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 (March 25, 1997)/FOOLWIRE/ --- Adobe Systems reported first quarter 1997 results after the market close on March 18th. For the quarter, the company achieved $226.5 million in revenues which is a 17% increase over the same quarter last year. They also reported $66.8 million in operating income which is a 58% increase over the first quarter last year. Net income for the quarter was $46.5 million, a 38% increase year over year. Earnings per share were $0.63, up 43% over last year. The revenue and operating income are records for Adobe.

NON-RECURRING ITEMS. They had a non-recurring gain of $2.4 million related to the divestiture of a product line. There was also an adjustment of $624,000 reflecting a markdown to market of their limited partnership interest in a portfolio of venture investments. For the same quarter last year, the only major non-recurring item was a markup to market of their venture investment portfolio. The normalized operating income of $64.4 million, the net income of $45.4 million, and the earnings per share of $0.61 are records for Adobe as well.

APPLICATION REVENUES. Application products revenues for the first quarter were $175 million, up 19% from the same quarter last year. During the quarter, Adobe released a number of new products as well as international language versions of products released in earlier quarters.

PHOTOSHOP. Photoshop was quite strong this quarter and was actually up from last quarter due to some new language releases as well as continued sales of the upgrade.

PAGEMAKER. Pagemaker also increased substantially over last quarter as they shipped the Mac versions there and upgrades continued on both Mac and Windows.

ILLUSTRATOR. Illustrator was down somewhat and they believe that is in anticipation of a new upgrade which they plan to ship in a few months. They don't believe this represents loss of market share.

FRAMEMAKER. The Framemaker product line was down slightly, contrary to their expectations last quarter. They are not certain whether the current Framemaker will pick up again this quarter. There were some disruptions in their sales channels where they changed some management. They are optimistic about an upgrade they plan for Frame in the third quarter. They believe it will begin to build revenue again.

ACROBAT. Acrobat set a record with nearly $10 million this quarter and that was with only the English version of Acrobat 3.0 shipping. They did not have the European languages or the Japanese version which they expect to ship this quarter, so they are very pleased and excited about Acrobat. The new packaging for 3.0 seems to have made a large difference. They will have to wait and see what the actual results are, of course, but this is a very encouraging quarter.

PHOTO DELUXE. Photo Deluxe, although it has a small base, increased a great deal. They shipped well over a million copies of that. Mostly it's bundled with scanners and cameras. They have renewed some of the current deals they have and expect a very significant year in shipping bundled with both scanners and digital cameras.

PAGEMILL. The rates of PageMill are somewhat below what they were a few quarters ago. They are working on a new version that just came out on the Macintosh and will come out on Windows. It's currently posted on their Web site in beta form and has been fairly popular. The current Page Mill product is at a fairly small part of the Web development market, namely individuals or small groups making relatively simple Web sites or prototyping others. So, they do expect that in that area, new products will become more capable of supporting the high end and that will be some time in the future. It's currently not a large market for them, but it has been a successful one.

PRINTING SYSTEMS. The Printing Systems division also set a record, increasing about 10% over the same period last year. All-in-all they had a very good quarter, both in terms of last year and the prior quarter.

SALES BREAKDOWNS. The international market continues to be a strong part of Adobe's customer base. For the first quarter, 48% of application revenues was generated in North America, 28% in Europe, 21% in Japan, and 3% in Asia/Pacific and Latin America. Also for the quarter, Windows represented 44% of all application revenues and Macintosh represented 56%, excluding the platform independent and UNIX sales. Dividing that between retail and upgrade products, 50% of Adobe's retail revenues came from the sale of products for Windows platforms and 50% came from Macintoshes. 31% of upgrade sales to the installed base of customers came from Windows users and 69% came from Macintosh users. Again, these figures exclude revenues for products that are platform independent or UNIX based. Year-over-year, revenues from Windows platforms increased 71% while Macintosh revenue remained essentially flat, but at a substantial level. As a divisional revenue breakdown, graphics products were about 57% of revenue, publishing products about 8%, Internet products about 6% consumer division products about 2%, printing systems division was about 23%, and then miscellaneous and other was about 4%.

PLATFORMS AND ILLUSTRATOR. Adobe is committed to providing its customers with the same experience and value regardless of the platform they choose. This objective will be achieved for major products with the introduction of Adobe Illustrator for Windows later this Spring. This also means that Adobe is committed to support the existing and future customers who choose to use the Macintosh platform. Their current plan is to ship Illustrator on both Macintosh and Windows platforms in the four major languages (English, Japanese, French, and German) at approximately the same time (within a few weeks of each other).

APPLE MACINTOSH MARKET. With regard to the Macintosh platform, obviously Apple represents a very large base of Adobe customers so they are working very closely with the Apple executive team to put together a strategy where they can both be successful in the market. It is obviously a time of concern with Apple but they are working as hard as they can to make both of their markets successful. At the current time Adobe really doesn't see people moving from the Apple platform to the Windows platform, that is evident both by the level of upgrades they have had with their Macintosh products and also by some surveys they have done. There is growth in the Windows market, but it is generally new customers, people within corporations and people that are already on the Windows platform. So, that is encouraging both to Adobe and Apple, that they are not actually losing customers there. It is a fairly flat situation right now, but there doesn't appear to be any movement or any significant movement from the Apple platform to the Windows or Windows NT platform by high-end professionals.

MARKETING PROGRAMS. We will see the beginnings of a "branding" effort with the Illustrator product launch. What they have done is focus the bulk of their marketing investment on the Windows channel, so if you take a look at where customers purchase products there, Adobe is emphasizing the superstore and the software-only category as opposed to mail order which is what you find on Macintosh. They have also taken the research they have done in their market segmentation and very carefully developed advertising that they know will appeal to the Windows buyer in the business market looking for graphics solutions and will continue to carry that type of methodology forward. They also have underway today an agency review, looking at a worldwide advertising agency that they expect to have on board before the Summer begins which they will put to work for this Fall on a major branding campaign.

R&D - PRODUCT DEVELOPMENT. They are focusing their priorities on the enterprise opportunities. They think there is a big opportunity in the management of documentation and converting from the paper-based to the electronic-based. There is a lot of interest in corporate America in doing that because of the cost savings that can be represented. They are looking at partners, relationships, and investments focusing on that enterprise sale and how to deliver Adobe technology to that market segment. In the consumer and business areas, they believe there is an opportunity for their technology to make it substantially easier to use and more suited for the general business customer so they are going to pursue aggressive development in that sector as well.

LICENSE REVENUES. License revenues for the first quarter were $51.5 million, up 10% from a year ago. During the quarter, 87 new Postscript products were released to OEMs. CPSI revenues continued strong at 37% of total licensing revenues. The high end of the business continues to be stronger and stronger for them. They are moving aggressively to the "demand digital printing" marketplace. It is very clear that both Postscript and TDS are very strong standards there. Their expectation is that they will continue to have growth in that marketplace.

POSTSCRIPT LEVEL 3. At the April Seybold Conference in New York, Adobe will demonstrate a large number of OEM products running Postscript Level 3 that are well-integrated with leading applications from Adobe and other software vendors. They will probably demonstrate something on the order of 10+ products at Seybold. The companies that are demonstrating those products are only demonstrating them because they expect to ship them sometime within 30-90 days afterward, so they think they will be able to stimulated some significant growth there because those will be the leading products they have. The products going to the show are in Adobe's hottest segments. All of Adobe's applications are moving very aggressively to support Level 3 so, in both the graphic arts market and other markets, that is a significant change.

HEWLETT-PACKARD RELATIONSHIP. Relative to the Hewlett-Packard relationship, they have nothing to report that suggests it would change, but the break has only been with the Boise division. The expectation is that the business with Boise, Boise only, will certainly begin to diminish sometime in the second half of the year. It has been Adobe's goal all along to replace that business with their Supra Technology, their Postscript Level 3 technology, and their Print Gear technology. Other divisions of HP are very strong supporters of Postscript and in fact they think there is a possibility that Hewlett-Packard will release a product with the Adobe Postscript logo on it. What they are able to see is that with Supra, they demonstrated the first product with IBM last year. At that show, it was very clear that Supra technology is becoming a more important part of the high end print production marketplace. It's very much based on the fact that the demand printing business is going to grow. So, one way they are going to replace the HP revenue is through that. Secondly, they will have a significant number of Print Gear products available in the marketplace in the second half of this year and the beginning of next year and that will also replace the HP business. And, the third thing is Postscript Level 3. It has always been their goal to replace that HP business with those technologies and everything right now is on track.

PRINT GEAR. As far as Print Gear, they will see another product released this quarter. Because of the results associated with the NEC product, there is a lot of interest in Print Gear and we will see a significant number of Print Gear products roll out over the next 6 months in the monochrome space and they think they will get a color inkjet product out by the end of this year. The market areas where they continue to be strong tend to be the demand printing marketplace.

GROSS MARGIN. Adobe's gross margin for the quarter was 85%, which is up from 82% in the first quarter last year. This improvement resulted principally from the continuing transition from floppy disks to CD-ROM for product distribution and from lower royalty payments on licenses related to products being shipped. They believe they will continue to see benefits as they complete the transition to CD-ROM and the lower royalty payments should continue going forward as well. There may be some upside to the 85% as a longer-term view, but they think it is a pretty good number to model on going forward.

OPERATING EXPENSES. Their total normalized operating expenses were $127.7 million, up from $116 million in the first quarter last year and up from $121 million in Q4. The increase primarily resulted from annual salary increases and higher bonus accruals relating to the quarter's performance. As a percentage of sales, operating expenses were down to 56%, compared to 60% a year ago. Their headcount at the end of the quarter was 2,262 full-time equivalents. Depending on their ability to actually source skilled talent in Silicon Valley, headcount could be up 10% or more later this year, but the market is very tight so they plan to probably under-run budget for most if not all year. Adobe does plan to add more headcount and plans additional expenditures to support a number of priority projects later this year. As these jobs are filled and programs are implemented, they anticipate an increase in operating expenses. However, they believe these additional expenses will contribute to the acceleration of revenues in 1998.

INCREASED STOCK OPTIONS/PURCHASE PLAN RESERVES PROPOSED. In connection with their efforts to attract top-quality talent from their industry, they have proposed in their proxy statement an increase in their stock options and stock purchase plan reserves. These increases are critical to attract and retain employees in their industry, especially given the intense competition in Silicon Valley. The increases in reserves are expected to last for at least two years.

STOCK REPURCHASE. To offset the exercise of stock options and purchase of stock by employees, Adobe has repurchased stock in the open market. During the last quarter, they repurchased 477,000 shares of stock at an average price of $33.68. This brings the total repurchases for the last four fiscal quarters to 3.8 million shares at an average price of $37. The actual outstanding shares of common stock at the end of the quarter were 71.6 million, down from 73.3 million at the end of the first quarter a year ago. As they indicated in their call at the end of last quarter, Adobe is currently restricted from repurchasing stock in greater quantities than those necessary to offset the dilutive effects of stock option exercises and employee stock purchases. These restrictions are related to the pooling accounting criteria established by the SEC. These restrictions should expire in October 1997.

OPERATING MARGIN. Normalized operating margin for the company rose to 28% during the first quarter, up from 22% in last year's first quarter and up from 24% in the fourth quarter of 1996. Their normalized non-operating income for the quarter was $7 million, down slightly from the $8.8 million in the first quarter of 1996. The decrease was due principally to a gain on the disposition of part of their short-term investment portfolio that occurred during the first quarter of 1996. They broke out investment gains and losses from interest and other income below the operating line. Investment gains and losses focuses on any realized gains from venture investments that are sold as well as the to-market valuation of their Adobe Ventures limited partnership investments.

TAX RATE. The tax rate for the quarter was 36.5% which is a modest improvement over the 37.5% that prevailed for most of last year. This was due to a shift to tax exempt short-term investments and also to additional R&D credits. They expect the tax rate to remain at the 36.5% level for the remainder of 1997.

BALANCE SHEET ITEMS. Cash and short-term investments increased slightly from $564 million to $568 million, net of tax payments of $37 million and stock repurchases of $16 million during the quarter. Their receivables were up slightly to $122 million from $115 million. Other assets were lower this quarter by about $17 million due primarily to the marking to market of the Netscape investment. As a result of stock repurchase activities in the past quarter, there was a $9.2 million net decrease in put warrants outstanding.

CASH DIVIDEND PROGRAM. The board of directors has declared this quarter's cash dividend of $0.05 per share payable on April 15th to shareholders on record as of April 1st. Adobe also announced a new venture stock dividend program. Under this new dividend program, Adobe will announce from time to time a dividend on a portion of a marketable stock it holds in publicly traded companies as a result of prior venture investments in these companies. These dividend announcements will be made after the shares in these companies are freely tradeable and after the companies have released their quarterly earnings. It is subject to some clarification as they proceed with this, but in fact what they plan to do is dividend the shares directly to shareholders proportionate to their share holdings in Adobe. They will not be transferring fractional share interest and so to the extent that the proportion between the shares distributed and the Adobe stock holdings is less than a share, those will not be distributed. Others will be distributed proportionately. The tax impact on individual investors will vary depending on their own tax status and Adobe expects that their cost basis would not, for the most part, be transferred over to individuals, they will receive the shares at market value. They believe this may be one of the first corporate programs to distribute the financial benefits of a venture investing program directly to its shareholders. They hope to be announcing the first stock dividend within the next few months after some of the stocks are freely tradeable and after the financial results of these companies have been announced.

OBJECTIVES OF THE VENTURE INVESTMENT PROGRAMS. The objectives of Adobe's venture investment programs are, first of all, to gain insights into emerging technologies and markets that can affect Adobe's strategic position. A second objective is to invest in companies that can create extensions to the features, functionality, or marketability of Adobe's current products. A third objective is to achieve acceptable financial returns for shareholders at the same time the strategic advantages of the program are being realized.

CURRENT VENTURE INVESTING HOLDINGS. Currently, Adobe has investments in 23 companies in its venture investing program. A list of these is attached to their earnings press release, identifying the companies whose stock they hold. Since the inception of the program in 1994, Adobe has a cumulative cost basis of $60.1 million in these investments. To-date they have received $73 million in cash proceeds from these investments and the market value of the remaining investments is $72 million, for a total value of $145 million from venture investing as of March 14th. This valuation does reflect certain discounts on certain securities which are restricted. More detail is in the press release. Adobe also has the authority to invest up to $40 million in a second venture investment limited partnership. However, to-date there have been no investments or commitments made under this authority.

PLANS TO RE-INCORPORATE IN DELAWARE. One other important matter in their current proxy solicitation is Adobe's proposal to re-incorporate in Delaware. As described in the proxy statement, management believes that this re-incorporation is in the best interest of shareholders -- considering California's Proposition 211 last year and the likelihood that similar propositions may be forthcoming in the future. Their ability to attract and retain officers and outside directors will be seriously impaired by a Proposition 211-like law. Also, since many of the anti-takeover measures that sometimes get associated with a Delaware re-incorporation are already in place at Adobe, this is not the primary consideration for their proposal. They encourage their shareholders to review the proxy statement carefully and to vote their shares.

REVENUE/EARNINGS OUTLOOK. The results Adobe achieved in the first quarter were certainly done under uncertain industry and market conditions. They have no reason to believe that the market conditions are going to change imminently during the next quarter. However, in the third quarter there is always a seasonal drop in revenues generally and, obviously the extent to which Illustrator ships in the second quarter would affect their revenues for that quarter. They have an internal topline growth plan for this year of 20% and they are obviously preparing themselves for 1998 and are prepared to commit the resources to achieve those objectives.

* 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.