Original Source: FD (FAIR DISCLOSURE) WIRE
. Mike Saviage, Adobe Systems Inc., VP, IR . Bruce Chizen, Adobe Systems Inc., President & CEO . Murray Demo, Adobe Systems Inc., SVP & CFO . Shantanu Narayen, Adobe Systems Inc., EVP, Worldwide Products
ADBE's performance in 3Q03 exceeded the co.'s target ranges for revenue and earnings. Revenue grew by 12% to $319.1m. GAAP operating income in 3Q03 was $92.2m or 28.9% of revenue. Q&A Focus: Server side Acrobat business, Acrobat Elements, sales force, licensing, upgrades.
A. Key Data From Call 1. 3Q03 GAAP net income = $64.5m. 2. 3Q03 Pro forma net income = $66.3m. 3. 3Q03 GAAP diluted EPS = $0.27.
4. 3Q03 GAAP operating expenses = $204.8m. 5. 4Q03 revenue target = $330-350m. 6. 4Q03 targeted other income = $3m.
S1. Opening Comments (B.C.) 1. Overview: 1. Performance in 3Q03 exceeded the co.'s target ranges for revenue and earnings.
2. Revenue grew by 12% to $319.1m, fourth consecutive quarter of
YoverY growth. 1. Success in the quarter was driven by the global performance of the co.'s ePaper business, which grew 62% YoverY, fueled by the release of the Acrobat family of products.
3. Continued to execute well against the co.'s overall business
plan. 1. ADBE delivered its products on schedule, managed expenses effectively, and grew net and operating income substantially
on a YoverY basis. 2. ADBE had another strong quarter of cash generation.
S2. Financial Results (M.D.) 1. 3Q03 Highlights: 1. ADBE achieved revenue of $319.1m. 1. This compares to $284.9m reported for 3Q02 and $320.1m reported for 2Q03. 2. GAAP net income was $64.5m vs. $47.2m reported in 3Q02 and $64.2m in 2Q03. 3. Pro forma net income, which excludes the amortization of goodwill, restructuring and other charges and investment gains and losses from the co.'s venture program was $66.3m vs. $52.5m reported in 3Q02 and $66.7m in 2Q03. 4. GAAP diluted EPS were $0.27 based on 240.5m weighted avg. shares. 1. This compares with GAAP diluted EPS of $0.19 reported in 3Q02 based on 243.4m weighted avg. shares and GAAP diluted EPS of $0.27 reported last quarter based on 239.2m weighted
avg. shares. 5. Pro forma diluted EPS, which excludes an investment loss in the co.'s venture program and a partial reversal of a previous restructuring charge, were $0.28. 6. GM was 93.1% vs. 88.9% in 3Q02 and 92.7% in 2Q03. 7. ADBE's business is increasingly being driven by licensing revenue, which is favorable to the co.'s GM. 8. GAAP operating expenses were $204.8m. 9. Pro forma operating expenses, which excludes a $439,000 reversal of a prior restructuring charge were $205.3m. 10. Regular employees at the end of 3Q totaled 3,486 vs. 3,440 at the end of 2Q03.
2. Expenses as a Percent of Revenue Breakdown: 1. R&D, 21.6%.
2. Sales and marketing, 33.3%. 3. G&A, 9.5%. 4. Operating expenses, as a percent of revenue were slightly below the target range provided at the outset of the quarter due better than targeted revenue and effective operating expense mgt. 5. GAAP operating income in 3Q03 was $92.2m or 28.9% of revenue. 1. This compares to GAAP operating income of $69.5m or 24.4% of revenue in 3Q02 at $91.5m or 28.6% of revenue last quarter. 6. Excluding the amortization of goodwill and restructuring and other charges, pro forma operating income in 3Q03 was $91.8m
or 28.8% of revenue. 1. This compares to pro forma operating income of $73m or 25.6% of revenue in 3Q02 and $91.5m or 28.6% of revenue in 2Q03. 7. Other income for 3Q03 was $3m. 8. ADBE's effective tax rate for 3Q03 was 30% vs. 32% in 3Q02 and 30% in 2Q03. 3. Revenue by Market Segment: 1. Creative Professional:
1. Revenue was $82m in 3Q03 vs. $86.6m in 3Q02 and $93.7m in
2Q03. 2. Digital Imaging & Video: 1. Revenue was $88.3m in 3Q03 vs. $96m in 3Q02 and $95.4m in 2Q03. 2. Normal seasonality and product life cycle timing contributed to the expected declines in the Creative Professional and Digital Imaging and Video Businesses.
3. OEM Postscript and Other Segment: 1. Revenue was $21.8m in 3Q03 vs. $23.7m in 3Q02 and $23m in 2Q03. 4. ePaper Solutions:
1. Revenue was a record $127m in 3Q03 vs. $78.6m in 3Q02 and
$108.1m in 2Q03. 2. In 3Q, with the release of the new localized versions of Acrobat 6, total ePaper desktop revenue was a record
$109.5m. 3. ePaper server revenue in 3Q was $17.5m, a sequential
increase over 2Q03. 4. Revenue By Geographic Segment: 1. Americas, 49%. 2. Europe, 26%. 3. Asia, 25%. 4. Europe and the Americas met ADBE's expectations in 3Q03. 5. In August, ADBE's North American education business was solid. 6. Europe experienced the typical seasonal upswing in business in the last two weeks of the month.
7. Japan exceeded expectations and there has been a modest
improvement in business conditions. 8. Application platform mix 77% Windows and 23% Mac in 3Q03 vs. 72% Windows and 28% Mac for 3Q02 and 73% Windows and 27% Mac in 2Q03. 9. Trade DSO in 3Q03 was 31 days, below the target range of 40-45 days.
1. This compares to 46 days in 3Q02 and 36 days in 2Q03.
2. DSO was lower in 3Q03, primarily due to the timing of the Acrobat 6 launch early in the quarter. 10. Global channel inventory position continues to be within co. policy. 11. At the end of 3Q03, cash and short-term investments were $852.7m vs. $782.6m at the end of 2Q03. 5. Adobe Ventures: 1. ADBE incurred an investment loss of $3m in 3Q03. 2. In the quarter, ADBE made additional investments of $600,000. 3. In total, ADBE has invested $220.6m through its venture partnerships and direct investments. 4. As of the end of 3Q, the net returns in this program were $345.3m, including the stock dividend to stock holders and market value of investments still held by ADBE. 6. Share Buyback: 1. ADBE repurchased approx. 1.2m shares at a cost of $39.2m during the quarter as part of its on going share repurchase program to offset dilution from employee stock programs. 2. ADBE's Board of Directors has declared this quarter's cash dividend of $0.0125 (one and a quarter cent) per share payable on 10/07/2003 to stockholders of record as of 09/23/2003. 7. 4Q03 Targets; 1. Targeting revenue of $330-350m.
2. As a percent of revenue, ADBE's approx. operating model
targets are: 1. GM, 93%. 2. R&D, 20-21%. 3. Sales and marketing, 32%. 4. G&A, 9%. 1. Resulting in a GAAP and pro forma operating margin target of approx. 31-32%. 5. For ADBE's share count, the co. is targeting a range of 243-245m shares.
6. Other income, ADBE is targeting approx. $3m. 7. Tax rate target of 30%. 8. These targets lead to a GAAP and pro forma EPS target range in 4Q03 of $0.30-0.32 per share. 9. Believe that the targeted pro forma EPS and pro forma operating margin results will not differ materially from targeted GAAP results.
S3. Business Segments Review (S.N.) 1. ePaper: 1. Continued strong adoption of Acrobat led to another record quarter for ePaper revenue. 2. ADBE first shipped the English version at the end of 2Q. 3. During the early part of 3Q, ADBE began shipping other major
languages including German, French, and Japanese. 4. Through the end of 3Q03, ADBE continued to see strong global demand for the desktop products. 5. Early results from the Acrobat 6 release indicate the following: 1. Adoption of the Professional version has been significantly stronger than expected. 2. Upgrades, as a percentage of the installed base for Acrobat 6, are slightly higher than Acrobat 5. 3. Licensing …