FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF 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 (June 26, 1997)/FOOLWIRE/ --- Adobe Systems, Inc. reported second quarter 1997 results after the market close on June 18th. For the second quarter Adobe achieved $228 million in revenue which is a 12% increase over the $204 million reported in the same quarter last year. They also reported $54.9 million in operating income, an increase of 66% over the $33.1 million reported for the second quarter of 1996. Their net income was $40.1 million, an 82% increase over the $22 million reported in Q2 last year. Earnings per share are $0.54 based on 74.4 million weighted average shares, an 86% increase over $0.29 per share reported last year based on a larger number of weighted average shares, 75.6 million.

NON-RECURRING ITEMS. On a quarterly basis the results of operations for the second quarter of both years reflect two types of non-recurring items which should be excluded in what they refer to as a normalized basis. These two types of non-recurring items were a writeoff of acquired in-process R&D in both years and also investment gains in both years. On a normalized basis, eliminating these non-recurring items, net income for the second quarter of fiscal 1997 was $42.1 million, which is an increase of 24% over the $33.9 million achieved in the second quarter of fiscal 1996. The normalized earnings per share were $0.57 compared to $0.45 last year.

SIX MONTH RESULTS. For the six months ended May 30th, Adobe achieved $454.7 million in revenue, a 14% increase over the $398 million posted for the first six months of 1996. Again, comparing six month results on a normalized basis, net income for 1997 was $87.5 million, an increase of 33% over the $65.8 million reported in the first half of fiscal 1996. Normalized earnings per share were $1.18 for the first half, a 36% increase over the $0.87 per share reported in the first half of last year.

LICENSING REVENUE. Licensing revenue for the second quarter was $53.3 million, an increase of 8% over the $49.3 million posted in Q2 last year. This growth is attributable to increasing OEM shipments of color printers, Japanese printers, and Japanese and Roman CPSI products. During the quarter 102 new Postscript products were released to OEMs. They also announced and demonstrated Postscript 3 software and products of 8 different OEMs. They introduced Postscript Extreme in products from 5 different OEMs. They expect revenue from these new products to begin to flow late this year. The response so far from their OEMs to Postscript Level 3, Postscript Extreme, and PrintGear is very positive. During this quarter they qualified 102 products through QA. Their expectation is that in Q3 and Q4 that number will increase.

UPDATE ON HP BOISE DIVISION BUSINESS. Regarding the HP Boise Division business, while the timing is still uncertain, they expect to begin to see the loss of some of the HP Boise Division business in September which is in their fourth fiscal quarter. They anticipate that this will impact licensing revenues by slightly more than $2 million per month on average going forward. They maintain business with a number of other divisions at HP. They think this loss of business is consistent with what they said and is not by any means a loss of all the HP business. They continue to maintain a significant share of that business. The introductions of Postscript 3, Postscript Extreme, and PrintGear all are meant to compensate for the loss of HP revenue.

APPLICATION REVENUES. Application revenues for the second quarter were $175 million, up 13% from the $155.1 million reported for Q2 last year. Late in the quarter, they began shipping Adobe Illustrator 7.0 in English, French, German, and Japanese languages on both the Macintosh and Windows platforms. Illustrator has had a very strong upgrade rate, even during the second quarter they got significant orders even though they only had two weeks to ship them. Those orders are continuing and they are checking channel inventory and it appears the product is selling through well. This completed a major effort at Adobe focusing on Adobe's 3 major applications products -- Adobe Photoshop, Adobe Pagemaker, and Adobe Illustrator. These 3 major products now offer the same features and functionality on the Windows platform that are available on the Macintosh platform as well as significant improvements in the commonality and look-and-feel across products and in the functional integration between the products. Photoshop had its second highest quarter ever. The upgrade rate has slowed slightly from the prior quarter. They also shipped a number of new releases of Windows-based applications software during the quarter, adding significantly to the breadth of their product offering for Windows customers. These new releasese include: Adobe Pagemill 2.0 for Windows, Adobe AfterEffects 3.1 for Windows, Adobe Type Manager Deluxe 4.0 for Windows NT, and Adobe Acrobat Capture 2.0 for Windows. Other new products releases during the quarter included Adobe Dimensions 3.0 and Adobe Streamline 4.0.

PROMOTIONAL PLANS. In the second half of the year they are planning some marketing promotions to move them more strongly into the Windows marketplace. They believe they have the best set of products to do that with now. They have some new products they will be introducing as well including the next version of Framemaker which they expect to ship this quarter and possibly the Japanese version next quarter. They also have some other minor product upgrades. In the future, they will have new upgrades of the Photoshop, Illustrator, and Pagemaker products. These will appear in 1998 and the flat performance this year in light of some upgrade revenue dropping off from Pagemaker and Photoshop is a strong sign to them in that regard. Beginning September 1st through the end of the year they have been working with the reseller community, especially the Windows component of it, putting together a promotion around Photoshop, Illustrator, and Pagemaker as their flagship products to drive increased revenue.

APPLICATION REVENUE OUTLOOK. They expect application revenue to be sequentially down in the third quarter because of seasonality. That will be somewhat offset by the fact that a lot of the new products which were released during the second quarter were released quite late in the second quarter so they expect some revenue momentum from those products into the third quarter. The fourth quarter will be more a function of what is going on cyclically and what is going on seasonally than it will be from new product releases.

MARKET TRENDS. They think the important thing to note here is that the growth in the Windows area is mostly new customers. Their existing customers are upgrading and generally staying on the Macintosh platform. They think the opportunity isn't so much in upgrades as it is in new customers for their products in a much larger market. Pagemaker continues to be softer than they expected and that is going to be a major part of their promotion later this year with the channel. They are targeting it more toward their current customers and the type of customer they have for Pagemaker rather than soley toward just displacing Quark XPress although they have had some success in that area it is certainly not a general movement. Acrobat had an extremely strong quarter. It was up 73% from last year and up 32% quarter-on-quarter, so it is beginning to be widely accepted as a standard and they are again very enthusiastic about the acceptance and also about the relationship of the PDF format to their new Postscript 3 and Postscript Extreme announcement.

SIX MONTH APPLICATIONS REVENUE. For the first six months of fiscal 1997, applications products revenues increased 16% to $350 million from $301.8 million in the first six months of fiscal 1996. The revenues in all geographic regions increased year-over-year and increased sequentially in all regions outside of North America. During the quarter just completed, 45% of applications revenues were generated in North America, 28% in Europe, 23% in Japan, and 4% in their Asia/Pacific and Latin American region.

APPLICATION REVENUES BY PLATFORM. Overall application revenues for Windows platform customers represented 51% of their total applications revenues. Product sales for Macintosh platforms represented 49%, excluding platform independent and UNIX sales. This is the first quarter that Windows revenues have been greater than those for the Macintosh platform. Total Windows applications revenues increased 78% year-over-year, while total Macintosh applications revenues decreased 12%. All of the Macintosh revenue decrease was in the sale of new units. The Macintosh upgrade revenues increased significantly year-over-year. 54% of Adobe's new unit revenues, excluding the platform-independent and UNIX revenue, came from the sale of products for Windows platforms and 46% came from those for Macintosh platforms. In terms of upgrade revenues, 43% of the upgrade revenues to the installed base of Adobe customers came from Windows users, while 57% came from Macintosh users. This represents a year-over-year increase in Windows upgrade revenues of 195% from a small revenue base. The Windows upgrade rate indicates that their customers on that platform are active and loyal users of their products. On a year-over-year basis, Macintosh upgrade revenue growth was 34%. This Macintosh upgrade revenue growth indicates continuing loyalty among Adobe's established Macintosh customers. Adobe's new releases during the quarter represent a significant achievement in broadening Adobe's product appeal to their Windows customers. These Windows offerings position Adobe well for potential future shifts in platform demand. They are alreading achieving rapid growth in Windows revenues, offsetting sales declines for Macintosh platforms during the quarter just completed. However, it is difficult to predict the timing of potential platform shifts and to determine whether such shifts could be accompanied by some deferral in software purchases. As a result, their near-term revenue outlook for the next several quarters is more cautious.

GROWTH RATE OUTLOOK. In terms of their 20% growth rate target going forward, they think it is fair to say that in the balance of the year they are probably not going to be able to produce sufficient additional revenues to give them 20% growth rate for the balance of the year. That is more likely to be somewhere in the high teens. Obviously they believe they should do those things over the long term that would enable them to achieve a 20% target growth rate but that is not a forecast of their expected future results for 1998.

GROSS MARGIN. Gross margin for the second quarter was 85.7%, up from 82.3% in Q2 last year. This improvement, as occured also in the first quarter this year, is attributable to the transition from floppy disks to CD-ROM media for product delivery and also to lower royalty payments on licenses related to products being shipped. Gross margins in general are affected by the mix of licensing revenue and application products revenue as well as the product mix within specific applications. On a year-to-date basis, gross margin for the first half is 85.3% compared to 82.1% in the first half of last year.

EXPENSES. Total normalized operating expenses for the second quarter were $137.8 million, up from $120.5 million in Q2 last year and up from $127.7 million in the first quarter. During the analyst call after their Q1 results, they indicated that they were planning operating expense increases to support their strategic initiatives. These increases are primarily attributable to hiring of additional staff for product development, incremental spending on marketing and sales efforts, and additional infrastructure required to support Adobe's growth.

G&A EXPENSES. The increase in G&A expenses was due to the fact that part of the investment they are making in supporting Adobe's growth has been a major systems upgrade for their overall information systems architecture, both software and hardware. They are in the middle of an SAP operating system installation. They are also bringing in a number of significant new applications software programs such as PeopleSoft for HR management and they are also bringing in applications to improve their ability to deal with foreign exchange/foreign currencies. The only other area that represents an increase in G&A has to do with the increases they have in outside legal expenses associated with their various outside lawsuits.

HEADCOUNT. Headcount in Q2 is up fairly significantly. They ended Q1 with 2,262 full-time employees and that has increased to 2,411 at the end of Q2. That reflects something they discussed at length in the last conference call which is a major effort they put into recruiting the kinds of technical marketing sales people they need to support the new marketing and sales strategies they need going forward. That is still about 184 heads under what their original plan was, but that is down from about 250 heads under the plan for the end of Q1.

OPERATING MARGIN. So they are making progress in areas they consider strategically important to put the base under their 1998/1999 revenue plans. In addition to normalized operating expenses, the company wrote off acquired in-process R&D totalling $3.2 million during the quarter. The normalized operating margin for Q2 was 25.3%, well within the range they indicated they expected to be during this period and up from the 23.4% in the second quarter last year. On a year-to-date basis, normalized operating margin for the first half was 26.9% compared to 22.7% for the first half last year. They think in Q3, because they are looking at a seasonally lower revenue base, they would expect that operating margin would dip down into the low 20s because a lot of the things they have underway where they are investing in people and systems will continue to have a pretty constant run rate in terms of dollars so it will be constant dollars on a lower revenue run rate for the quarter.

TAXES & NON-OPERATING INCOME. The normalized non-operating income which excludes gains on investments for the second quarter was $8.3 million compared to $6.4 million in the second quarter last year. This increase was due primarily to an increase in invested cash which they derive from positive cash flow during the first six months of the year. The effective tax rate for the second quarter was 36.5%, consistent with what they estimated in the first quarter and slightly lower than last year's rate of 37.5%. This lower rate reflects the absence of significant non-deductible one-time charges so far this year and also assumes the continuation of the R&D tax credit. They do expect that tax rate to remain at approximately 36.5% for the rest of this year.

CASH. At the end of the quarter compared to the end of the fiscal year 1996 cash and short term investments increased from $564.1 million to $647.5 million. That is net of estimated income tax payments of $54.6 million and also net of repurchases of common stock of $34.3 million. In addition to the cash generated from their profitable operations, some of the increase in cash and short-term investments is actually the result of a reclassification of their investment in Netscape Communication Corporation from the category called "other assets." This amount of approximately $26.3 million was reclassified during the quarter when they announced the dividend of a portion of this investment in Netscape for distribution to Adobe stockholders later this year. The shortened holding period necessitates a reclassification to the short-term investment category.

ACCOUNTS RECEIVABLE. Accounts receivable were up slightly compared to the end of last year mainly due to the release of Adobe Illustrator in the last two weeks of the quarter and the decrease in the other asset category from $195.3 million to $159.8 million again is primarily due to the reclassification out of other assets of that Netscape common stock they will be distributing in August. There have been no additional major investments during the quarter in their venture investing area. The value of the remaining portfolio of investments in 23 companies has increased from $76.1 million to $80.9 million during the quarter.

STOCK REPURCHASE. As an offset to the issuances of common stock which is normally related to activities in the company's stock option plan and employee stock purchase plan, the company has repurchased common stock both in the open market and also by selling put options and purchsing call options. During the second quarter, Adobe repurchased 500,000 shares of common stock at an average price of $36.56 per share. This brings the total repurchases within the last 5 fiscal quarters to 4.3 million shares at an average price of $36.96 per share. They continue to use systematic stock repurchase activities consistent with the SEC position on the number of shares that can be repurchased during the two-year period following a pooling merger with Frame Technology. This restriction should expire in October 1997. As of May 30, 1997, the company had outstanding put warrants to purchase 1.3 million shares of the company's common stock with the potential obligation of $47.8 million. Due to changes made in the settlement terms in these options contracts, Adobe is no longer reclassifying this potential obligation as a reduction in stockholders equity.

REINCORPORATION. Adobe had its annual stockholders meeting on April 9th and they are pleased to report that all of the proposals were approved by the shareholders. The second proposal for reincorporating in the state of Delaware was completed and the reincorporation was effective on May 30th of this year. As part of the reincorporation, each outstanding share of Adobe as the old California corporation common stock has been converted automatically to one share of the new Delaware corporation which now has a par value of 1/10 of one cent. This change results in a transfer from a common stock account into an additional paid-in capital account totalling $246.8 million for this quarter and $148.5 million for the period ending November 29, 1996.

DIVIDENDS & ENTRY IN S&P 500 INDEX. The board of directors has declared this quarter's cash dividend of $0.05 per share payable on July 21, 1997 to stockholders of record on July 7, 1997. In addition, on April 24th they announced the first dividend of venture investment stock under their venture stock dividend program. Adobe plans to dividend one share of Netscape Communication Corporation common stock on August 27th of this year for every 100 shares of Adobe common stock held by stockholders of record on July 31, 1997. Also of possible interest to stockholders is the announcement that was made on April 30th by the Equity Services Group of the Standard and Poors Corporation that, as of the close of trading on May 5th of this year, Adobe was to be included in the S&P 500 Index. The company was added to that Index in the Computer Software and Services category in the Technology economic sector.

* 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.