Highlights From ADBE's Q3 Conference Call: Record Revenues Created By Strength in All Major Business Lines

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ADBE Hot Sheet

Revenue Growth %: +1.9%

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Net income: 185.21M

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Adobe Systems, Inc. (Nasdaq: ADBE) reports Q3 adj-EPS of $0.54, 5 cents better than the analyst estimate of $0.49. Revenue for the quarter was $990.3 million, which compares to the estimate of $984.07 million.

Highlights From ADBE's Q3 Conference Call:

Sees Q4 adj-EPS of 48-54c on sales of $950 million-$1 billion. The Street is currently looking for quarterly sales of $1.03 billion.
(Shantanu Narayen, President and CEO) 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.
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.
Customers such as Omnicom (NYSE: OMC) and Target (NYSE: TGT) entered into multi-year licensing agreements for CS5 during Q3. In addition, we achieved record revenue with Master Collection.
In our Omniture (Nasdaq: OMTR) 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 (Nasdaq: DELL), Guess (NYSE: GES), and Home Depot (NYSE: HD).
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.
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, Crdit Agricole, and Daiwa.
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 (Nasdaq: GOOG), Motorola (NYSE: MOT), HTC, and Samsung.
(CFO) For Q3 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.
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.
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.
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.
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.
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.
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 last quarter. The increase in head count 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.
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.
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.
(Guidance) We are targeting a Q4 revenue range of 950 million to $1 billion with our Q4 revenue expectations by business segment as follows: We believe that Creative revenue in Q4 will be flat to slightly down from revenue achieved in Q3.
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%.
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.
(Q&A) You're entering only the second full quarter of CS5. Why guide down - flat to down? And I guess if you could just cover what happened in the quarter, you mentioned the U.S. education and Japan business was weak. What were the issues there? Are those short-term issues, or is there something deeper going on? (A) Let me take that, Brent. Overall, when we looked at CS5, we continue to think it performs well. And there really is opportunity to drive customer adoption, greater penetration, as well as upselling 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. And when I look at the business results for Q3, suites continue to do well. We were driving higher-value suites with 71%, and adoption of Master Collection was also good. In fact, we drove record revenue there. When we see individual customers - these are freelancers who are using the product - we have driven actually a record revenue again for that segment through adobe.com. 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. And 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 in 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. And with respect to education, education is our largest vertical in terms of the CS business. And 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. And 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.
Great. I'd just like to follow up on Brett's question. And wondering if you could quantify in dollars - and maybe not exact dollars - but how much was the variance in the education business and Japan in the third quarter versus what you had expected? (A) Steve, what we're - 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're 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.
If we took education and Japan off the table, would the business for Creative Solutions be up sequentially in the fourth quarter? (A) As we look at the revenue for Q4, yes, we continue to believe that - I mean, I'll put 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're going to continue to drive the revenue.