ADBE

Adobe Systems Incorporated (ADBE)

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Adobe (ADBE)

F1Q10 Earnings Call

March 23, 2010 5:00 pm ET

Executives

Mike Saviage – Vice President Investor Relations

Mark Garrett – Executive Vice President, Chief Executive Officer

Shantanu Narayen – President, Chief Executive Officer

Analysts

Steve Ashley – Robert W. Baird

Walter Pritchard – Citigroup

Brent Thill – UBS

Sarah Frier – Goldman Sachs

Adam Holt – Morgan Stanley

Heather Bellini – ISI Group

Brad Zelnick – Macquarie Research

Phillip Rueppel – Wells Fargo

Jay Vleeschhouwer – Ticonderoga Securities

Michael Olson – Piper Jaffray

Sasa Zoravic – Janney Montgomery Scott

David Halil – FBR

Ross MacMillan – Jefferies & Company

Kash Rangan – Merrill Lynch

Presentation

Mike Saviage

Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO Shantanu Narayen as well as Mark Garrett, Executive Vice President and CFO.

In the call today, we will discuss Adobe’s first quarter fiscal year 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 Adobe.com under the Company and Press links to find an electronic copy.

Before we get started, I want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans is based on information as of today, March 31, 2010 and contains forward-looking statements that risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today as well as Adobe’s SEC filings.

During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in today’s earning 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 will now turn the call over to Mark.

Mark Garrett

Thanks, Mike. For the first quarter of fiscal 2010, Adobe achieved revenue of $858.7 million. This compares to $786.4 million reported in Q1 fiscal 2009 and $757.3 million reported last quarter.

Our Q1 revenue includes $87.7 million in Omniture revenue but excludes $14.9 million in deferred Omniture revenue in accordance with business combination accounting guidelines. Our Q1 revenue benefited from an extra week in the quarter due to our 52/53 week financial calendar as we discussed in our December call and which was factored into our financial targets. We estimate the net revenue benefit from the extra week to be approximately $35 million in the quarter.

We entered the first quarter with approximately 9% of reported Q4 revenue in shippable backlog and we exited the first quarter with approximately 6% of reported Q1 revenue in shippable backlog.

Q1 GAAP operating expenses were $592.5 million compared to $501.1 million reported in Q1 fiscal 2009 and $521.3 million last quarter. Non-GAAP operating expenses in Q1 were $498.7 million compared to $428.6 million reported for Q1 fiscal 2009 and $482.8 million last quarter.

GAAP operating income in Q1 fiscal 2010 was $176.8 million or 20.6% of revenue. This compares to GAAP operating income of $207.9 million or 26.4% of revenue in Q1 fiscal 2009 and $153.6 million or 20.3% of revenue last quarter.

Non-GAAP operating income in Q1 fiscal 2010 was $289.3 million or 33.7% of revenue. This compares to non-GAAP operating income of $295 million or 37.5% of revenue in Q1 fiscal 2009 and $265.2 million or 35% of revenue last quarter.

Adobe’s effective GAAP tax rate in Q1 was 23.5% and the non-GAAP tax rate was 25%. Our non-GAAP tax rate was approximately one point higher than our target of 24% due to the non-renewal of the R&D tax credit by Congress.

Q1 GAAP net income was $127.2 million compared to $156.4 million reported in Q1 fiscal 2009 a net loss of $32 million last quarter. Non-GAAP net income in Q1 was $211l7 million compared to $236.8 million reported in Q1 fiscal 2009 and $206.8 million last quarter.

GAAP diluted earnings per share for Q1 fiscal 2010 were $0.24 based on 532.6 million weighted average shares. This compares with GAAP diluted earnings per share of $0.30 reported in Q1 fiscal 2009 based on 527.8 million weighted average shares and GAAP net loss per share of $0.06 reported last quarter based on 532 million weighted average shares.

Non-GAAP diluted earnings per share for Q1 fiscal 2010 were $0.40. This compares with non-GAAP diluted earnings per share of $0.45 in Q1 fiscal 2009 and $0.39 reported last quarter. The higher non-GAAP tax rate due to the non-renewal of the R&D tax credit reduced our Q1 non-GAAP earnings per share by approximately $0.01.

I will now discuss Adobe’s revenue in Q1 by business segment. As we discussed on our December call, beginning this quarter we have adjusted our reporting segments. Specifically, we have moved our Adobe Connect product from our Knowledge Worker segment to our Enterprise segment.

Today’s update investor data sheet reflects this change with our Knowledge Worker and Enterprise segment revenue restated back to fiscal 2006 for comparison purposes.

Read the rest of this transcript for free on seekingalpha.com