed.

Operator: Ross MacMillan, Jeffries.

Ross MacMillan - Jeffries & Company: Mark or Shantanu, I just wanted if you could help us with the enterprise strengths. Shantanu, you mentioned Day was up 2X year-over-year, but given that you are deemphasizing certain vertical industries for LiveCycle, I wondered if there was any – for want of a better word, draining of the pipe there, any color on that you could give us would be real helpful.

Shantanu Narayen - President and CEO: Sure. So, Ross, first as it relates to the Creative and the Acrobat business, Enterprise has continuously grown as a percentage of the revenue that we get and I think the investment that we made in the field organization over the years has continued to pay off in terms of the strategic relationships that we're having with those customers. Increasingly, what we are finding is that as we go in and sell to the marketing departments, that serves as a great entree for us to be able to ask them about their re-platforming efforts. We're clearly seeing the demand for Day is coming from businesses wanting to move online, wanting a social presence, wanting to be able to deliver mobile applications and the need for commerce. So, we're clearly seeing the synergy frankly as we go into these enterprises between everything that we've delivered to them on the desktop and what we've delivered to them as part of our digital marketing solutions. We had some very, very significant multi-product wins as well where the combination of Day, plus the Creative product line, plus what we are doing with the Digital Marketing Suite, and that's exactly in line with the strategy that we laid out. As it relates to LiveCycle specifically, yes, I mean, in the government, as we said we continue to see good adoption within the government. There was clearly the pipe that we had built-up for LiveCycle, we did a successful job of closing that.

Ross MacMillan - Jeffries & Company: Then, I was just curious; obviously you had another little bit of a look at the CS5.5 subscription adoption. I think you mentioned – either you or Mark said that 40% of subscribers are net new. Is that mix of the other 60% with regard to installed based customers that either would or would not have upgraded. Is that consistent with your comments at the Analyst Day a month or so ago?

Shantanu Narayen - President and CEO: (Indiscernible). I mean once we announce the new product, in effect the anticipation is now really building for the CS6 cycle. So yeah, Mark's comments were, we haven't seen anything significant, so we wanted to give you an update, but really I think all eyes are on the next version.

Operator: Adam Holt, Morgan Stanley.

Adam Holt - Morgan Stanley: Is it possible to call out what the impacts of the CS promotions were in the quarter? I believe they run through the end of December. So what the expectation would be for the next year as well?

Shantanu Narayen - President and CEO: Adam, I think every single quarter, we continue to drive demand. I would say, actually our demand generation activities have been more effective. Frankly, we're a big user of our own digital marketing products in terms of driving more visitors online, and then converting them to paying customers. So I wouldn't attribute it frankly to one promotion. I would attribute it to a great sense of efficiency that we're driving in terms of our marketing ROI. So, I wouldn't point to one specifically that we think had a meaningful or material impact.

Adam Holt - Morgan Stanley: If I could just ask a quick follow-up for Mark. It looks like since we have done some modeling that your subscriptions have the potential to be higher margined, then say some SaaS companies, because you have a lower touch distribution model. Can you talk a little bit about how you think about your margins in a subscription business relative to the core business as it starts to ramp?

Mark Garrett - EVP and CFO: We haven't spent a lot of time on this walking you guys through it and we will. The margins will be lower than they will for a perpetual license product, but they will clearly be much, much, higher than a typical SaaS business. We are not really hosting the software in the cloud like other people are potentially doing with their software. As we discussed at Analyst Day, you are using the cloud to store and to share, but you are pulling the software and down running it on your desktop. So, there is not a lot of incremental COGS like there would be in a typical SaaS business.

Operator: Jay Vleeschhouwer, Griffin Securities

Jay Vleeschhouwer - Griffin Securities: I would like to ask first about your enterprise business, and particularly the performance of Day, where it looks like you added 50 million or more year-over-year hence the double. Is that the kind of incremental revenue momentum that you think you can maintain going into fiscal '12 and help to mitigate at least some of the loss of revenue on the LC side?

Shantanu Narayen - President and CEO: Jay I think as it relates to the enterprise digital marketing opportunity, we said 25% growth in bookings is what we expect. We are clearly going to be introducing three or four new solutions that have great integration between the day product lines and the digital marketing, old Omniture product line. So, 25% bookings is what we are forecasting for fiscal 2012. The nice thing now about when you start add up the Omniture business, what we're seeing with Day, as we put Efficient Frontier into that mix, we think it's a really healthy business that's growing quite well for us, and a very differentiated offering given how all of those customers are also using our creative products on the desktops. So excited about what we see for next year.

Jay Vleeschhouwer - Griffin Securities: Let me follow up with a question about the longer-term evolution of the model. At the Analyst Meeting, you spoke of the goal of having about 800,000 subscribers by 2015. Would it be fair to assume that you're not looking at additions to the subscriber base to be equal per year; in other words, each subsequent year will be more than the prior year to grow the subscriber base?

Shantanu Narayen - President and CEO: I think, Jay, what we said at the Analyst Meeting was that for year one, we'd expect to see a 10% increase in the number of seats. We have to get the offering out and continue to market frankly the benefits of the subscription. So, what we had said was, as you pointed out, by 2015, 800,000 and 10% increase in the first year.

Jay Vleeschhouwer - Griffin Securities: Let me just sneak in one last follow-up, if I may. Taking your projections at the Analyst Meeting at face value, that would suggest about $1.5 billion of subscription revenues I think by 2015. Could you talk about the offsetting, the decline of your upgrades revenue, do you foresee having any upgrades revenue lessen at all or do you think it will be a pretty immaterial amount by then?

Shantanu Narayen - President and CEO: Yeah, I think it's again important to remember that one of the things we've done to mitigate any risk that people think might exist in this is we will have both the perpetual offering in terms of at least people being able to acquire the perpetual software with the subscriptions. We certainly think directionally that the subscription offering is where people will start to see more rapid innovation, it will attract new customers. We modeled that for fiscal 2012, and frankly, as we roll this out, we'll give you more data. So, it will help you model the business in 2013 and beyond.

Mike Saviage - VP of IR: Operator, we're approaching the end time and before we take our last question or two, I want to correct something I said earlier. I made a mention that our Q1 earnings day was March 20. It's actually March 19. So just correcting that Q1 date is March 19. So why don't we take one or two last questions.

Operator: Michael Olson, Piper Jaffray.

Michael Olson - Piper Jaffray: I think you said half of the sequential revenue decline in Q1 is going to be related to changes in the strategic focus. So, are you saying that there will be basically a sequential drop of $50 million in Digital Enterprise in Q1? I guess is that in the ballpark, and will the Q1 revenue level of Digital Enterprise be kind of the new run rate for that segment or is it going to continue to decline throughout the year as you focus less on LiveCycle and Connect?

Mark Garrett - EVP and CFO: That's right, we expect about $50 million drop in LiveCycle and Connect as a result of the changes that we announced at Analyst Day. Then that is a seasonally low quarter for Enterprise. So, it may not be – that it drops every single quarter sequentially from there, but generally speaking, we had said $150 million comes out of next year's revenue for those changes.

Michael Olson - Piper Jaffray: Then just a real quick one here. You talked about strength in volume license. What percent of CS purchases are volume license now?

Mark Garrett - EVP and CFO: I'd have to do that offline with you. I don't have that number in front of me to be honest with you.

Operator: Philip Rueppel, Wells Fargo.

Philip Rueppel - Wells Fargo: Shantanu, you've talked a lot about the customer reaction and potential reaction to the new subscription model and focus. Can you talk a little bit about the channel and sort of their perspective and opportunities for them, and in that regard, do you think you've got the right indirect channel if it's necessary as you move further into the digital marketing realm?

Shantanu Narayen - President and CEO: Again, as I said, as we rollout the subscription offering, we think the individual customers will be the first to adopt it, having the channel be partners in this rollout is definitely part of the strategy. We're starting to fill them in. Remember we're not really pioneers here, because there are other desktop companies that also have utilized their channel frankly to sell their subscriptions. So, we're focused on making sure that the offering is right. We've been working with these channel partners and we're confident that when we roll it out, we will be able to leverage them just like we leveraged them on the desktop software. Thank you again for joining us on this call today. We think it was a great close to fiscal 2011. We're really excited about the two growth opportunities in the big categories that we have in 2012.

Mike Saviage - VP of IR: This concludes our call. Thanks for joining us today.