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Highlights From Adobe's (ADBE) Q3 Conference Call: Sees Acquisition of Omniture (OMTR) Accretive in 2010

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September 16, 2009 11:14 AM EDT

Adobe Systems (Nasdaq: ADBE) reports Q3 EPS of $0.35, 1 cent better than the analyst estimate of $0.34. Revenue for the quarter was $697.5 million, which compares to the Street estimate of $686.16 million. Shares are down almost 7% today after In-line financials and guidance. However, in a merger, usually shares of the acquirer (Adobe) fall and the acquiring company gets the boost (Omniture (Nasdaq: OMTR) +25%)

Highlights From ADBE's Q3 Conference Call:

Adobe Systems sees Q4 $0.33-$0.39, versus the consensus of $0.37. Adobe sees Q3 revenues of $690-$740 million, versus the consensus of $719.2 million.
(CEO) I am excited to announce we have signed a definitive agreement to acquire Omniture (Nasdaq: OMTR)...it positions Adobe to provide an end-to-end platform with the power to transform digital media and advertising.
(CFO) Adobe achieved revenue of 697.5 million. This compares to 887.3 million reported Q3 fiscal 2008 and 704.7 million reported last quarter.
Non-GAAP operating expenses in Q3 were 409.9 million, compared to 475.1 million reported for Q3 fiscal 2008, and 410.6 million last quarter.
Non-GAAP net income was 186.1 million compared to 269.1 million reported in Q3 fiscal 2008 and 185 million last quarter.
Creative Solutions segment revenue was 400.4 million compared to 493.6 million in Q3 fiscal 2008 and 411.7 million last quarter.
Our overall CS business remained stable with European weakness offset by strength in the education market.
Business Productivity Solutions revenue was 210 million compared to 283.5 million in Q3 fiscal 2008 and 209.7 million last quarter.
Our Acrobat business continues to be impacted by the economy while our web conferencing solution, Connect Pro, had a strong quarter.
In Q3, Enterprise revenue was 55.5 million compared to 65.5 million in Q3 fiscal 2008 and 53.7 million last quarter. LiveCycle revenue grew sequentially in Q3 but the business declined year over year due to the weaker economy.
Print and Publishing segment revenue was 42.2 million compared to 51.1 million in Q3 fiscal 2008 and 46.5 million last quarter.
Platform revenue in Q3 was 44.9 million compared to 59.1 million in Q3 fiscal 2008 and 36.8 million last quarter.
Mobile revenue was flat quarter over quarter and down year over year due to the impact of the Open Screen Project.
Turning to our geographic segments, results on a percent of revenue basis were as follows: the Americas 51%, Europe 28%, Asia 21%. In North America, our underlying business remained stable and we achieved strong results in the education market. Asia performed better than we expected, which helped to offset some of the continuing weakness in Europe.
Employees at the end of Q3 totaled 7,564 versus 7,437 at the end of Q2.
During the quarter, cash flow from operations was 237 million. Our ending cash and short-term investment position was 2.6 billion compared to 2.7 billion at the end of last quarter.
In Q3, we repurchased approximately 4 million shares at a total cost of 116.1 million.
From a business segment standpoint, we expect our Creative, Knowledge Worker, and Enterprise businesses to grow sequentially in Q4. We also expect our Platform business to decline modestly in Q4.
For margins, we are targeting a Q4 GAAP operating margin range of 23 to 27% and non-GAAP operating margin range of 33 to 36%.
For non-operating income, we are targeting a range of 1 to 3 million on both a GAAP and non-GAAP basis.
For our Q4 GAAP effective tax rate, we are targeting approximately 23%. And for our non-GAAP effective tax rate, we are targeting 23.5%.
(Acquisition) Under the terms of the agreement, we expect to acquire all of the outstanding Omniture common stock for $21.50 per share in cash or approximately $1.8 billion on a diluted equity value basis including options or approximately $1.7 billion net of cash.
We expect to finance the transaction through a combination of cash on hand and our existing line of credit.
Over time, we expect the addition of Omniture to positively impact revenue growth and earnings growth. While we expect limited expense synergies, the strategic rationale for the combination is the longer-term revenue benefits we expect from both existing products and services and new jointly developed solutions.
The transaction is expected to be accretive to earnings on a non-GAAP basis in fiscal 2010 based on projected Omniture non-GAAP revenue performance.
(CEO) We see opportunities to enhance the measurement, analysis, and optimization capabilities of content and media created with the Adobe Creative Suite, applications developed on the Adobe Flash platform, and rich media delivered by Adobe Scene7 and the Flash media server.
(CEO, Omniture) Net-net, this combination is a huge win for Omniture's customers, partners, employees and shareholders. We are truly excited to become a part of Adobe.
(Q&A) Few questions for you on the Omniture side, could you just elaborate a little bit more on your first thoughts on the product synergies and in particular, I guess, some of the questions I'm being asked is ,are these products really sold to the same buyer in the organization because I would think of them as different. So how do you imagine that coming together? And then Mark, can you just confirm did you say the deal would be accretive in fiscal year 2010 overall? (A) Why don't I do that one first to get it out of the way? Yes, I did say the deal would be non-GAAP accretive, Sarah, in 2010 overall.
Okay. And that's - without a whole lot of cost synergies you're assuming that's coming more from the top line, correct? (A)We are not assuming a lot of cost synergies in this, correct. It's accretive without that.
Okay, great. And so maybe Shantanu on the broader product synergy thought? (A)And I think it will be useful for me to maybe just take a little bit of a step back and talk about why Omniture and why now. As you know, we've been sharing with you our vision of where technology is headed for a quite while now, richer media, more video, mobile access to information, as well as rich Internet applications. And we believe that we've really delivered against that vision of creating absolutely the best tools in the world. So that creative professionals and ad developers can create those engaging experiences. What we found is that as we've been talking to our customers in the conversation with them it's clear that they would like us to do a lot more. For example, the chief digital officers that we talked to at media companies have been telling us that they want to understand which video content was performing the best so that they could feature it more prominently and increase their ad revenue. Advertisers and ad agencies were using Flash to produce rich ads, but they were telling us that they really wanted to understand what the click through rates of those ads were in real time to be able to take more advantage of it. For web developers, web developers who've been using Adobe technologies to create these RIAs, have said that they want to build intelligence, so the site can automatically recommend the best products to drive higher conversion rates. And so it clearly dawned on us that all of them want us to complete the loop between the offering part, the delivery part and consumption. And they wanted Adobe to play this bigger role, which really for us was a natural extension of what we were trying to do to transform these experiences. And what was interesting was that a number of these customers actually wanted us to integrate with solutions like Omniture. And we found ironically that we were having exactly that same experience with our own web site and our own e-commerce site, which was adobe.com. And so as we started to embark on this, we realized in conversations with Josh, that they actually had the same vision. And they were equally focused on delivering greater value for their customers. In terms of the actual buyers of these products and what we find, with the Creative Suite, we are finding that increasingly it's the mission-critical solution that the chief digital officers are deciding in terms of the entire platform. The chief marketing officers are thinking about what the experience is and so as it relates to the go-to-market synergies as well, both companies have actually built direct enterprises that are serving these customers. So we think that there is natural synergy between both the creative professionals, who create this content and the chief marketing officers, who are increasingly making the decisions on how to optimize their business.