By Trevor Shackelford September 27, 2006 -- Adobe Systems Incorporated (NYSE: ADBE) announced their third quarter results recently. Total revenue for the company’s third quarter was $602.2 million compared to $487.0 million reported a year ago. On a year-over-year basis, this is a 24% revenue growth. GAAP diluted earnings per share for the third quarter of fiscal 2006 were $0.16, compared to $0.29 last year. GAAP net income was $94.4 million for the third quarter 2006, compared to $144.9 million reported in the same quarter a year ago. Adobe’s GAAP operating income was $110.0 million in the third quarter, compared to $183.6 million in the third quarter of 2005. * Contents of this Summary * •Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Revenue by geographic segment is 52% from the Americas, Europe 27%, and Asia 21%. • Gross margin for the third quarter using GAAP accounting was 88.5%, compared to 94.4% in the third quarter of fiscal 2005. • GAAP operating expenses were $422.7 million, non-GAAP operating expenses, which include the Macromedia acquisition costs, and restructuring costs were $360.8 million for the third quarter. • DSO was 43 days compared to 29 days in the third quarter one year ago. • Cash and short-term investments were $2.0 billion, compared to $1.8 billion in the same quarter one year ago. • Adobe repurchased 12.1 million shares at a cost $358.3 million as part of their share re-purchase program, completing the $1 billion share purchase program. Segment Performance Creative Solutions Segment Revenues for the third quarter of fiscal year 2006 were $328.1 million, compared to $357.3 million last quarter. The decline was anticipated and was the result of normal seasonality and customer deferrals in anticipation of the Creative Suite 3 launch. The digital video business grew 39% year-over-year. The Photoshop business remained steady in the quarter. Knowledge Worker Solutions Segment Revenues for the third quarter of fiscal year 2006 were $154.1 million, compared to $163.0 million last quarter. Acrobat revenue grew on a year-to-year basis. The ratio of Acrobat Professional to Acrobat Standard revenue still remains 1:1. The next version of Acrobat is scheduled to ship in the fourth quarter. Enterprise and Developer Solutions Segment Revenues for the third quarter of fiscal year 2006 were $49.4 million, compared to $42.8 million last quarter. The Life Cycle server business achieved record revenue in the third quarter. The company has also announced a partnership with IKON. Mobile and Device Solutions Segment Revenues for the third quarter of fiscal year 2006 were $9.1 million, compared to $7.9 million last quarter. Revenues continue to be impacted due to purchase accounting from the Macromedia acquisition. Other Segment Revenues for the third quarter of fiscal year 2006 were $61.5 million, compared to $64.5 million last quarter. PostScript revenues grew year-over-year. Adobe announced a distribution relationship with Google, a strategic alliance with Viacom, and the availability of Flash Player 9. Guidance For the fourth quarter of fiscal 2006, Adobe is targeting revenues of $655 million to $685 million. The company is also targeting a GAAP operating margin of approximately 21% to 24% in the fourth quarter. Share counts are targeted to be between 600 million and 602 million shares in the fourth quarter of 2006. Finally, the tax rate is expected to be approximately 26%. Raine Radar Although Adobe's revenue did climb 24%, earnings were off, primarily due to increased costs related to its acquisition of Macromedia. EPS is expected to be up next quarter, probably as a result of the launch of its newest version of Acrobat. The latest version of Creative Suite isn’t expected until sometime during the first half of 2007. Overall, the company has a lot to look forward to as it moves ahead, especially if it can control its acquisition-related costs. One particularly area generating excitement for the company is the digital video craze. Adobe is definitely one company that can cash in on this trend, since its Flash Player is used by many online providers. Q & A 1. The company is planning an aggressive marketing campaign to introduce the newest version of CS2, Creative Suite 2.3 Premium. They want to make sure that they provide information and marketing to those who have not standardized on the newest platform. The newest version of Acrobat will also be provided with the new CS2. 2. The migration from Windows XP to Vista will be a much more seamless migration. Adobe said that the newest version of the Adobe product would work very well in a Vista environment. The bulk of their revenue will come from businesses rather than the general public. 3. Adobe believes that over the years they have been able to create a PDF product that has grown and changed with the needs of businesses as well as the general public. 4. Adobe said that their fourth quarter should be very good. They expect to see an increase in the creative segment because the new version of Adobe Acrobat is being released. They went on to say that the first quarter of 2007 will likely be the most challenging. 5. Adobe is targeting revenues of $655 million to $685 million for the fourth quarter of fiscal 2006, primarily due to an end in seasonality and the introduction of the newest version of Adobe Acrobat. 6. In terms of cost of sales and gross margins, Adobe thinks that they were right on track in the third quarter. Going forward they think the Google alliance revenues will start to kick in and drive the revenues in all subsequent quarters. 7. Adobe is continuing to make progress on FlashLite and FlashCast. Samsung’s UGo active home screen is based on Adobe FlashLite II technology. Adobe is very optimistic about their FlashCast success with NNT DoCoMo, which is generating interest in other carriers around the world. Trevor Shackelford is an Associate at Raine Media, Inc. and can be reached at [email protected]