Highlights From ADBE's Q3 Conference Call: Numbers Up Across The Board; Guides Above for Q4

Adobe Systems, Inc. (NASDAQ: ADBE) reported Q3 EPS of $0.55, $0.01 better than the analyst estimate of $0.54. Revenue for the quarter came in at $1.01 billion versus the consensus estimate of $1.03 billion. Shares are currently trading up 3.13% today.

Highlights From ADBE's Q3 Conference Call:

• (Shantanu Narayen) In Q3, we delivered revenue and earnings within our targeted ranges. Revenue in the quarter was $1.013 billion, with non-GAAP earnings per share of $0.55.
  
• Highlights in the quarter include record Education revenue, strong growth in our digital video products, solid performance with Acrobat, continued bookings momentum in digital marketing, and non-GAAP earnings at the high end of our targeted range.
  
• (Mark S. Garrett) In the third quarter of fiscal 2011, Adobe achieved revenue of $1.013 billion. This compares to $990.3 million reported in Q3 fiscal 2010 and $1.023 billion reported last quarter.
  
• Q3 GAAP operating expenses were $634.4 million, compared to $589.2 million reported in Q3 fiscal 2010 and $637.3 million last quarter.
  
• Non-GAAP operating expenses in Q3 were $560.1 million, compared to $524.7 million reported for Q3 fiscal 2010 and $556.7 million last quarter.
  
• GAAP operating income in Q3 fiscal 2011 was $274.1 million, or 27.1% of revenue. This compares to GAAP operating income of $302 million, or 30.5% of revenue, in Q3 fiscal 2010 and $276.7 million, or 27% of revenue, last quarter.
  
• Non-GAAP operating income in Q3 fiscal 2011 was $366.1 million, or 36.1% of revenue. This compares to non-GAAP operating income of $384.9 million, or 38.9% of revenue in Q3 fiscal 2010 and $376.4 million, or 36.8% of revenue, last quarter.
  
• Adobe's effective GAAP tax rate in Q3 was 24%, and the effective non-GAAP tax rate was 22%. The difference between the GAAP and non-GAAP tax rates is due to our acquisition of EchoSign during the quarter.
  
• Creative and Interactive Solutions segment revenue in Q3 was $417.9 million, compared to $416.9 million in Q3 fiscal 2010 and $433.1 million last quarter.
  
• Digital Media Solutions Q3 revenue was $151.1 million, compared to $157.7 million in Q3 fiscal 2010 and $136.7 million last quarter. Creative Suite revenue in Q3 was consistent with revenue achieved in the year-ago quarter, demonstrating that CS5.5 continues to maintain the solid run rate that CS5 established.
  
• We also had a strong quarter and record revenue in the education market in Q3. When comparing the performance of recent Creative Suite releases, CS5 and CS5.5 combined revenue has now achieved approximately the same amount of revenue that we achieved with CS 3 for the comparable amount of time, and has exceeded revenue achieved with CS 4 by approximately 25%.
  
• Digital Enterprise Solutions revenue was $270.4 million in Q3, compared to $256.1 million in Q3 fiscal 2010 and $283.5 million last quarter.
  
• Within Digital Enterprise Solutions, Knowledge Worker revenue was $174.6 million, compared to $162.6 million in Q3 fiscal 2010 and $182 million last quarter. Our 7% year-over-year growth demonstrates the continued strength of Acrobat as a standard tool in small and large enterprises.
  
• Enterprise segment revenue was $95.8 million, compared to $93.5 million in Q3 fiscal 2010 and $101.5 million last quarter. We continue to see strong demand for the combination of our Day content management and Omniture online marketing solutions. As a result, we are focusing more field resources on the integrated product line.
  
• Omniture segment revenue in Q3 was $118.2 million, compared to $99.8 million reported in Q3 of fiscal 2010 and $115.9 million last quarter. Omniture year-over-year bookings growth continues to exceed 20%, and Enterprise renewal rates remain strong, at 95% in the quarter.
  
• Mobile and tablet device traffic remains the fastest-growing part of the Omniture business, with the number of transactions we measured from mobile devices growing to 11% of total transactions in Q3, up from 7% last quarter.
  
• Omniture revenue diversification continued, with SiteCatalyst decreasing to 50% of Q3 Omniture product revenue. Conversion and multi-channel analytics products are growing in size, as the analytics business becomes a smaller percentage of the business.
  
• Our Social Analytics product is the industry's first analytic solution to tie social activity to business results. Finally, Print and Publishing segment revenue was $55.6 million, compared to $59.8 million in Q3 fiscal 2010 and $54 million last quarter.
  
• Turning to our geographic segments in Q3, results on a percent of revenue basis were as follows: the Americas, 50%; Europe, 29%; Asia, 21%. We experienced stable demand in the Americas and Asia. The weakness in EMEA that we experienced in Q2 continued into Q3. From a year-over-year currency perspective, FX increased revenue by $37.6 million. We had no hedge gains in Q3 fiscal 2011, versus a $13.2 million hedge gain in Q3 fiscal 2010. Thus the net year-over-year currency increase to revenue, considering hedging gains, was $24.4 million.
  
• From a quarter-over-quarter perspective, FX increased revenue by $4.6 million. We had no hedge gains in Q3 fiscal 2011, versus a $0.2 million hedge gain in Q2 fiscal 2011. Thus the net sequential currency increase to revenue, considering hedging gains, was $4.4 million.
  
• During the quarter, cash flow from operations was $325 million. Our ending cash and short-term investment position was $2.7 billion, compared to $2.6 billion at the end of Q2.
  
• Deferred revenue in the quarter increased by approximately $2 million in the quarter, to a total of $484 million.
  
• In Q3, we repurchased approximately 3.6 million shares, at a total cost of $100 million. Entering Q4, $355 million of stock repurchase authority remains against the $1.6 billion stock repurchase authorization announced in July of last year.
  
• (GUIDANCE) We are targeting our Q4 share count to be 497 million to 499 million shares. We are targeting non-operating expense to be between $17 million and $21 million on both a GAAP and non-GAAP basis. For our Q4 effective GAAP and non-GAAP tax rates, we are targeting 22%.
  
• These targets lead to a GAAP earnings-per-share range of $0.41 to $0.50 per share and a non-GAAP earnings-per-share range of $0.57 to $0.64. At the high end of our financial targets for our fourth quarter, we will achieve our 10% annual revenue growth target, as well as earnings growth of 20%, for the fiscal year. (Consensus is $0.54)
  
• (Shantanu Narayen) Our industry is in the midst of a major transformation. Tablets and smartphones have become the new devices of choice. Software is moving to the cloud. Business models are evolving, with subscription offerings and app stores, and technologies like HTML5 are gaining favor...With a shifting landscape that favors HTML5-based content and application > delivery, we are doubling down in our investment in this area.
  
• The explosion of tablets is changing the paradigm for content authoring. We believe that content will be consumed and created on these devices. Similar to the desktop, we intend to be the leading provider of creative offering applications on tablets. We will soon be introducing a broad set of tablet-based and cloud-connected apps and services across IOS, Android, and other mobile platforms that represent a new revenue stream. We're excited about the recent introduction of Adobe Carousel, an innovative new cloud-connected imaging app for Mac OS and iOS devices (Nasdaq: AAPL).
  
• In addition to publishers, every major enterprise is moving more of its business online. We are helping our customers re-platform their digital assets, optimize their marketing spend, and drive more digital commerce.
  
• In digital marketing, the opportunity is massive, with worldwide ad spend expected to grow to more than $100 billion by 2013, according to IDC. Adobe's Online Marketing Suite is one of the largest cloud-based software offerings in the world.
  
• (Q&A) During your prepared remarks, you talked about possibly monetizing some of the new HTML5 tools that you plan to introduce in the future, and I was just wondering if you might be able to give us a little bit more color around that. (A) Sure. So, Steve, as we think about the evolution of Creative Suite moving forward, I think there are a couple of different things that we're hearing from our customers in terms of what would be catalysts for Creative Suite, and HTML5 and support for HTML5, whether that's browser-based content or creating standalone applications, is certainly one of it. So as you can expect we will be taking the tools that we've been delivering, like Adobe Edge and Muse, and you might see that in future versions of the Creative Suite. So that's one example of how we're continuing to monetize HTML, because we want to be clearly the leader in HTML offering. The other way is, as HTML video is also taking off, you've probably seen that we announced a new version of the Flash Media Server, and the Flash Media Server also now serves up content ,not just to Flash video, but in addition to that also to HTML video. So - and finally, the Digital Publishing solutions, the Digital Publishing solutions also export all of these newspapers, magazines, catalogs that we are preparing in either Flash content or AIR or as HTML. So big picture, I would say, as HTML is getting more prevalent, we're clearly both embracing it from the point of view of tools and being a leader in tools, but also contributing aggressively to the evolution of HTML as a standard.
  
• Great. And maybe lastly, I'm sure the question on most people's minds are have you seen any change in kind of the economic environment, and maybe particularly Europe here in recent weeks or months. (A) From a demand perspective, I'd say that Asia and the Americas has been relatively stable, like I said in my prepared remarks. The weakness that we saw in the second quarter did continue into the third quarter in Europe, but I think it's important to keep in mind that Q3 is always our tough quarter due to summer seasonality, the way our calendar falls, so we were very pleased with where we came in, in our target range. And if you look at the guidance we provided, like I said, at the high end, we would grow the business 10%, just like we anticipated before the start of the year. Margins are improving year-over-year. Earnings growth will be around 20% at the high end of the range. As Shantanu said, CS5.5 is having the effect of keeping the run rate up late in the cycle. Omniture bookings are growing over 20%, and Acrobat's doing very well. So overall we're really pleased. We were definitely off the most in Europe. The weakness that we saw last quarter, like I said, continued. The largest miss within Europe was in the Enterprise segment, but we've got a strong pipeline for Q4, and we just now need to execute on our fourth quarter.

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