Bruce Chizen - CEO Mark Garrett - EVP and CFO Shantanu Narayen - President and COO Mike Saviage - VP of IR

Brent Thill - Citigroup Jay Vleeschhouwer - Merrill Lynch John Stewart - UBS Gene Munster - Piper Jaffray John McPeake - Prudential Walter Pritchard - Cowen and Company Sarah Friar - Goldman Sachs Brian Essex - Morgan Stanley Steve Ashley - Robert W. Baird Ross MacMillan - Jefferies Phil Rueppel - Wachovia Securities Adam Holt - J.P. Morgan Yun Kim - Pacific Growth Equities

Good day, everyone. Welcome to the Adobe First Quarter and Fiscal Year 2007 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon and thank you for joining us today. Joining me on the call are Bruce Chizen, our CEO; Shantanu Narayen, President and COO; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's first quarter fiscal year 2007 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 45 minutes ago. If you need a copy of the press release, you can go to adobe.com under the Company and Press links to find an electronic copy. Before we get started, I want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans, is based on the information as of today, March 20, 2007, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review Adobe's SEC filings, including our annual report on Form 10-K for fiscal 2006 and our quarterly reports on Form 10-Q in fiscal 2006 and 2007. During this call, we will discuss non-GAAP financial measures. The GAAP financial measures that correspond to non-GAAP financial measures, as well as the reconciliation between the two, are available on our website. Call participants are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. An archive of the call will be made available in Acrobat Connect on the Adobe's Investor Relations website for approximately 45 days, and it is the property of Adobe Systems. The audio and archive may not be re-recorded or otherwise reproduced or distributed without prior written permission from Adobe Systems. I would now like to turn the call over to Bruce.

Thanks, Mike, and good afternoon. Q1 was a solid quarter for Adobe. Revenue was $649.4 million, in line with the target range we communicated at the outset of the quarter. I'm particularly pleased with our earnings performance, as non-GAAP diluted earnings per share were $0.30, which was at the high end of our targeted range. Adobe's overall business continued to perform well. Acrobat continues to receive great customer feedback and had its second best quarter ever. Our Creatives business was strong in front of our upcoming CS3 release. We continued to gain traction in our Mobile and Enterprise businesses, and we are excited about the Developer release of Apollo, which was made available yesterday. Shantanu will be providing more color in a few minutes. I'll now hand the call over to Mark for a more detailed review of our Q1 financial performance. Mark?

Thanks Bruce. This is my first earnings call as Adobe's CFO and I am excited to be here. Adobe is a great company with a first class management team and many significant opportunities in front of it. We are looking forward to presenting the Adobe story to you next week at our analysts' meeting, and I am personally looking forward to seeing many of you. For the first quarter of fiscal 2007, Adobe achieved revenue of $649.4 million. This compares to $655.5 million reported for the first quarter of fiscal 2006 and $682.2 million reported last quarter. GAAP operating expenses for the first quarter of fiscal 2007 were $430.8 million compared to $439.2 million last quarter. Non-GAAP operating expenses were $383.7 million compared to $383.3 million last quarter. GAAP operating income in the first quarter of fiscal 2007 was $146.3 million or 22.5% of revenue. This compares to GAAP operating income of $130 million or 19.8% of revenue in the first quarter of fiscal 2006 and $163.4 million or 23.9% of revenue last quarter. Non-GAAP operating income in the first quarter of fiscal 2007 was $222.5 million or 34.3% of revenue. This compares to non-GAAP operating income of $252.4 million or 38.5% of revenue in the first quarter of fiscal 2006 and $255.8 million or 37.5% of revenue last quarter. Adobe's GAAP effective tax rate for the first quarter of fiscal 2007 was 17.5%, and Adobe's non-GAAP effective tax rate was 25.6%. Our non-GAAP rate was lower than targeted due to the reenactment of the R&D tax credit signed into law in December of 2006. GAAP net income for the first quarter of fiscal 2007 was $143.9 million compared to $105.1 million reported in the first quarter of fiscal 2006 and $183.2 million last quarter. Non-GAAP net income was $182.3 million compared to $197.5 million reported in the first quarter of fiscal 2006 and $198.3 million last quarter. GAAP diluted earnings per share for the first quarter of fiscal 2007 were $0.24 based on 604.2 million weighted average shares. This compares with GAAP diluted earnings per share of $0.17 reported in the first quarter of fiscal 2006 based on 621.8 million weighted average shares and GAAP diluted earnings per share of $0.30 reported last quarter based on 602.2 million weighted average shares. Non-GAAP diluted earnings per share for the first quarter of fiscal 2007 were $0.30. This compares with non-GAAP diluted earnings per share of $0.32 in the first quarter of fiscal 2006 and $0.33 reported in the last quarter. I will now discuss Adobe's revenue by business segment. Beginning in Q1, we are reporting Flash Video Streaming Service and Flash Media Server product revenue as part of our Creative Solutions segment instead of our Knowledge Worker segment. Historical fiscal year 2006 segment data has been adjusted accordingly and is available today in our Investor Relations data sheet on the Investor Relations page of adobe.com. Creative Solutions segment revenue was $346.4 million compared to (inaudible) fiscal 2006 and $364.1 million last quarter. We note that revenue for our new Photoshop Lightroom product is being recognized ratably over time as opposed to our normal channel-based desktop software revenue recognition approach enabling us to deliver new functionality throughout its life cycle. Only a small portion of approximately $7 million in Lightroom revenue was recognized in Q1. Knowledge Worker segment revenue was $174.8 million compared to $166.3 million in Q1 of fiscal 2006 and $180.9 million last quarter. Enterprise and Developer segment revenue was $50.9 million compared to $45 million in Q1 of fiscal 2006 and $52 million last quarter. Mobile and Device segment revenue was $13.7 million compared to $8.6 million in Q1 of fiscal 2006 and $12.1 million last quarter. Revenue in this segment continues to be negatively impacted due to purchase accounting from the Macromedia acquisition. Finally, our Other segment revenue was $63.6 million compared to $53.5 million in Q1 of fiscal 2006 and $73.1 million last quarter. The sequential decline was driven mainly by the nature of contracts associated with the monetization of our free client software downloads. We experienced solid demand across all of our major geographies. Results in Q1 fiscal 2007 on a percent of revenue basis were as follows: The Americas 46%, Europe 33%, and Asia 21%. Regular employees at the end of the first quarter totaled 6,151 versus 6,068 at the end of the fourth quarter of fiscal 2006. The majority of the headcount increase from the last quarter was in research and development. Our trade DSO in the first quarter of fiscal 2007 was 43 days. This compares to 39 days in Q1 fiscal 2006 and 48 days last quarter. In regard to our global channel inventory position, we ended the quarter within company policy. At the end of the first quarter of fiscal 2007, cash and short-term investments were $2.3 billion, the same as it was at the end of the fourth quarter of fiscal 2006. During the quarter, we repurchased 4.8 million shares at a total cost of $184.7 million as a part of our share repurchase program. This concludes my discussion on our financial results. I would now like to comment on our targets for our second quarter of fiscal 2007. We are targeting a Q2 revenue range of approximately $700 million to $740 million. In addition, we are targeting a GAAP operating margin of approximately 23% to 25% and a non-GAAP operating margin of 36% to 37%. We are targeting our second quarter share count to be approximately 605 million to 607 million shares. For other income, we are targeting approximately $23 million to $24 million. For our GAAP effective tax rate, we are targeting approximately 24% to 26% and a non-GAAP effective tax rate of approximately 25% to 27%. These targets lead to a GAAP earnings per share target range in Q2 fiscal 2007 of $0.23 to $0.26 per share and a non-GAAP earnings per share target range of $0.34 to $0.36. For fiscal year 2007, we are reaffirming the financial targets we provided in December. These targets are an annual revenue growth target of approximately 15% with a GAAP operating margin range of approximately 25% to 27% and a non-GAAP operating margin range of approximately 37% to 38%. Our full year financial targets continue to be based on the following assumptions: We expect to ship new versions of our Creative products in English late in Q2, with the bulk of the major foreign language versions expected to ship in Q3. We expect overall revenue in Q3 to be substantially higher than revenue in Q2 because of the launch timing. Finally, we expect Q4 to be the highest revenue quarter of the fiscal year. This concludes my discussion on our financial results. I would now like to turn the call over to Shantanu.

Thanks Mark. I will spend the next few minutes reviewing the highlights from our performance, starting first with Creative Solutions. Overall, our Creative business was solid. As expected, revenue declined sequentially from Q4 and was in line with our expectations. In our Digital Imaging business, standalone Photoshop unit sales grew year-over-year. In addition, we shipped Photoshop Lightroom, our new product line extension that enables professional photographers to manage and share large volumes of digital photographs. Reviews from publications such as The New York Times and CNET have been positive, helping to create awareness and generate demand for the new product. We announced that we will be delivering two versions of Photoshop CS3. The new Photoshop CS3 Extended will add new capabilities such as the integration of 3D and motion graphics and image measurement and analysis to simplify work flows for professionals in architecture, engineering, medicine and science. In addition, we will offer a standard Photoshop CS3 for designers and professional photographers. Our Digital Video business had another solid quarter, driven by demand for our Flash Video Server products, as more and more video is streamed over the web using Flash Video. In January, we announced the next versions of our video products, and the Production Studio Suite will be available on both the Macintosh and Windows platforms and is expected to ship in mid 2007. We also extended our Digital Video business with our hosted ad-based video editing offering. We launched our first partnership with Photobucket to integrate this technology directly into the site's user experience. It provides Photobucket's 35 million users with easy access to an online Adobe Digital Video editing experience. We continue to be on track to deliver the next version of Creative Suite, the largest Adobe release in our 25-year history. Creative Suite 3.0 will be a revolutionary offering of tightly integrated industry leading design and development tools for virtually every creative workflow. Feedback from CS3 beta customers has been positive and anticipation is building around the upcoming release. A customer event to announce CS3 is planned for March 27 in New York. In our Knowledge Worker Solutions business, Acrobat desktop revenue achieved its second highest quarter ever. Some customers delayed purchasing and deploying Acrobat 8 due to a new electronic license management solution called Adobe License Manager. We recently delivered a new version of Acrobat, which has addressed the issue, and we are assuming modest sequential growth in Q2. We continue to see more customers adopting the higher-end features of the Acrobat family of products. For example, [Renova] France has selected Acrobat to extend 3D visualization and design collaboration capabilities across its extended enterprise of employees and supply chain partners. The agreement involves 5,000 seats of Acrobat 3D. Revenue for Acrobat Professional continues to exceed that of standard by a slight margin. In January, we announced we intend to release the full PDF specification to an open standards body. This will help continue to drive innovation and expand the rich PDF ecosystem that has evolved over the past 15 years. In our Enterprise and Developer Solutions business, we continue to drive customer adoption and year-over-year growth. Wins in the government market include the Ohio Department of Taxation, which is utilizing an Adobe LiveCycle Solution technology to save form-processing time and eliminate costly re-keying errors. The Prime Minister's office in Belgium, which has adopted LiveCycle to transform all incoming documents into the PDF/A format for archiving, and the European Medicines Agency, the EU equivalent to the FDA, which will use an Adobe eForm Solution to gather data from the pharmaceutical industry and EU Ministries of Health. LiveCycle wins in the commercial market include BNP Paribas Private Bank, which will utilize LiveCycle forms technology to optimize customer account portfolio handling by bank employees; McCann Worldgroup, which is leveraging a LiveCycle document security solution to enhance and secure internal and external review and approval processes; and HSBC Bank which is using a LiveCycle eForm and Barcode solution to enable the global transfer of customer details streamlining the process for opening accounts in different countries. In total, the number of Enterprise transactions in the quarter with licensing revenue greater than $50,000 for server products, including LiveCycle, Flex, Acrobat Connect, and Flash Media Server was 110, up from 104 last quarter. In our Mobile and Device Solutions business, we announced support for Flash Video integration in the next generation of Adobe Flash Lite software. Flash Lite 3 for mobile phones is expected to be available in the first half of 2007. We continue to make progress with mobile operators worldwide. Telenor, a Swedish mobile operator will conduct the first FlashCast trial in Europe, joining several operators across the globe now testing FlashCast. We also launched a new Flash Lite service with China Mobile. China Mobile customers can download Flash Lite compatible content in five different categories, including classic animation, music, games, magazines, and screen savers. In our Platform business, yesterday we announced the first public alpha version of Apollo is now available for developers on Adobe Labs. Apollo is our code name for a cross operating system application runtime that allows web developers to leverage their existing skills in HTML, JavaScript, and AJAX, as well as Adobe Flash and Flex to build and deploy rich Internet applications on the desktop. This concludes my comments. I will now turn the call back over to Bruce.

Thanks Shantanu. We will formally unveil the next version of Creative Suite at a launch event next week in New York City. This represents the biggest product launch in Adobe's 25-year history and sets the stage for another year of strong performance. We look forward to sharing more details about CS3 and discussing other exciting growth opportunities with you at our Financial Analyst meeting next month. I'll now turn the call back over to Mike.

Thanks Bruce. Before we start Q&A, a couple of logistical items. We encourage members of the financial community to watch next week's Creative Suite event via a live webcast, which will be made available from the main page of adobe.com on Tuesday, March 27, starting at 3:30 p.m. Eastern Time. Our Financial Analyst meeting will occur the day after the Creative event, Wednesday, March 28 in New York City. If you have not registered to attend, please contact Adobe Investor Relations for registration information. If you are unable to attend, a live webcast can be accessed from the Investor Relations page of adobe.com, starting at approximately 10:00 a.m. Eastern Time. We have set the date for MAX 2007, our annual customer and developer conference. It will be held in Chicago, September 30 through October 3. Invitations will be sent out in the summer. As always, we have posted several documents on the IR page of adobe.com related to our earnings report today. They include today's earnings release, our updated investor data sheet, and a table providing reconciliation for GAAP to non-GAAP financial data. To access these documents and other investor-related information, you can go to www.adobe.com/adbe. For those who wish to listen to a playback of today's conference call, a web-based Acrobat Connect archive of the call will be available from the IR page on adobe.com later today. Alternatively, you can listen to a phone replay by calling 888-203-1112. Use conference ID number 3262438. Again, the phone number is 888-203-1112, with ID number 3262438. International callers should dial 719-457-0820. The phone playback service will be available beginning at 4:00 p.m. Pacific Time today and ending at 4:00 p.m. Pacific Time on Friday, March 23, 2007. We would now be happy to take your questions. Operator?

Thank you. (Operator Instructions). We'll go first to Brent Thill with Citigroup. Brent Thill - Citigroup: Thanks. Mark, may be if you could address the cash position, $2.3 billion and your potential plans for a larger buyback at some point?

Hey, Brent, thanks. Obviously, we've got a lot of cash. We're looking at our excess cash balance. And we're focused on delivering that cash back to shareholders in the best way possible, which we believe is a share buyback, and we'll talk more about that at the Analyst Day. Brent Thill - Citigroup: Okay. And just a follow-up on Apollo. When do you think that's going to have a broader impact on the financial model?

Brent this is Shantanu. We are pretty excited. Yesterday was the first day we got the alpha build-out for developers to start to deliver applications on top of Apollo. The reality is in 2007, we are not really going to see a revenue impact of Apollo. But it's really the next phase of what we are doing with PDF and Flash as well. Brent Thill - Citigroup: Thanks.

We'll go next to Jay Vleeschhouwer with Merrill Lynch. Jay Vleeschhouwer - Merrill Lynch: Thanks. Good afternoon. Bruce, you're going to be announcing, as you've pointed out, an unusually large number of new products next week. Can you walk us through what some of the new or different logistical or marketing challenges might be that you have to manage given the number of products that you will have? And is it fair to assume that you're going to have staggered releases of the 14 products, for example, will the Video products ship as late as the summer? Secondly, on Acrobat you pointed out that desktop had its second best quarter. But it would seem from some of the sales data that Acrobat 7 hung around so to say a little bit longer and had a little bit more material impact during the first few months of 8's availability than we saw two years ago with 6? Is there something different going on here in terms of how quickly you are transitioning from the previous version to the new version or is this a shift to 2.3 that you're seeing in the Creative Solutions number?

Jay, first of all regarding the Creative Suite, we've had about a year-and-a-half to get this right. And I can assure you that we have gotten that right and it's well planned, well thought out. We will be introducing 13 new applications, 19 different product configurations, seven technologies that cut across all of those applications and two services. It's clearly the biggest release in the Adobe's 25-year history of being in business. We're excited about it. The revenue for Q2 is already factored into the guidance that we have provided. Clearly, given the timing of the releases, the timing of the foreign language version, as well as potentially some of the SKUs, we do expect Q3 to be up. Next week, we will give you all of the details about which SKUs come when, which applications, which segments, video, web, etcetera come over what period of time. So, stay tuned and look for an exciting announcement next week in New York.

Jay with respect to Acrobat 8, we continue to see great customer adoption. As we said on the call, it was our second best quarter ever. And when we look at it version over version, given similar time 7 to 8, we're actually up in both units as well as in revenue. And as we said also, we expect Q2 to be sequentially up. What we did see in Q1 was some licensing manager issues that I alluded to. Those are all behind us right now. And so, we continue to be excited about getting new customers to the PDF platform. And clearly, we are seeing higher value usage of PDF and Acrobat go up. Jay Vleeschhouwer - Merrill Lynch: And just to clarify, did you see upside, as far as you are concerned in the adoption of 2.3 as a means to get to Acrobat 8.

I think sequentially we had said between Q3 of '06 and Q4 of '06, that when we introduced the new Creative Suite, that we would be seeing an uptick as a result of Acrobat. And clearly, Acrobat is a big part of the Creative workflow. But I wouldn't say it specifically that what we are seeing is Acrobat moving to the Creative. We continue to be excited about the opportunity in Knowledge Workers.

Keep in mind, for any Creative Professional that has stalled or deferred their purchases of the Creative Suite until the new versions are available. They would more than likely also install their purchase of any product associated with the suite including Acrobat 8. So, it is possible that any of our Creative Professional customers have not yet upgraded to Acrobat 8, waiting for the release of the Creative Suite SKUs that we'll be announcing next week. Jay Vleeschhouwer - Merrill Lynch: Thank you.

We'll go next to Heather Bellini of UBS. John Stewart - UBS: Hi, this is John Stewart for Heather. Bruce, you mentioned some of the new applications that are going to be coming out with CS3. Can you talk a little bit about the average revenue increase you expect from customers, and may be talk a little bit about the pricing elasticity of the customers?

Yeah, we are somewhat fortunate in that. Our customer is not typically price sensitive. This is a customer that really cares about the quality of their output, whether it's web or video or print or mobile. More important than anything else is what kind of experience, and creating an engaging reliable, relatively secure experience for their user. And they are typically either an employee of a corporation or more than likely are a contractor who work for a web shop, graphic shop, video shop doing work on behalf of a corporation. The cost of the tool is not what is critical to them. What's critical to them is the productivity of that tool and what their output could be. So, that customer is not very price sensitive. Clearly, they want to pay for value. As long as we deliver innovative features that allow them to be more productive and more creative, we believe that they will in return pay an appropriate price for that product. So, what we've seen happen over the last number of releases of our applications as well as the Creative Suite, they have tended to buy on an average more applications per user for themselves, which has ultimately led to a higher ASP or higher dollars per seat per user. And we expect that with this release, they will probably want to use more products because of some of the great things that will be introducing next year. So, we are anticipating overall ASPs going up. John Stewart - UBS: Okay. And then one other follow-up question with the Photoshop Extended. Looking out into the future of this product, how deeply will they start to compete with Autodesk products?

I think imaging, what we are finding increasingly, John, is that imaging is used in all these vertical industries to do a very extensive usage. And so, while we are supporting 3D models, the reality is that Photoshop will just continue to be used to create an image of it as opposed to doing the modeling. So, I don't really see Photoshop Extended as being competitive to what Autodesk is doing in the CAD marketplace at all. What I do see is that it allows people in those industries to do more interesting things by importing CAD objects and converting it into raster images.

It will be interesting to see what happens once we ship both of the products. While there are number of features in Photoshop Extended that are targeted towards certain verticals, the medical profession, the police profession, the more technical user, the engineering profession and so on, a number of people who are typically aren't in that profession might end up buying the product anyway, as we saw with Acrobat Pro and Acrobat Standard, many customers choose to go with the more fully featured product, because they really want the capabilities even though they might not be typically targeted directly at their profession. John Stewart - UBS: Great, thanks a lot.

We'll go next to Gene Munster with Piper Jaffray. Gene Munster - Piper Jaffray: Hey guys. I guess one of the big drivers here, where you guys are kind of helping each other is Apple with the new Intel base, is there any chance you guys could do some sort of co-promotions with CS3 or co-branding around CS3 in the Intel based Mac?

Gene, we are certainly going to get a lot of support at our launch from a number of partners, Apple being clearly a very important partner in terms of excitement of Creative Suite driving, whether it's hardware purchases, peripheral, etcetera. So, you will see a number of partners support us. Apple is clearly one of the most important ones. We've seen tremendous performance improvements with our new applications on the new Mactel hardware. So, they are very excited. Gene Munster - Piper Jaffray: But you don't see kind of cooperative branding between Apple and Adobe?

We have such a close relationship already with our customer in a direct relationship, they will help promote the release, but we don't anticipate seeing bundles on hardware, that's the question. Gene Munster - Piper Jaffray: Okay, yeah. Couple of quick other questions in terms of Acrobat, the licensing manager issue. Is there any way to quantify how big of an issue that was in the quarter? And then as a part of that the increase in deferred, was there anything in particular that was a driver in the increase in deferred, any segment in particular?

From the licensing, let me take that one Gene. Clearly piracy is a considerable issue for us, for Acrobat. And what we did with 7 was we put activation for retail. With 8 we tried to also extend that into the Enterprise because even in the Enterprise there is a fair amount of leakage. It's hard to quantify it. But we do know that a number of our field resources were involved in whether it was educating the customers or helping them overcome it. So, we've made the decision to disable the licensing manager and have them continue to focus at this time on selling more Acrobat into the Enterprise.

And Gene this is Mark. On the deferred, the largest increase was from the Lightroom revenue deferral I spoke about. We had about $7 million in revenue from the product and took only a small portion of that to revenue. The rest of it went to deferred. We wanted, since it was a new product, to be able to continue to provide updates. So from an accounting perspective, we recognized the revenue ratably so we could provide updates. Gene Munster - Piper Jaffray: Okay. And then final question on Apollo. Obviously, this is going to be probably a big theme team, you guys are going to talk a lot about the Analyst Day about why Adobe is more than a product cycle company and Apollo is probably part of that. Is this going be new products that are going to be around? Is it going to be a new branding and a new segment? Because I think conceptually it's sometimes hard for you really to get what Apollo is. And Shantanu I know you kind of gave a technical explanation of it, but essentially are these tools to help software developers create hosted applications or is this something totally different?

Yeah, what you want to do Gene is, think about Apollo the same way you think about the Adobe Reader or the Flash Player. It's a free client, a free runtime client in which A; we'll have tools, the same way that we had Acrobat and LiveCycle that takes advantage of the free Reader. We have Flash Authoring and now Acrobat Connect taking advantage of the Flash Player. We will have applications that take advantage of that free client, plus our existing applications, products like Flash authoring, Flex, Photoshop and Illustrator can all be used to take advantage and to create applications that others can create applications based on that free client. Gene Munster - Piper Jaffray: Okay.

And then we'll have new solutions, some of which we hope to give you a glimpse of next week that will take advantage of this radically new user experience that the client will be able to provide. So stay tuned, you'll hear a lot more about it at the Analyst Meeting. It will be a key focus of ours. Gene Munster - Piper Jaffray: Great, thank you.

We'll go next to John McPeake with Prudential. John McPeake - Prudential: Congratulations guys. Look forward to seeing you next week. Questions about the Flash. It certainly seems anecdotally, as you around the Internet that there is less Windows Media and Real Player, even QuickTime to Apple's disappointment, I am sure. It seems like Flash is starting to dominate more. I’m wondering Shantanu if you can share any statistics you have with respect to the percentage of files since you guys own the file format that are coming across in Flash format versus competitive formats? And then I just have a quick follow-up.

I think your observation is right on John. If you do a right click on most of the video that goes through the web today, it's mostly Flash. People really love the interactive experience. They love the fact that it's crossed platform. They love the fact that they can use their existing tools, like Adobe Premiere and After Effects that easily output it to the Flash file format. The one piece of data that I recently saw from an independent research study was that, if you look at broadcast and cable TV, 74% of that information that typically goes out on cable TV that's not going out on the web is going out via Flash Video. So, that's a pretty compelling number which validates I think what we're all experiencing. For us, we're seeing that the benefit of that through increased revenue and Flash Authoring, Shantanu talked about it earlier, the increase that we saw with the Flash Media Server and the Flash Video Server, and we are seeing people becoming more loyal to the Adobe work flow, using product like Premier and After Effects. So, for us, it's all good news, and expect a lot more there and we want to take advantage of Apollo to enhance our overall video strategy. John McPeake - Prudential: And getting back to Gene's question on Mac. Is there going to be any enhancements in your product set that you can get if you use OS 10.5 Leopard versus prior generations of OS and this is sort of what I am thinking about.

John, the reality is for the new CS3 products, most of them will run on both the old Macintoshes, the Power PC-based architecture as well as the Intel-based architecture. People see significant performance gains when they move to the new hardware architecture. But between the current OS that's shipping and the next OS, it's unlikely that there will be significant advantages because the next OS is not yet released. So, if Apple makes underlying changes that improves performance, customers will see it. But we don't have features in CS3 that take advantage of an unannounced and non-shipping Mac OS at this point. John McPeake - Prudential: And you were testing on Leopard data version I imagine.

We continue to test with early versions of OSs with our partners whether it be Microsoft before Vista was released or Apple, yes. John McPeake - Prudential: Okay. Thank you.

We'll go next to Walter Pritchard with Cowen and Company. Walter Pritchard - Cowen and Company: Hi, just a couple of questions. Couple of questions here on, it sounds like you are taking Lightroom ratable. Is that a trend going forward or is that just simply isolated to this product, that's a very new product, because I know that you are releasing some new versions and so forth in the upcoming suites? So just wanted to see if any of that was going to be treated ratably?

No, we made the decision to do it for Lightroom which was a brand new product. Clearly, with Lightroom as you know, we also put it out on labs prior to releasing it. And the overwhelming feedback that we got from the community was that they wanted to see us continue to enhance the product during the product cycles. And so, it really made sense from an accounting treatment treat it as to recognizing that revenue ratably over the period of the product. But I don't expect that for CS3. Walter Pritchard - Cowen and Company: Okay, and just a follow-up on Acrobat, there's been a couple questions asked. But, I note that just the Knowledge Worker business grew about 4% year-over-year, and you noted there were some one-time issues. What would you cite as the medium-term growth rate of that business? Is it still a double-digit growth business or do you think that business is starting to flatten out here?

Again, we will talk about the business opportunity in more detail at the Analyst Meeting next week. For the rest of the year in terms of outlook for Acrobat desktop, we are expecting it to follow previous versions, which is factoring in seasonality we expect it to have sequential increase for the rest of the year. It really is a business where we are attracting new customers to the platform. So, it's driven primarily by new units.

Yeah, we will update you with current numbers. But if you think about what we talked about last January, we said we had shipped back then about 20 million new units. And we thought there were about 84 million people who should be using Acrobat. So, if you assume whatever number this year or up through then, the opportunity continues to be enormous. The fact that Acrobat 8 is doing better than Acrobat 7 was in terms of units and revenue is also very encouraging to us. And keep in mind this was the second best quarter. We have reached a plateau that's higher than where Acrobat 7 was. And we expect sequential growth again next quarter. Obviously, Q3 there could be some seasonal weakness. But we expect the pattern of Acrobat 8 to be similar to the pattern of 5, 6 and 7. Walter Pritchard - Cowen and Company: Great, thanks a lot. See you next weak.

We'll go next to Sarah Friar with Goldman Sachs. Sarah Friar - Goldman Sachs: Good afternoon, guys. Just briefly on guidance. Can you give us any sense of what you are assuming in terms of CS3 upgrades, in terms of the percentage of people that will upgrade it in that guidance you just gave for the next quarter?

Yeah, Sarah, we haven't broken that out publicly. What we are assuming is that English will ship in the quarter, and we should be able to get a full shipment of it, shipping later in the quarter. We expect to ship a small quantity of French and German, with the bulk of French, German and Japanese and the other foreign languages that are of importance being Q3. In terms of the mix of upgrade versus full, we haven't been more explicit about it. Sarah Friar - Goldman Sachs: Fair enough. And then Bruce, we saw your 3GSM, obviously you're announcing some new products here on the Chinese such as China Mobile. As we start to annualize out the Macromedia acquisition or get past a lot of their [rev rake]. Should we start seeing inflection in growth in the mobile area? How do you typically price deals and recognize revenue and what are some of the milestones we should really be looking at for in that division?

So Sarah, again at the Analyst Meeting we're going to try and share more with you in terms of if the revenue was not recognized upfront, but rather as our royalty customers who were shipping the products, what that revenue would look like. So we're going to try and give you some more insight into the business in terms of unit shipped by year. So having said that what we are seeing is that we are seeing steady growth. A number of our early customers who had maybe signed deals with Macromedias are burning through their pre-pay. I think in Q1 of '07 you did see another couple of one-time licensing transactions, which enabled that revenue to grow. And so, our goal really is on the royalty side to continue to see steady growth. As volumes of these mobile phones, and especially Smart Phones increases around the world, and clearly the attention is also on the Flash Card services. So the announcement that we made with Telenor is exciting and China Mobile, because it's starting to show that we are able to drive recurring transaction revenue streams in our mobile business.

And as I have said, I'd be very disappointed if we don't launch a major service here in the United States with a carrier by the time we end this year. Sarah Friar - Goldman Sachs: Got it. One other just quick one for you Mark. It looked like EMEA was your strongest geography, is there anything specific there or was there a currency impact that you could call out for us?

Sarah, we did have a year-over-year currency benefit of approximately $13 million, the bulk of which was Euro. That was factored into our guidance at the beginning of the quarter. So, we obviously knew the rate coming into the quarter when we gave guidance. Sarah Friar - Goldman Sachs: Got it. And in the guidance going forward, is the expectation the rate is not going to stay the same or are you building in anything?

They stay where they are today, correct. Sarah Friar - Goldman Sachs: Okay great, thanks a lot.

We'll go next to Brian Essex with Morgan Stanley. Brian Essex - Morgan Stanley: Hi, good afternoon. Just wanted to start with maybe a follow-up to Sarah's question on guidance. How much visibility do you have, primarily in the CS3 but also others in terms of how you base that guidance number? And I guess what I am getting at is maybe over some adjustments that you've had in the past. And then also with Apollo GA, I am guessing end of year, that there is no Apollo revenue baked into that?

Yeah, so on Apollo there is no Apollo revenue baked into the 2007 numbers nor do we anticipate any kind of material revenue from Apollo certainly in 2007. So, that's just wanted to make sure that that's fully understood. Regarding the guidance that we provided for Q2 and the adoption rates of Creative Suite 3, we do a lot of analysis trying to understand the desire of our users to both upgrade and/or buy new solutions. Based on that we come up with a forecast and a revenue range that we think is realistic and we take that very seriously. It's one of the reasons why the range is as large as it is, because the Creative Suite 3 is brand new. And that's why we have chosen the range $700 million to $740 million. As I have said, we take our guidance very seriously and we are excited. Brian Essex - Morgan Stanley: Sure. Okay. And then in terms of Acrobat 8, you mentioned performing better than 7 at this point. Does that mean, as it relates to some of the licensing issues you feel pretty much "caught up at this point"?

We are expecting in Q1 of '07 for the Acrobat revenue to be sequentially up from Q4 of '06. And we attribute some of that shortfall due to the licensing. Yes, that's all behind us right now, which is why we are expecting it to go up sequentially in Q2. Brian Essex - Morgan Stanley: Got it. Thank you.

We'll go next to Steve Ashley with Robert W. Baird. Steve Ashley - Robert W. Baird: Hi. I was wondering, Shantanu if you could maybe give us a little color on how broad the beta response was to the CS3 and what kind of feedback you've got, specifically as it might have related to performance on the Mactel platform? Thanks.

So, Steve, the feedback overall was just fantastic. I think people have been really blown away by CS3 when they have looked at it. As you know, we did a public beta of Photoshop CS3. The number of downloads there and the feedback that we've got was just very, very exciting. But in addition to that when we've been showing the product to press, when we have been doing early betas, I think customers are remarking on a couple of things. One is they are blown away by some of the creative features in each of the individual applications. They are amazed at how much we could do on the user interface integration between each of the products and the work flow. And on the Mac specifically, I think they are really pleased at how much advantage we have been able to take of the new hardware. So, good stuff. We are excited.

Yeah. It's fascinating. If you think about, we announced Photoshop CS3 through the beta program. Yet, new units of Photoshop actually grew on a year-over-year basis. And I think that is pretty telling not only about the anticipation of CS3, but just the overall environment that we are in. There is a lot going on as it relates to digital information and people want tools that are going to able them to produce really engaging information regardless of platforms. And Adobe is the company they are turning to. More than 0.5 million people downloaded the beta of CS3 Photoshop. Steve Ashley - Robert W. Baird: Great. And getting back to the question that Gene had asked earlier about Apollo. When we look at that, I mean, you are going to get some incremental revenue from Flex and ColdFusion, but the real benefit should come from new incremental demand for the existing CS3 product family. What kind of metrics or milestones should we use, should you use to measure the success of the Apollo project?

Steve, we have multiple metrics that we are looking at internally to measure Apollo. In the short run, we are really looking to see new applications that developers are developing on the Apollo platform, which we believe will drive adoption of the platform. Certainly, as you said, the developer tools should see people using our Flex Builder and ColdFusion, as you said, to develop Apollo and the authoring applications, because what the Apollo platform is designed to do is develop a new generation of rich Internet applications. And we believe the differentiation that we bring is in the user experience, which really plays well to our creative tool strength. Steve Ashley - Robert W. Baird: Great, thanks.

We’ll go next to Ross MacMillan with Jefferies. Ross MacMillan - Jefferies: Thank you. Most of mine have been answered, but maybe just one on the mobile again. My understanding was you had actually won effective design in with NTT and Verizon here in the US. So, I'm just curious as to why China Mobile is one of the first carriers to actually implement services on Flash Lite or maybe it's not? And the other ones have already done it, could you just clarify that? Thanks.

Sure, DoCoMo has actually been delivering services based on this technology for quite a while now. And they have said publicly that they have over 8 million subscribers already using these innovative Flash card services. I think the reality, Ross, is also that as it relates to the mobile revolution, you are seeing a fair amount of advances in what are considered emerging countries, whether that be China, or India or Korea. And so, some of the operators there are really aggressive. Europe, also we're seeing action with Telenor, and as Bruce mentioned, we also hope to see another major carrier here in the US deliver services. So, all of them are aligned with us in that they are seeing their voice revenues go down, and they all want to deliver innovative new data services using Flash as the environment.

Yes, to be clear, we've obviously announced our working relationship with NTT DoCoMo and using FlashCast. What the media alert that we sent out on China Mobile was related to the ability to or the joint efforts to deliver Flash-based content to the mobile phones, and Verizon announced a while back their intent to support the Flash ecosystem, and that was primarily around Flash content. We have not made any additional announcements, other than what we mentioned at 3GSM, which was around Telenor, who is currently doing a trial in the Nordic region within Europe. Ross MacMillan - Jefferies: And have you moved though to actually on some of these relationships to an economic model where you are not just taking a royalty for the Flash Lite client on the handset but also for the content being delivered to the handset?

That's correct. And again, we will share more of the business model with you at the Analyst Meeting next week. Ross MacMillan - Jefferies: Thank you.

We'll go next to Phil Rueppel with Wachovia Securities. Phil Rueppel - Wachovia Securities: Great, thanks Mark. Quick question for you on, you mentioned channel inventory was within policy. Does that policy take into consideration product cycles or I guess the real question is, the stock of CS2, is that where it needs to be ahead of the new product introduction?

Yeah, it does. We have a very close relationship with the channel. We get data virtually daily in terms of what inventory is out there. We've been doing this for years and years. We intend to lower the channel inventory for CS2 in front of the launch, but are careful not to take it down too low that we don't have stock out before CS3. So, we've been doing this a really long time and frankly are pretty good at it. Phil Rueppel - Wachovia Securities: Okay, that's it from me tonight. Thanks.

Operator, we will take one or two more questions please.

Okay. We'll go next to Adam Holt with J.P. Morgan. Adam Holt - J.P. Morgan: Good afternoon. I just had two quick questions on the Enterprise side, actually to shift gears here. Can you give us an update on the upcoming LiveCycle release? What you are thinking about in terms of timing and impact? And then secondly, may be give us a little bit of an update on some of the OEM relationships there, how they are tracking and what some of the milestones are coming up over the next couple of quarters?

First, Adam, in Q1 we continue to see really good traction for our solutions. Financial services, we had a number of good wins. And in what's a seasonally weak quarter we were really pleased at the amount of traction we are getting with our Enterprise. The SAP relationship continues to deliver in the field. We are seeing more engagements in the field not just in the US, but also that's extending to Europe. And even with the EMC, we continue to grow that business year-over-year. So, as it relates to both the OEMs, we are seeing traction. In terms of the roadmap and strategy moving forward, we've been showing customers what we are doing with respect to combining the benefits of Flex as a front-end to these next-generation of applications coupled with the workflow, security and process management that we have in LiveCycle. And the next version of the combined suite, will combine all of that functionality. Keep in mind though, with respect to the Enterprise, unlike our desktop products where there is a significant spike when we deliver a new release, with the Enterprise we continue to expect it to sequentially grow, but not have the kind of spike you see with desktop products. Feedback has been good from our customers. Adam Holt - J.P. Morgan: Terrific, thank you.

We'll take our final question from Yun Kim, Pacific Growth Equities. Yun Kim - Pacific Growth Equities: Thank you. Looking at the Other revenue category, which makes up a pretty big percentage of your total revenue now, obviously, the so-called monetization of free software downloads has been a big factor in driving that revenue category over the past year. Can you give us some sense on what the year-over-year growth rate of that business was in the quarter end? Do you continue to expect that particular business to show strong double-digit growth rate for the foreseeable future or do you see it maybe tampering it off sometime this year?

Let me answer the second question first. On the Other segment, we expect that to be relatively flat from the run rate that we showed in Q1 for the rest of the year. And what you saw there was clearly we have monetization deals in terms of distributing other people's software. And as those deals come in, that revenue can grow, but at this point, we're not making any new announcements. Yun Kim - Pacific Growth Equities: Okay. Thank you.

This concludes our call today, and we thank you for joining us.

Ladies and gentlemen, you may disconnect your phone lines at this time. Have a great day.