Adobe Earning Call, F4Q08

Adobe announced quarterly financial results today, and there was the regular financial analyst call this afternoon. Seeking Alpha has the transcript (thanks!), and I’ve pulled out some technology-oriented points below.

To get an overall feeling of the piece, start with Shantanu’s conclusion:

“So thank you all again for joining us today. I mean, in summary, when we look at 2008, we think that in a tough economic environment, we achieved both our revenue as well as our profitability goals and more important, we put the company in a very strong position as it relates to the focus on Flash platform, the Creative Suite and Acrobat business. And as we said, we think 2009 will be a tough market. We’ve already taken the actions in place to help us through this tough economic climate and we continue to be really positive about the long-term prospects for the company and we are confident that as we emerge from this economic climate, that Adobe will be in a stronger position than ever before. And we look forward to sharing more at our next earnings call.”

A line about Creative Suite:

“Industry and press response to CS4 has been excellent… We believe CS4 is a stellar release, with new product innovations, time-saving features, and workflow enhancements that will improve productivity… While customer feedback has been positive, given the current economic climate, we believe CS4 adoption in the short-term will be muted when compared to prior cycles.”

Dynamic Media, which builds atop Flash Platform:

“Dynamic media continues to be a key growth focus for Adobe… Recent high profile wins include Disney.com, the number one ranked kids entertainment and family community destination on the web [which] has experienced record online traffic levels, as viewers logged on to watch full-length movies delivered via the Adobe Flash platform… Telecom Italia [with] live television channels and on-demand content through its web portal… And MLB.com [is using] Flash Platform to deliver all of its live and on-demand video offerings for two years [and] will provide a downloadable rich Internet application built using Adobe Air.”

Shantanu closes his prepared remarks:

“In closing, as we enter fiscal 2009, we will continue to make strategic investments that will position us well for the future while managing our business to ensure consistent profitability. Our strategic priorities are advancing the Adobe Flash platform as the preferred solution for how the world engages with ideas and information; investing in our core businesses, including Creative Suite and Acrobat, to maintain our leadership position through innovation and continue our expansion into new customer segments and geographical markets; and focusing on our growth businesses, which include LiveCycle, Connect Pro, Scene 7, and Dynamic Media as areas we believe have significant potential for future growth.

“While 2009 will be a challenging year because of the macroeconomic environment, we believe the key market trends driving our business remain intact. By continuing to innovate and deliver through solid execution, we believe Adobe is well-positioned for future growth.”

Question and answer session… I’ll paraphrase some parts, so look for quotemarks to signify direct quotations from the text:

(Q) Why did mobile revenue drop?
(A) “The reason for the drop is, like we’ve been talking about for quite some time, the move to the Open Screen Project will ultimately make the royalty revenue that we have for mobile go away, and you are starting to see that in 2009 as we anticipated.”

(Q) Future guidance?
(A) “We’re not providing ’09 guidance, primarily because of the limited visibility that most companies have right now.”

(Q) What about CS4 sales?
(A) “I have gone out and talked to a bunch of customers and frankly the response to CS4 in terms of the innovation that we’ve done and productivity features that we have added in addition to the workflow actually remains as strong as it’s ever been. CS4, as I said earlier, was our strongest product ever. There’s just a tremendous amount of innovation but there’s no question that the economic uncertainty is playing into the adoption rate we’ve seen and that’s why we thought it would be muted in the short-run… We just saw some research that Omni had produced which stated that CS4 actually can save over 18% of the productivity versus CS3… But we are definitely seeing some impact due to the financial situation.”

(I’ll echo that one. I’ve never seen as positive a reception to a release, and I know the timesaving stuff in there makes it a sound economic value. I think CS4 will have a slow start and a long tail. And the wild thing is that there’s more stuff brewing in the labs for CS5. There’s a whole lot of new things yet to accomplish. But many businesses are, sensibly, being cautious right now.)

(Q) “You’ve made a swift move here with an 8% headcount reduction. How much through the year will you continue to look to keep costs very tight and preserve the margins, even if the demand continues to track, you know, maybe even worse than what we are seeing right now?”
(A) “Based on what we saw in the economic climate, as you point out, we took fairly quick action. We’ve already restructured and that was actually done on the day that we announced it, so I think rather than have that linger or there be uncertainty within the organization, we were able to get that all behind us… And it’s not just the restructuring that we’ve done. We’ve also taken a number of other internal measures to make sure that there’s a very significant scrutiny on expenses, whether it’s travel where we are not doing really any travel that’s not related to customers. We use Acrobat Connect and so that’s a good use of travel. Every single external expense as it relates to contractors is being scrutinized by Mark. We’ve also made some decisions as it relates to the salary structure for employees, so we will continue to monitor all of that and balance investing in our strategic directions versus returning to shareholders.”

(Q) How come you’re still reporting mobile revenue? Wasn’t the Open Screen Project announced awhile ago?
(A) “As it relates to mobile, you’re right — we did anticipate it starting to drop a little sooner. What happened is a lot of the OEMs burned through some of their prepaids faster than we thought. Flash Lite has done extremely well and they just couldn’t wait for the OSP version of Flash to come out later in 2009, so we did some renewals with them earlier and larger than we thought we would do.”

(Q) Wow, LiveCycle and enterprise is growing fast, at 46%!
(A) Yes, but we want to grow the business appropriately, “rather than investing too much ahead of the curve… I think moving people from inefficient, paper-based processes to automated processes is resonating with our customers.”

(Q) Yadda yadda Silverlight?
(A) Look at the entire ecosystem around Flash. It gives you access to every computer, and already nearly a billion devices. Every creative tool now offers a Flash workflow. Every manufacturer wants to offer it. And there’s an entire server system, as well as CDN support, hosting support, third-party tools. That ecosystem — including the millions of creative professionals already earning their living through Flash — is what makes Flash Platform work. And: “We will be very aggressive about making sure that we continue to innovate in the entire media space to keep our lead.”

(I didn’t really paraphrase the above text from the transcript, but made the case as I would make it, based on the ideas in the text.)

(Q) What about magazine and newspaper publishers, the print market?
(A) “The way I would characterize that entire business, frankly, is that as you look at employment, if employment exists in those publishing markets and they are spending, the Creative Suite tends to be the top of the list. I’ve met a number of customers who say if they are going to buy a piece of software, to increase their productivity, it’s going to be Creative Suite 4. But I think the economic impact certainly weighs on them as well. So from our perspective, we’ve been focused on making sure that as they migrate from print to web to video to wireless, that Creative Suite is ahead of where they want to be. ”

(Q) Flex Builder?
(A) “We are continuing to see a fairly good demand for Flex Builder and in addition to the Flex Builder, we are actually also pretty excited about the possibilities associated with Flash Catalyst, Steve, that as you know, we showed at our recent MAX conference. So clearly the number of people who have been downloading the Air SDK and who have been looking at Flex Builder and our other development tools to create these engaging applications, is going up.”

(Q) And hey, what about that iPhone I keep hearing about?
(A) “Sure. So smartphones continues to be a category that we are focused on. We have clearly streamlined our strategic intent to make sure that we have both web browsing as well as Air support on these smartphones. We actually already deliver Flash for smartphones, such as those powered by either the series 60 from Nokia, running the [Symbian] operating system and/or running Windows Mobile, as well as in Japan we certainly have a lot of support. So I would say that already today we have a lot of smartphone category phones that are supported with Flash. That’s why we’ve shipped over 800 million and we say we expect to reach our one billion mark sooner than anticipated… At MAX recently, we also showed a prototype of Flash running on the Android operating system that’s powered by Google, and now we have also said that we are only going to focus on Flash 10 rather than Flash Lite, which is why it’s taking a little time. But we fully expect to see versions running for smartphones in the middle of next year.”

(Yes, I know he didn’t even mention the name this time… twice burned and all that, I guess…. ;-)

My takeaways: Adobe is committed to making this Flash Platform thing work. It’s a core part of the business — the next publishing platform that the entire company can build atop. It’s not a tangent or a me-too effort… establishing predictable interactive screen publishing atop any device is what Adobe must provide over the next few years. And there’s an entire ecosystem — including millions of creative professionals already earning their living through Flash every day — working alongside Adobe to bring this capability to fruition.

Do you have thoughts, opinions, follow-ups or bounce-offs to the above…?