FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Adobe Systems, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %>
345 Park Avenue
San Jose, CA 95110-2704
(408) 536-6000
http://www.adobe.com

UNION CITY, Ca., January 9, 1997/FOOLWIRE/ --- Adobe Systems announced their fourth quarter and fiscal year end results for 1996 after the market close on January 7th. Revenue for the fourth quarter reached $207.7 million compared to $200.9 million in the fourth quarter last year. Net income for the quarter was $67.8 million or $0.92 per share. This included $31.9 million in net after-tax gains from various non-recurring activities principally related to their venture investments. Excluding these non-recurring items, normalized net income was $35.9 million or $0.49 per share, up 23% when compared to a normalized $0.40 per share for Q4 last year and a penny above analyst estimates of $0.48 per share. Sequentially, earnings were up 36% over Q3's $0.36 per share.

FISCAL YEAR RESULTS. For the fiscal year, total revenue was $786.6 million compared to $762.3 million in fiscal 1995. Net income was $153.3 million or $2.04 per share. Adjusted for non-recurring items, normalized net income was $128.2 million or $1.71 per share compared with normalized net income of $135.6 million and earnings per share of $1.80 in 1995.

MAJOR NON-RECURRING ITEMS EXCLUDED FROM NORMALIZED EARNINGS. In both 1995 and 1996 most of the non-recurring items Adobe recorded in the fourth quarters. In the fourth fiscal quarter of 1996 total pre-tax investment gains were $59.4 million resulting primarily from the sale of venture investments in Netscape, Siebel Systems, and Luminous Corporation common stock and from net unrealized gains on other venture investments.

Non-recurring expenses in the fourth quarter of 1996 totaled $14.4 million which reflected the write-off of in-process research and development (R&D) on acquisitions, in addition to restructuring charges and expenses resulting from divested and discontinued products. In the fourth quarter of 1995, there were also non-recurring expenses of $49.7 million including restructuring charges for the acquisition of Frame and the write-off of in-process R&D from other acquisitions. There were no significant investment gains in 1995.

OPERATING RESULTS DETAILS. Application products revenue for the fourth quarter of 1996 was $157.6 million, up from $153.8 million for Q4 1995. Licensing revenue was $50.1 million, up from $47 million last year. Gross margin was 82.5% for the fourth quarter, up from 81.8% in Q4 1995. Total operating expenses for the fourth quarter were 3% lower than the same quarter last year. Operating income as a percentage of revenue rose to 24.5% compared to 19.76% in last year's Q4.

QUARTERLY EXPENSE TRENDS. Normalized R&D expenses were 18.7% of revenue compared to 19.7% last year. Sales and marketing expenses were 31.8% of revenue compared to 34% in Q4 last year. Their general and administrative expenses were 7.3% of revenue compared to 7.2% last year. Normalized non-operating income in the quarter was $6.6 million compared with $8.6 million for the fourth quarter of 1995. They have broken out the interest and other income from the investment gains and losses. The investment gains and losses line item includes any realized gains from direct investments which are sold as well as the market valuation of their Adobe Ventures investments. As noted earlier, they had some signficant investment gains during this quarter. The normal tax rate was 37.5%. The R&D tax credit which they activated on a prospective basis will see a mild positive impact for 1997 taxes.

SEQUENTIAL BALANCE SHEET COMPARISONS. Comparing the balance sheet with the third quarter, cash and short term investments increased by $75 million to $564 million. The increase is due primarily to cash generated from operations as well as sales of investments. The increase in cash highlights the success of their current Venture Investment program. Receivables increased by $18 million due to new products which shipped near the end of the fourth quarter. Other assets were lower this quarter by $31 million, primarily due to the sale of the portion of their Netscape investment.

STOCK REPURCHASE. During the quarter they repurchased one million shares of Adobe stock at an average price of $33.67 per share. This was by exercising options that were acquired earlier in the year. That brings the total repurchases in fiscal 1996 to 3.3 million shares at an average price of $38.16 per share. Actual outstanding shares of common stock at the end of the quarter were 71.5 millio shares. As a result of the repurchase activities, their was a $47 million net increase in put warrants during the fourth quarter. Put warrants are part of Adobe's systematic stock repurchase activities to offset future dilution expected from issuances occuring as part of the stock options and stock purchase programs. They are currently restricted under some SEC regulations and policy guidelines not to be purchasing stock in excess of their requirements for either stock option granting or employee stock purchase programs as a result of the pooling transaction with Frame. That set of restrictions should expire late in 1997. In the meantime they do have the ability to continue to purchase along the level of slightly under one million shares per quarter on average.

NEW PRODUCT RELEASES. The increase in revenue in the fourth quarter resulted from the successful launch of new products including PhotoShop 4.0, Acrobat 3.0, PageMill 2.0 for the Macintosh, and Persuasion 4.0. With PhotoShop, Acrobat, and Persuasion they met their corporate objective of shipping simultaneously on both the Macintosh and Windows platforms. The importance of their move to concurrent platform development and release is evidenced in the split of application revenues between Windows and Macintosh. Windows product revenue increased 19% over the fourth quarter of 1995 and Windows now represents 39% of application revenue.

PRODUCT MIX CHANGES. Although quarterly application product sales increased only 3% from the fourth quarter of 1995, there were significant offsetting changes within their major product lines. Frame and PageMaker were both down approximately 40% from the fourth quarter of 1995. Frame was down primarily due to product divestitures and PageMaker was down due to the company's anticipation of a 6.5 upgrade which shipped in December. PhotoShop, Acrobat, and Illustrator were all up significantly over the fourth quarter of last year and PhotoShop in particular was up more than 50% due in part to a strong 4.0 upgrade revenue stream.

ILLUSTRATOR. Sales of Illustrator were up about 20% over Q4 last year. They expect a new version to ship, cross-platform, in the first half of the year. Compared to Freehand, the market data they have still shows a commanding lead toward Illustrator over Freehand.

PAGEMILL. PageMill received MacUser's Software Product of the Year award on January 6th. PageMill has been a very popular product and estimates are that about 60% of Web pages are created using PageMill. It is a Macintosh-only product now, but by the middle of the year they expect to release the Windows version as well.

ACROBAT. Acrobat 3.0 is up substantially from last quarter. They feel that the new organization in sales which will support the enterprise for both Framemaker and Acrobat will help those sales to increase. They have greatly simplified the product and believe they will be back on a growth track for Acrobat.

PERSUASION. They are happy with the new releases of Persuasion. They released the product on both Macintosh and Windows. They don't view it as long-term revenue generator for Adobe because there are too many other products, notably Powerpoint that ships with Office that makes it a fairly limited market. But they are going to continue to support their existing customers and continue to ship the product as long as there is demand for it.

RETAIL/NEW BUSINESS VERSUS UPGRADE REVENUES. The retail business actually exceeded the upgrade business, so the increase in revenues wasn't primarily upgrades but upgrades still added a significant portion. Retail revenues represented 2/3 of revenues on the Windows platform and were also significant on the Macintosh platform. They are still seeing a lot of new business on the Macintosh platform. An interesting split between upgrades and the retail product is that on the Macintosh it is about even and is about 2-to-1 on Windows because of the larger installed base on Macintosh. That also had the effect of increasing Adobe's share of the Macintosh for PhotoShop because of that large installed base and those upgrades. Looking at the new shipments only on retail, about 48% of the PhotoShop shipments are on Windows, which is up from last quarter and is the highest they've had on PhotoShop and is approaching the level they have on PageMaker.

HOT GROWTH AREAS IN THE MARKETPLACE. They think that the general content authoring business is very strong. The activity that is on the Internet and the activity of electronic deployment of content is increasing. They were down in Hollywood a couple of weeks ago and they are having a hard time finding people who know PhotoShop and Illustrator, so the demand in the marketplace for content creators is growing. They think that is an opportunity for Adobe. Almost every magazine in the world is produced with Adobe's software as are newspapers, Web sites, etc. and this activity is increasing. There is a trend away from spending money on deployment of information and to the creation of information and Adobe is one of the beneficiaries of that shift. They are developing products that are "net aware" such as PhotoShop which is used heavily for online content creation and PageMaker which features one-button net format to print format automatic transition for documents. They wouldn't characterize the multimedia/video market to be slower, but it continues to be a minor portion of Adobe's revenue. After Effects continues to grow in popularity and they are very pleased with the direction of sales, but it is not a big portion of revenue.

GEOGRAPHIC MIX OF REVENUES. For the fourth quarter, the geographic mix of revenue was 59% from North America and 41% outside the US. This compares with 64% and 36% respectively in the fourth quarter last year. Revenue in North America decreased by 4% when compared to the fourth quarter revenue of 1995, while European revenue was down 11%. They did have a strong comeback from Q3 to Q4 in Europe although it was not as strong as they had hoped. They had hoped to get more international versions of PhotoShop released. They had French and German versions of PhotoShop as well as the Japanese version released on the Macintosh. So those versions are still coming this quarter. Europe is mostly limited now by the release dates of new products. Other than that, they are seeing a fairly good recovery in their revenue to prior levels. Other geographies experienced better results. In Japan, sales were up 40%. In the region they call Asia Pacific and Latin America, sales were up 39%, but on a much smaller basis. Much of these differences were attributable to the timing of localized releases for international markets.

Several new products were released through the end of the quarter and as a result they are continuing to feel the international demand for these products in the first quarter of 1997, especially in Europe. PageMaker 6.5 shipped in December first on the Windows platform with the Macintosh version expected to follow this month.

NEW CFO. Jack Bell joined Adobe in November as Executive Vice President, Chief Financial Officer, and Chief Administrative Officer. He has worldwide responsibility for the company's financial, administrative, and operational functions. Jack joined Adobe from Conner Peripherals where he was Executive Vice President and CFO until March of this year when Conner was merged into Seagate. He has also held financial and corporate strategic planning positions with American Airlines, Burlington Northern, and USAir Group. Adobe is delighted to have him on board.

They also welcomed a new Senior Vice President and General Manager of the Graphics Division who was most recently Senior Vice President for Enterprise Technology at Silicon Graphics where he was responsible for establishment and growth of the company's server business and drove SGI's software development efforts in the areas of data mining and data warehousing, enterprise management, and multimedia toolsets.

DEVELOPMENTS AT APPLE COMPUTER. Adobe is very pleased that Apple Computer has outlined its operating system strategy going forward and they believe that Apple's proposed acquisition of NeXT is good for the industry. Steve Jobs has a distinguished record in the area of innovation and Adobe looks forward to his contributions to the Macintosh platform. In addition, Adobe believes that the OpenStep operating system is robust and tested and because Display Postscript provides the graphics component of the operating system, it will allow Adobe to develop enhanced functionality in all of their Macintosh products. They look forward to working closely with the development teams at Apple as they lay out their plans for the actual implementation of their dual operating system strategy.

IMPACT OF APPLE ANNOUNCEMENT/STRATEGY ON ADOBE. From Adobe's perspective, the timing is good. They have recently just begun shipping major new releases of several application products including PhotoShop, PageMaker, and Acrobat and following meetings between development teams at Adobe and Apple, they expect to communicate a roadmap for supporting Apple's new operating system strategy. Most of Adobe's applications are already operating on the UNIX platform and the NeXT OpenStep environment. Also Adobe has developed independent of the operating system in its porting activities and independence from the operating systems actually makes porting easier. So, Adobe is in an excellent position to port to the new environment and actually the strength of their entire product line is their ability to build better portability between applications.

PRODUCT DEVELOPMENT STRATEGY GOING FORWARD WITH REGARD TO APPLE. They will continue to support the MacOS 7.x versions, will continue to go aggressively after Windows '95 and NT platforms, and they think the OpenStep environment is looks intriguing. Adobe customers are waiting and seeing what actually happens, but they think in general it is very good news because OpenStep is a very robust platform. It is not a brand new operating system, it is an operating system that has been tested in a lot of mission-critical situations and Adobe's customers in the publishing group need to have software that works. Adobe's strategy has been to provide the solutions that their customers want and they basically make the decisions about what kind of hardware and operating environments they prefer to use. Adobe's goal is to put themselves in a position so that, with only modest incremental R&D investments, they can port to whatever platform they choose. The environment that Apple is talking about has some interesting opportunities for Adobe because of the functionality that Display PostScript will bring to the OpenStep environment on the Mac and Adobe is looking forward to that.

THE PRINTING BUSINESS. Adobe's printing business is moving forward on several fronts. On the low end, their first PrintGear product from NEC has won over a dozen industry awards as best product in its class. They expect to see additional implementations of PrintGear for color inkjet later this year. IBM introduced it's 464 page-per-minute printer based on Adobe's Supra technology at a conference in October. Given the enthusiastic reception of this technology for production printing, they anticipate that several of their OEM customers will introduce new implementations of Supra during the upcoming year. HP will be shipping Adobe products for at least the first half of the year and probably through nine months. Not all divisions of HP are dropping Adobe products.

POSTSCRIPT. In their PostScript business they expect to see continued OEM demand for PostScript Level 3.0 which was announced in September. Product introductions from their OEM customers are also expected later this year. About 30% of their PostScript revenue came from CPSI. The code business continues to increase. The growth areas have been Japan, color, and CPSI.

THE WINDOWS MARKET. The Windows market continues to be a significant growth opportunity for Adobe as they target Windows '95 and Windows NT users with new products such as Acrobat 3.0, PhotoShop 4.0, and PageMaker 6.5. In the brief time that these products have been shipping, they are already selling extremely well on the Windows platforms. They will capitalize on Intel's new Pentium processor which features MMX technology. In fact, existing versions of PhotoShop and PhotoDeluxe are prepared to take advantage and upcoming versions of Premiere and After Effects will also take advantage of this new technology which will give Adobe users additional functionality and higher performance.

MARKET SHARE DATA. DataQuest recently published data on the desktop software market that showed Adobe as the largest supplier on the Macintosh with a little over 25% of the market followed by Microsoft. On the Windows side, Microsoft had the commanding lead but in that particular study Adobe was in the second position with about 5% of the market. In Japan, Adobe is in the number three position. Adobe is a significant player around the world, even cross-platform and as their Windows business continues to grow they expect to become even more noticed on the Windows platform with their products.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.