UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May ~~31, 2019~~29, 2020



o☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-15175

ADOBE INC.

(Exact name of registrant as specified in its charter)



Delaware	77-0019522
(State or other jurisdiction of incorporation or organization)	~~77-0019522~~ (I.R.S. Employer Identification No.)

345 Park Avenue, San Jose, California 95110-2704

(Address of principal executive offices and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	ADBE	~~The~~ NASDAQ Stock Market LLC (NASDAQ Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filerx	☒	Accelerated filer	☐	~~Accelerated filer~~ o	Non-accelerated filero (Do not check if a smaller reporting company)	☐	Smaller reporting companyo	☐	Emerging growth companyo	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No x☒

The number of shares outstanding of the registrant’s common stock as of June ~~21, 2019~~19, 2020 was ~~485,438,762.~~479,665,239.

ADOBE INC.

FORM 10-Q

TABLE OF CONTENTS



		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Balance Sheets May ~~31, 2019~~29, 2020 and November ~~30, 2018~~29, 2019	3
	Condensed Consolidated Statements of Income Three and Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~	4
	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~	5
	Condensed Consolidated Statements of Stockholders’ Equity Three and Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~	6
	Condensed Consolidated Statements of Cash Flows Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3931
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5445
Item 4.	Controls and Procedures	5445

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	5446
Item 1A.	Risk Factors	5546
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6760
Item 4.	Mine Safety Disclosures	6760
Item 5.	Other Information	6760
Item 6.	Exhibits	6861
Signature		7362
Summary of Trademarks		7463

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In ~~thousands,~~millions, except par value)


	May 31, 2019			November 30, 2018			May 29, 2020			November 29, 2019
	(Unaudited)			(*)			(Unaudited)			(*)
ASSETS
Current assets:
Cash and cash equivalents	$	2,082,910		$	1,642,775		$	3,044		$	2,650
Short-term investments	1,396,069			1,586,187			1,307			1,527
Trade receivables, net of allowances for doubtful accounts of $12,379 and $14,981, respectively	1,272,668			1,315,578
Trade receivables, net of allowances for doubtful accounts of $22 and $10, respectively							1,366			1,535
Prepaid expenses and other current assets	590,998			312,499			932			783
Total current assets	5,342,645			4,857,039			6,649			6,495
Property and equipment, net	1,205,020			1,075,072			1,387			1,293
Operating lease right-of-use assets, net							489			—
Goodwill	10,697,874			10,581,048			10,695			10,691
Purchased and other intangibles, net	1,917,149			2,069,001
Other intangibles, net							1,535			1,721
Deferred income taxes							231			—
Other assets	503,221			186,522			617			562
Total assets	$	19,665,909		$	18,768,682		$	21,603		$	20,762

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	169,101		$	186,258		$	289		$	209
Accrued expenses	1,314,998			1,163,185			1,303			1,399
Debt	3,145,668			—			—			3,149
Deferred revenue							3,321			3,378
Income taxes payable	45,778			35,709			166			56
Deferred revenue	3,011,552			2,915,974
Operating lease liabilities							85			—
Total current liabilities	7,687,097			4,301,126			5,164			8,191
Long-term liabilities:
Debt	987,938			4,124,800			4,114			989
Deferred revenue	122,522			137,630			140			123
Income taxes payable	637,733			644,101			503			616
Deferred income taxes	133,886			46,702			107			140
Operating lease liabilities							498			—
Other liabilities	165,040			152,209			196			173
Total liabilities	9,734,216			9,406,568			10,722			10,232
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued	—			—
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 486,273 and 487,663 shares outstanding, respectively	61			61
Preferred stock, $0.0001 par value; 2 shares authorized, none issued							—			—
Common stock, $0.0001 par value; 900 shares authorized; 601 shares issued; 480 and 483 shares outstanding, respectively							—			—
Additional paid-in-capital	6,050,800			5,685,337			6,892			6,504
Retained earnings	13,183,938			11,815,597			16,428			14,829
Accumulated other comprehensive income (loss)	(144,364		)	(148,130		)	(195		)	(188		)
Treasury stock, at cost (114,561 and 113,171 shares, respectively), net of reissuances	(9,158,742		)	(7,990,751		)
Treasury stock, at cost (121 and 118 shares, respectively)							(12,244		)	(10,615		)
Total stockholders’ equity	9,931,693			9,362,114			10,881			10,530
Total liabilities and stockholders’ equity	$	19,665,909		$	18,768,682		$	21,603		$	20,762

^{_________________________________________}


(*)	The condensed consolidated balance sheet as of November ~~30, 2018~~29, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In ~~thousands,~~millions, except per share data)

(Unaudited)


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	May 31, 2019			June 1, 2018			May 31, 2019			June 1, 2018			May 29, 2020			May 31, 2019			May 29, 2020			May 31, 2019
Revenue:
Subscription	$	2,456,097		$	1,923,131		$	4,761,064		$	3,716,489		$	2,874		$	2,456		$	5,699		$	4,761
Product	152,816			150,993			323,370			322,601			128			153			271			323
Services and support	135,367			121,236			260,792			235,217			126			135			249			261
Total revenue	2,744,280			2,195,360			5,345,226			4,274,307			3,128			2,744			6,219			5,345
Cost of revenue:
Subscription	296,476			186,355			584,507			351,040			317			296			672			585
Product	9,345			10,779			21,450			23,656			9			9			16			21
Services and support	101,667			84,210			198,817			165,550			89			102			179			199
Total cost of revenue	407,488			281,344			804,774			540,246			415			407			867			805
Gross profit	2,336,792			1,914,016			4,540,452			3,734,061			2,713			2,337			5,352			4,540
Operating expenses:
Research and development	475,958			374,128			940,595			722,897			532			476			1,064			941
Sales and marketing	848,927			646,215			1,630,445			1,227,172			901			849			1,758			1,630
General and administrative	219,334			178,040			435,443			348,480			224			219			495			435
Amortization of purchased intangibles	43,026			17,149			89,592			34,295
Amortization of intangibles													40			43			82			90
Total operating expenses	1,587,245			1,215,532			3,096,075			2,332,844			1,697			1,587			3,399			3,096
Operating income	749,547			698,484			1,444,377			1,401,217			1,016			750			1,953			1,444
Non-operating income (expense):
Interest and other income (expense), net	2,558			11,599			6,824			28,271
Interest expense	(40,577		)	(20,363		)	(81,170		)	(40,262		)	(28		)	(40		)	(61		)	(81		)
Investment gains (losses), net	(756		)	1,079			43,075			4,075			—			(1		)	(3		)	43
Other income (expense), net													12			2			30			7
Total non-operating income (expense), net	(38,775		)	(7,685		)	(31,271		)	(7,916		)	(16		)	(39		)	(34		)	(31		)
Income before income taxes	710,772			690,799			1,413,106			1,393,301			1,000			711			1,919			1,413
Provision for income taxes	78,179			27,632			106,272			147,058
Provision for (benefit from) income taxes													(100		)	78			(136		)	106
Net income	$	632,593		$	663,167		$	1,306,834		$	1,246,243		$	1,100		$	633		$	2,055		$	1,307
Basic net income per share	$	1.30		$	1.35		$	2.68		$	2.53		$	2.28		$	1.30		$	4.26		$	2.68
Shares used to compute basic net income per share	487,535			491,914			487,795			491,993			481			488			482			488
Diluted net income per share	$	1.29		$	1.33		$	2.65		$	2.50		$	2.27		$	1.29		$	4.23		$	2.65
Shares used to compute diluted net income per share	492,212			498,252			493,200			499,166			485			492			486			493

See accompanying notes to condensed consolidated financial statements.

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In ~~thousands)~~millions)

(Unaudited)


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	May 31, 2019			June 1, 2018			May 31, 2019			June 1, 2018			May 29, 2020			May 31, 2019			May 29, 2020			May 31, 2019
	Increase/(Decrease)						Increase/(Decrease)						Increase/(Decrease)						Increase/(Decrease)
Net income	$	632,593		$	663,167		$	1,306,834		$	1,246,243		$	1,100		$	633		$	2,055		$	1,307
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities	9,910			(1,721		)	22,312			(24,869		)	2			10			6			23
Reclassification adjustment for recognized gains / losses on available-for-sale securities	67			75			192			197
Net increase (decrease) from available-for-sale securities	9,977			(1,646		)	22,504			(24,672		)
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments	16,765			31,104			8,308			29,767			1			17			2			8
Reclassification adjustment for recognized gains / losses on derivative instruments	(8,675		)	(37		)	(16,872		)	(2,177		)
Reclassification adjustment for realized gains / losses on derivative instruments													(2		)	(9		)	(4		)	(17		)
Net increase (decrease) from derivatives designated as hedging instruments	8,090			31,067			(8,564		)	27,590			(1		)	8			(2		)	(9		)
Foreign currency translation adjustments	(11,999		)	(48,712		)	(10,174		)	(20,327		)	(7		)	(12		)	(11		)	(10		)
Other comprehensive income (loss), net of taxes	6,068			(19,291		)	3,766			(17,409		)	(6		)	6			(7		)	4
Total comprehensive income, net of taxes	$	638,661		$	643,876		$	1,310,600		$	1,228,834		$	1,094		$	639		$	2,048		$	1,311

See accompanying notes to condensed consolidated financial statements.

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In ~~thousands)~~millions)

(Unaudited)


	Three Months Ended May 31, 2019																							Three Months Ended May 29, 2020
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Treasury Stock										Common Stock					Additional Paid-In Capital			Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock
	Shares	Amount				Shares				Accumulated Other Comprehensive Income (Loss)			Amount				Total			Shares			Amount					Shares				Retained Earnings			Amount					Total
Balances at March 1, 2019	600,834	$	61	Additional Paid-In Capital		$	Retained Earnings	5,857,440		$	12,579,311			$	(150,432	)		(112,330	)	$	(8,414,895	)		$	9,871,485
Balances at February 28, 2020																								601		$	—		Additional Paid-In Capital	$	6,665		$	15,390		Accumulated Other Comprehensive Income (Loss)			$	(189	)	(118	)		$	(11,401	)		$	10,465
Net income	—	—		—			632,593			—				—			—			632,593				—		—			—			1,100				—				—		—				1,100
Other comprehensive income (losses), net of taxes	—	—		—			—			6,068				—			—			6,068
Other comprehensive income (loss), net of taxes																								—		—			—			—				(6		)		—		—				(6		)
Re-issuance of treasury stock under stock compensation plans	—	—		—			(27,966		)	—				224			6,153			(21,813		)		—		—			—			(62		)		—				—		9				(53		)
Purchase of treasury stock	—	—		—			—			—				(2,455	)		(750,000		)	(750,000		)		—		—			—			—				—				(3	)	(850		)		(850		)
Stock-based compensation	—	—		193,360			—			—				—			—			193,360				—		—			227			—				—				—		—				227
Balances at May 31, 2019	600,834	$	61	$	6,050,800		$	13,183,938		$	(144,364	)		(114,561	)		$	(9,158,742	)	$	9,931,693
Value of shares in deferred compensation plan																								—		—			—			—				—				—		(2		)		(2		)
Balances at May 29, 2020																								601		$	—		$	6,892		$	16,428			$	(195	)		(121	)	$	(12,244	)		$	10,881

Three Months Ended June 1, 2018

Common Stock

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Shares Amount Shares Amount Total
Balances at March 2, 2018 600,834
$ 61
$ 5,208,588
$ 9,830,399
$ (109,939 ) (107,954 ) $ (6,295,081 ) $ 8,634,028
Net income —
—
—
663,167
—
—
—
663,167
Other comprehensive income (losses), net of taxes —
—
—
—
(19,291 ) —
—
(19,291 )
Re-issuance of treasury stock under
stock compensation plans —
—
—
(22,500 ) —
194
5,646
(16,854 )
Purchase of treasury stock —
—
—
—
—
(2,639 ) (700,000 ) (700,000 )
Stock-based compensation —
—
145,587
—
—
—
—
145,587
Value of shares in deferred compensation plan —
—
—
—
—
—
(1,054 ) (1,054 )
Balances at June 1, 2018 600,834
$ 61
$ 5,354,175
$ 10,471,066
$ (129,230 ) (110,399 ) $ (6,990,489 ) $ 8,705,583



	Three Months Ended May 31, 2019
	Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shares		Amount			Total
Balances at March 1, 2019	601	$	—	$	5,857	$	12,579		$	(150	)	(112	)	$	(8,415	)	$	9,871
Net income	—	—		—		633			—			—		—			633
Other comprehensive income (loss), net of taxes	—	—		—		—			6			—		—			6
Re-issuance of treasury stock under stock compensation plans	—	—		—		(28		)	—			—		6			(22		)
Purchase of treasury stock	—	—		—		—			—			(3	)	(750		)	(750		)
Stock-based compensation	—	—		194		—			—			—		—			194
Balances at May 31, 2019	601	$	—	$	6,051	$	13,184		$	(144	)	(115	)	$	(9,159	)	$	9,932

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(In ~~thousands)~~millions)

(Unaudited)

Six Months Ended May 31, 2019
Common Stock Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Treasury Stock
Shares Amount Shares Amount Total
Balances at November 30, 2018 600,834
$ 61
$ 5,685,337
$ 11,815,597
$ (148,130 ) (113,171 ) $ (7,990,751 ) $ 9,362,114
Impacts of ASC 606 adoption —
—
—
442,319
—
—
—
442,319
Net income —
—
—
1,306,834
—
—
—
1,306,834
Other comprehensive income (losses), net of taxes —
—
—
—
3,766
—
—
3,766
Re-issuance of treasury stock under
stock compensation plans —
—
(8,008 ) (380,812 ) —
3,135
86,026
(302,794 )
Purchase of treasury stock —
—
—
—
—
(4,525 ) (1,250,000 ) (1,250,000 )
Stock-based compensation —
—
373,471
—
—
—
—
373,471
Value of shares in deferred compensation plan —
—
—
—
—
—
(4,017 ) (4,017 )
Balances at May 31, 2019 600,834
$ 61
$ 6,050,800
$ 13,183,938
$ (144,364 ) (114,561 ) $ (9,158,742 ) $ 9,931,693



	Six Months Ended May 29, 2020
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shares		Amount			Total
Balances at November 29, 2019	601	$	—	$	6,504		$	14,829		$	(188	)	(118	)	$	(10,615	)	$	10,530
Net income	—	—		—			2,055			—			—		—			2,055
Other comprehensive income (loss), net of taxes	—	—		—			—			(7		)	—		—			(7		)
Re-issuance of treasury stock under stock compensation plans	—	—		(56		)	(456		)	—			2		81			(431		)
Purchase of treasury stock	—	—		—			—			—			(5	)	(1,700		)	(1,700		)
Stock-based compensation	—	—		444			—			—			—		—			444
Value of shares in deferred compensation plan	—	—		—			—			—			—		(10		)	(10		)
Balances at May 29, 2020	601	$	—	$	6,892		$	16,428		$	(195	)	(121	)	$	(12,244	)	$	10,881

Six Months Ended June 1, 2018
Common Stock Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Treasury Stock
Shares Amount Shares Amount Total
Balances at December 1, 2017 600,834
$ 61
$ 5,082,195
$ 9,573,870
$ (111,821 ) (109,572 ) $ (6,084,436 ) $ 8,459,869
Net income —
—
—
1,246,243
—
—
—
1,246,243
Other comprehensive income (losses), net of taxes —
—
—
—
(17,409 ) —
—
(17,409 )
Re-issuance of treasury stock under
stock compensation plans —
—
(9,133 ) (348,729 ) —
3,439
100,039
(257,823 )
Purchase of treasury stock —
—
—
—
—
(4,266 ) (1,000,000 ) (1,000,000 )
Stock-based compensation —
—
281,113
—
—
—
—
281,113
Value of shares in deferred compensation plan —
—
—
—
—
—
(6,092 ) (6,092 )
Impacts of the U.S. Tax Cut and Jobs Act —
—
—
(318 ) —
—
—
(318 )
Balances at June 1, 2018 600,834
$ 61
$ 5,354,175
$ 10,471,066
$ (129,230 ) (110,399 ) $ (6,990,489 ) $ 8,705,583



	Six Months Ended May 31, 2019
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shares		Amount			Total
Balances at November 30, 2018	601	$	—	$	5,685		$	11,816		$	(148	)	(113	)	$	(7,991	)	$	9,362
Impacts of adoption of the new revenue standard	—	—		—			442			—			—		—			442
Net income	—	—		—			1,307			—			—		—			1,307
Other comprehensive income (loss), net of taxes	—	—		—			—			4			—		—			4
Re-issuance of treasury stock under stock compensation plans	—	—		(8		)	(381		)	—			3		86			(303		)
Purchase of treasury stock	—	—		—			—			—			(5	)	(1,250		)	(1,250		)
Stock-based compensation	—	—		374			—			—			—		—			374
Value of shares in deferred compensation plan	—	—		—			—			—			—		(4		)	(4		)
Balances at May 31, 2019	601	$	—	$	6,051		$	13,184		$	(144	)	(115	)	$	(9,159	)	$	9,932

See accompanying notes to condensed consolidated financial statements.

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In ~~thousands)~~millions)

(Unaudited)


	Six Months Ended						Six Months Ended
	May 31, 2019			June 1, 2018			May 29, 2020			May 31, 2019
Cash flows from operating activities:
Net income	$	1,306,834		$	1,246,243		$	2,055		$	1,307
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	290,508			152,882			376			373
Stock-based compensation	388,987			280,902			444			389
Reduction of operating lease right-of-use assets							42			—
Deferred income taxes	(10,682		)	(400,069		)	(265		)	(11		)
Unrealized losses (gains) on investments, net	(39,978		)	(1,502		)	5			(40		)
Other non-cash items	1,970			3,623			16			2
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net	85,683			140,681			155			86
Prepaid expenses and other assets	(142,520		)	(106,612		)	(303		)	(225		)
Trade payables	(17,269		)	3,656			80			(17		)
Accrued expenses	116,994			46,535
Accrued expenses and other liabilities							(58		)	117
Income taxes payable	11,929			459,943			2			12
Deferred revenue	130,320			139,725			(40		)	130
Net cash provided by operating activities	2,122,776			1,966,007			2,509			2,123
Cash flows from investing activities:
Purchases of short-term investments	(139,346		)	(412,746		)	(263		)	(139		)
Maturities of short-term investments	320,629			352,078			417			321
Proceeds from sales of short-term investments	29,473			200,458			70			29
Acquisitions, net of cash acquired	(99,817		)	(14,614		)	—			(100		)
Purchases of property and equipment	(210,760		)	(140,458		)	(190		)	(211		)
Purchases of long-term investments, intangibles and other assets	(23,680		)	(13,698		)	(6		)	(24		)
Proceeds from sale of long-term investments and other assets	1,656			2,897			4			2
Net cash used for investing activities	(121,845		)	(26,083		)
Net cash provided by (used for) investing activities							32			(122		)
Cash flows from financing activities:
Purchases of treasury stock	(1,250,000		)	(1,000,000		)	(1,700		)	(1,250		)
Proceeds from issuance of treasury stock	73,912			64,682
Proceeds from re-issuance of treasury stock							89			74
Taxes paid related to net share settlement of equity awards	(376,706		)	(322,505		)	(521		)	(377		)
Repayment of capital lease obligations	(3,219		)	(815		)
Proceeds from issuance of debt							3,144			—
Repayment of debt							(3,150		)	—
Other financing activities, net							4			(3		)
Net cash used for financing activities	(1,556,013		)	(1,258,638		)	(2,134		)	(1,556		)
Effect of foreign currency exchange rates on cash and cash equivalents	(4,783		)	628			(13		)	(5		)
Net increase in cash and cash equivalents	440,135			681,914			394			440
Cash and cash equivalents at beginning of period	1,642,775			2,306,072			2,650			1,643
Cash and cash equivalents at end of period	$	2,082,910		$	2,987,986		$	3,044		$	2,083
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	107,938		$	73,508		$	116		$	108
Cash paid for interest	$	78,006		$	37,503		$	38		$	78

See accompanying notes to condensed consolidated financial statements.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November ~~30, 2018~~29, 2019 on file with the SEC (our “Annual Report”).

~~Reclassifications~~Reclassification

Certain immaterial prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated statements of cash ~~flows.~~flows and notes to condensed consolidated financial statements.

Use of Estimates

In preparing the condensed consolidated financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we must make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, sales allowances and programs, bad debts, stock-based compensation, determining the fair value of acquired assets and assumed liabilities, impairment of goodwill and intangible assets, litigation and income taxes. Actual results may differ materially from these estimates.

In March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic. This pandemic has created and may continue to create significant uncertainty in the macroeconomic environment which, in addition to other unforeseen effects of this pandemic, may adversely impact our results of operations. As a result, most of our estimates and assumptions may require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.

Recently Adopted Accounting Guidance

On ~~May 28, 2014,~~February 24, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2014-09, Revenue from Contracts~~2016-02, Leases (Topic 842), (“ASC 842”), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with ~~Customers, Topic 606, requiring an entity~~terms greater than twelve months, including for those leases classified as operating leases under the legacy standard (“ASC 840”). Under ASC 842, added disclosures are required as compared to ~~recognize~~ASC 840 to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue standard replaces most existing revenue recognition guidance in GAAP and permits the use of either the full retrospective or modified retrospective transition method.cash flows arising from leases.

On ~~December 1, 2018,~~November 30, 2019, the beginning of our fiscal year ~~2019,~~2020, we adopted ASC 842 using the ~~requirements of the new revenue standard utilizing the~~alternative modified retrospective transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, we recorded ROU assets and lease liabilities of ~~transition. Prior period information has~~approximately $519 million and $618 million, respectively, at the adoption date and did not ~~been restated and continues~~include any retrospective adjustments to ~~be reported under~~comparative periods to reflect the ~~accounting standard in effect~~adoption of ASC 842. The lease liabilities reflect the remaining minimum rental payments for ~~those periods. We applied the new revenue standard to contracts that were not completed~~our existing leases as of the adoption date, ~~consistent with~~discounted using our incremental borrowing rate for each lease. The standard had no impact on our consolidated net income or cash flows. We elected the package of practical expedients permitted under the transition ~~guidance. Further,~~guidance, which allowed us to carry forward our assessments on whether a contract was or contains a lease, our historical lease classification and our initial direct costs for any leases that existed prior to adoption ofdate. We also elected the ~~new revenue standard resulted in changes~~practical expedient that allowed us to carry forward our accounting ~~policies~~treatment for ~~revenue recognition and sales commissions as detailed below.~~

existing land easements. We ~~recognized~~did not elect the ~~following cumulative effects of initially applying~~hindsight practical expedient to determine the ~~new revenue standard as of December 1, 2018 (in thousands):~~

As of
November 30, 2018
ASC 606 Adoption Adjustments
As of
December 1, 2018
Assets
Trade receivables, net of allowances for doubtful accounts $ 1,315,578
$ 43,028
$ 1,358,606
Prepaid expenses and other current assets 312,499
186,220
498,719
Other assets 186,522
273,421
459,943
Liabilities and Stockholders’ Equity
Accrued expenses 1,163,185
30,358
1,193,543
Deferred revenue, current 2,915,974
(52,842 ) 2,863,132
Deferred income taxes 46,702
82,834
129,536
Retained earnings $ 11,815,597
$ 442,319
$ 12,257,916

lease term for existing leases.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

~~Below is a summary of the adoption impacts of the new revenue standard:~~

We capitalized $413.2 million of contract acquisition costs comprised of sales and partner commission costs at adoption date (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion), with a corresponding adjustment to retained earnings. We are amortizing these costs over their respective expected period of benefit.

Revenue for certain contracts that were previously deferred would have been recognized in periods prior to adoption under the new standard. Upon adoption, we recorded the following adjustments to our beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts: an increase in unbilled receivables (included in trade receivables, net) of $24.8 million, an increase in contract assets (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion) of $46.4 million and a decrease in deferred revenue of $52.8 million, with corresponding adjustments to retained earnings.

~~We recorded an increase to our opening deferred income tax liability of $82.8 million, with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments.~~

~~Further, we had other impacts to various accounts which resulted to an immaterial net reduction to our retained earnings.~~

~~Adoption of the new revenue standard impacted our condensed consolidated statement of income for three months ended May 31, 2019 as follows (in thousands, except per share amounts):~~

As reported Adjustments Balances without ASC 606 adoption impact
Revenue
Subscription $ 2,456,097
$ (6,444 ) $ 2,449,653
Product 152,816
(19,148 ) 133,668
Services and support 135,367
(304 ) 135,063
Total revenue 2,744,280
(25,896 ) 2,718,384
Operating expenses
Sales and marketing 848,927
8,068
856,995
Provision for income taxes 78,179
(3,747 ) 74,432
Net income $ 632,593
$ (30,370 ) $ 602,223
Basic net income per share $ 1.30
$ (0.06 ) $ 1.24
Diluted net income per share $ 1.29
$ (0.07 ) $ 1.22

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

~~Adoption of the new revenue standard impacted our condensed consolidated statement of income for six months ended May 31, 2019 as follows (in thousands, except per share amounts):~~

As reported Adjustments Balances without ASC 606 adoption impact
Revenue
Subscription $ 4,761,064
$ (4,237 ) $ 4,756,827
Product 323,370
(42,028 ) 281,342
Services and support 260,792
(1,075 ) 259,717
Total revenue 5,345,226
(47,340 ) 5,297,886
Operating expenses
Sales and marketing 1,630,445
16,936
1,647,381
Provision for income taxes 106,272
(4,957 ) 101,315
Net income $ 1,306,834
$ (59,423 ) $ 1,247,411
Basic net income per share $ 2.68
$ (0.12 ) $ 2.56
Diluted net income per share $ 2.65
$ (0.12 ) $ 2.53

~~Adoption of the new revenue standard impacted our condensed consolidated balance sheets as of May 31, 2019 as follows (in thousands):~~

As reported Adjustments Balances without ASC 606 adoption impact
Assets
Trade receivables, net of allowances for doubtful accounts $ 1,272,668
$ (73,370 ) $ 1,199,298
Prepaid expenses and other current assets 590,998
(190,282 ) 400,716
Other assets 503,221
(306,265 ) 196,956
Liabilities and Stockholders’ Equity
Accrued expenses 1,314,998
(36,444 ) 1,278,554
Deferred revenue, current 3,011,552
58,244
3,069,796
Deferred revenue, long-term 122,522
(2,183 ) 120,339
Deferred income taxes 133,886
(87,792 ) 46,094
Retained earnings $ 13,183,938
$ (501,742 ) $ 12,682,196

There was no net impact to our condensed consolidated statements of comprehensive income and cash flows from operating, financing or investing activities on the condensed consolidated cash flows resulting from the adoption of the new revenue standard other than the impact to reported net income as presented above. The impact to our condensed consolidated statement of stockholders’ equity was only to retained earnings, as presented above.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

The most significant impact of the new revenue standard relates to our capitalization of certain incremental costs to acquire contracts and the requirement to amortize these amounts over the expected period of benefit. Under the previous standard, we expensed costs related to the acquisition of revenue-generating contracts as incurred. Additionally, there was impact from arrangements with our customers that include on-premise term-based software licenses bundled with maintenance and support. Under the previous standard, revenue attributable to these software licenses was recognized ratably over the term of the arrangement because vendor-specific objective evidence (“VSOE”) did not exist for the undelivered maintenance and support element as it is not sold separately. The requirement to have VSOE for undelivered elements to enable the separation of revenue recognition for delivered software licenses is eliminated under the new revenue standard. Accordingly, under the new revenue standard we recognize as revenue a portion of the arrangement fee upon delivery of the software licenses and classify that recognized revenue as product revenue instead of subscription revenue in our condensed consolidated statements of income.

Other impacts to our policies and disclosures include earlier recognition of revenue for certain contracts due to the elimination of contingent revenue limitations, the requirement to estimate variable consideration for certain arrangements, increased allocation of revenue to and from professional services and other offerings and changes to our financial statement disclosures such as new disclosures related to our remaining performance obligations. However, the timing and pattern of revenue recognition related to our professional services and cloud-enabled offerings, including Creative Cloud and Document Cloud for enterprises, individuals and teams, remain substantially unchanged. When Creative Cloud and Document Cloud are sold with cloud-enabled services, the on-premise/on-device software licenses and cloud-enabled services are so highly interrelated and interdependent that they are not each separately identifiable within the context of the contract and therefore not distinct from each other. Revenue for these offerings continues to be recognized ratably over the subscription period for which the cloud-enabled services are provided.

~~Significant Accounting Policies~~

~~Revenue Recognition~~

~~For revenue recognition policies under Accounting Standards Codification Topic 605, refer to Note 1. Basis of Presentation and Significant Accounting Policies in our Annual Report.~~

Our revenue is derived from the sale of cloud-enabled software subscriptions, cloud-hosted offerings, term-based, royalty, and perpetual software licenses, associated software maintenance and support plans, consulting services, training and technical support. Most of our enterprise customer arrangements involve multiple promises to our customers.

Revenue is recognized when a contract exists between us and a customer and upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which may be capable of being distinct and accounted for as separate performance obligations, or in the case of offerings such as cloud-enabled Creative Cloud and Document Cloud, accounted for as a single performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

~~Product, Subscription, and Services Offerings~~

We enter into revenue arrangements in which a customer may purchase a combination of cloud-enabled subscriptions, cloud-hosted offerings, term-based, royalty, and perpetual software licenses, associated software maintenance and support plans, consulting services, training and technical support.

Fully hosted subscription services (Software-as-a-Service) allow customers to access hosted software during the contractual term without taking possession of the software. Cloud-hosted subscription services may be sold on a fee-per-subscription period basis or based on consumption or usage.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

We recognize revenue ratably over the contractual service term for hosted services that are priced based on a committed number of transactions where the delivery and consumption of the benefit of the services occur evenly over time, beginning on the date the services associated with the committed transactions are first made available to the customer and continuing through the end of the contractual service term. Over-usage fees and fees based on the actual number of transactions, are billed in accordance with contract terms as these fees are incurred and are included in the transaction price of an arrangement as variable consideration. Fees based on a number of transactions or impressions per month, where invoicing is aligned to the pattern of performance, customer benefit, and consumption, are typically accounted for utilizing the “as-invoiced” practical expedient. Revenue for subscriptions sold as a fee per period is recognized ratably over the contractual term as the customer simultaneously receives and consumes the benefit of the underlying service.

When cloud-enabled services are highly integrated and interrelated with on-premise software, such as in our cloud-enabled Creative Cloud and Document Cloud offerings, the individual components are not considered distinct and revenue is recognized ratably over the subscription period for which the cloud-enabled services are provided.

Licenses for on-premise software may be purchased on a perpetual basis, as a subscription for a fixed period of time or based on usage for certain of our OEM and royalty agreements. Revenue from distinct on-premise licenses is recognized at the point in time the software is available to the customer, provided all other revenue recognition criteria are met, and classified as product revenue on the condensed consolidated statements of income. Some of our enterprise license arrangements allow customers to commit non-cancellable funds. These non-cancellable committed funds are nonrefundable and provide our customers options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Revenue associated with these monthly term-based licenses is classified as subscription revenue.

Our services and support revenue is composed of consulting, training, and maintenance and support, primarily related to our enterprise offerings. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. We typically sell our consulting contracts on a time-and-materials basis and recognize the related revenue as services are rendered. We typically sell our maintenance and support contracts on a flat fee or percentage of associated license fees basis and recognize the related revenue ratably over the support term as the underlying service is a stand-ready performance obligation.

We exclude from the transaction price sales and other taxes collected from customers on behalf of the relevant government authority. Most of our products are delivered electronically, however in instances where shipping and handling costs are incurred, we treat these amounts as costs to fulfill the contract and they are not considered a performance obligation and the associated fees are not included in the transaction price.

~~Judgments~~

Our contracts with customers may include multiple goods and services. For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services. Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided. In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams. We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

Cloud-based features that are integral to our Creative Cloud and Document Cloud offerings and that work together with the on-premise/on-device software include, but are not limited to: Creative Cloud Libraries, which enable customers to access their work, settings, preferences, and other assets seamlessly across desktop and mobile devices and collaborate across teams in real time; shared reviews which enable simultaneous editing and commenting of PDFs across desktop, mobile, and web; automatic cloud rendering of a design which enables it to be worked on in multiple mediums; and Sensei, Adobe’s cloud-hosted artificial intelligence and machine learning framework, which enables features such as automated photo-editing, photograph content-awareness, natural language processing, optical character recognition, and automated document tagging.

Standalone selling price is established by maximizing the amount of observable inputs, primarily actual historical selling prices for performance obligations where available, and includes consideration of factors such as go-to-market model and geography. Individual products may have multiple values for standalone selling price depending on factors such as where they are sold and what channel they are sold through. Where standalone selling price may not be directly observable (e.g., the performance obligation is not sold separately), we maximize the use of observable inputs by using information that may include reviewing pricing practices, performance obligations with similar customers and selling models.

Capitalized costs to obtain a contract are amortized over the expected period of benefit, which we have determined, based on analysis, to be 5 years. We evaluated qualitative and quantitative factors to determine the period of amortization, including contract length, renewals, customer life and the useful lives of our products and acquired products. When the expected period of benefit of an asset which would be capitalized is less than one year, we expense the amount as incurred, utilizing the practical expedient. We regularly evaluate whether there have been changes in the underlying assumptions and data used to determine the amortization period.

We offer limited rights of return, rebates and price protection of our products under various policies and programs with our distributors, resellers and/or end-user customers. We estimate and record reserves for these programs as variable consideration when estimating transaction price. Returns, rebates and other offsets to transaction price are estimated at contract inception on a portfolio basis and assessed for reasonableness each reporting period when additional information becomes available.

~~General Contract Provisions~~

~~We maintain revenue reserves for rebates, rights of return, or other limited price adjustments.~~

Distributors are allowed limited rights of return of products purchased during the previous quarter. In addition, distributors are allowed to return products that have reached the end of their lives, as defined by us, and for products that are being replaced by new versions.

We offer rebates to our distributors, resellers and/or end user customers. Transaction price is reduced for these amounts based on actual performance against objectives set forth by us for a particular reporting period, such as volume and timely reporting.

On a quarterly basis, the amount of revenue that is reserved is calculated based on our historical trends and data specific to each reporting period. The primary method of establishing these reserves is to review historical data from prior periods as a percent of revenue to determine a historical reserve rate. We then apply the historical rate to the current period revenue as a basis for estimating future returns. When necessary, we also provide a specific reserve in excess of portfolio-level estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans and other factors.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

Although our subscription contracts are generally non-cancellable, a limited number of customers have the right to cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term and consumers have a period of time to terminate certain agreements without penalty. In the event a customer cancels their contract, they are generally not entitled to a refund for prior services we have provided to them. Contracts that include termination rights without substantive penalty are accounted for as contracts only for the committed period. Periods of time after the right of termination are accounted for as optional purchases when they do not represent material rights. For certain of our usage-based license agreements, typically in our royalty and OEM businesses, reporting may be received after the end of a fiscal period. In such instances, we estimate and accrue license revenue. We base our estimates on multiple factors, including historical sales information, seasonality and other business information which may impact our estimates. We do not estimate variable consideration for our sales and usage-based license royalty agreements, consistent with the associated practical expedient under the new revenue standard.

~~Recent Accounting Pronouncements Not Yet Effective~~

On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases with a lease term of twelve months or less. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new leases standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new leases standard is effective for us beginning in the first quarter of fiscal 2020, and we will not early adopt.

The new leases standard must be adopted using a modified retrospective transition method and allows for the application of the new guidance at the beginning of the earliest comparative period presented or at the adoption date. In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements, providing an optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We intend to adopt the new leases standard using this optional transition method.

While we are continuing to assess the potential impacts of the standard, we currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities on our balance sheet. The standard is not expected to have a material impact to our condensed consolidated statements of income and cash flows. We are implementing a new lease accounting system and are updating our processes in preparation for the adoption of the new leases standard.

On August 28, 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, requiring expanded hedge accounting for both non-financial and financial risk components and refining the measurement of hedge results to better reflect an entity’s hedging strategies. ~~For example, adoption would result in reclassification of hedge costs from foreign currency hedges from interest and other income (expense), net to revenue in our statements of income.~~ The updated standard also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. On November 30, 2019, the beginning of our fiscal year 2020, we adopted the accounting requirements of the updated standard utilizing the modified retrospective method of transition. The adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.

Significant Accounting Policies

Leases

We determine if an arrangement is or contains a lease at contract inception. In certain of our lease arrangements, primarily those related to our data center arrangements, judgment is required in determining if a contract contains a lease. For these arrangements, there is judgment in evaluating if the arrangement involves an identified asset that is physically distinct or whether we have the right to substantially all of the capacity of an identified asset that is not physically distinct. In arrangements that involve an identified asset, there is also judgment in evaluating if we have the right to direct the use of that asset.

We do not have any finance leases. Operating leases are recorded in our condensed consolidated balance sheets. ROU assets and lease liabilities are measured at the lease commencement date based on the present value of the remaining lease payments over the lease term, determined using the discount rate for the lease at the commencement date. Because the rate implicit in our leases is not readily determinable, we use our incremental borrowing rate as the discount rate, which approximates the interest rate at which we could borrow on a collateralized basis with similar terms and payments and in similar economic environments. Our leases have remaining lease terms of up to 12 years, some of which include options to extend the lease for up to 9 years and options to terminate the lease within 1 year. Optional periods to extend the lease, including by not exercising a termination option, are included in the lease term when it is reasonably certain that the option will be exercised. We also have one land lease that expires in 2091. Operating lease expense is recognized on a straight-line basis over the lease term. We account for lease and non-lease components, principally common area maintenance for our facilities leases, as a single lease component for our facilities and data center leases.

There have been no other material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.

Recent Accounting Pronouncements Not Yet Effective

On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses, requiring the measurement and recognition of expected credit losses for financial assets held at amortized cost, which include our accounts receivable and contract assets. The standard also requires that we recognize credit impairment losses related to our available-for-sale debt securities through an allowance for credit losses instead of a reduction in the cost basis. The effective date of the new standard for public companies is for fiscal years beginning after December 15, ~~2018~~2019 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a ~~cumulative-effect~~cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The updated standard is effective for us beginning in the first quarter of fiscal ~~2020, which is when~~2021 and we do not plan to ~~adopt~~early adopt. We are currently evaluating the ~~standard. While we are continuing to assess the potential impacts of~~effect that the standard ~~we currently do not expect it to~~will have ~~a material impact~~ on our condensed consolidated financial statements and related disclosures.

With the exception of the new ~~standards~~standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended May ~~31, 2019,~~29, 2020, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance or potential significance to us.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 2. REVENUE

Revenue for the three and six months ended May 31, 2019 presented below is in accordance with a new revenue standard that was adopted under the modified retrospective method. Prior period revenue has not been restated.Segment Information

Our segment results for the three months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were as ~~follows (dollars in thousands):~~follows:


	Digital Media			Digital Experience			Publishing			Total
(dollars in millions)													Digital Media			Digital Experience			Publishing			Total
Three months ended May 29, 2020
Revenue													$	2,232		$	826		$	70		$	3,128
Cost of revenue													84			326			5			415
Gross profit													$	2,148		$	500		$	65		$	2,713
Gross profit as a percentage of revenue													96		%	61		%	93		%	87		%
Three months ended May 31, 2019
Revenue	$	1,890,151		$	783,542		$	70,587		$	2,744,280		$	1,890		$	784		$	70		$	2,744
Cost of revenue	70,734			331,675			5,079			407,488			71			331			5			407
Gross profit	$	1,819,417		$	451,867		$	65,508		$	2,336,792		$	1,819		$	453		$	65		$	2,337
Gross profit as a percentage of revenue	96		%	58		%	93		%	85		%	96		%	58		%	93		%	85		%
Three months ended June 1, 2018
Revenue	$	1,546,424		$	585,952		$	62,984		$	2,195,360
Cost of revenue	54,760			220,696			5,888			281,344
Gross profit	$	1,491,664		$	365,256		$	57,096		$	1,914,016
Gross profit as a percentage of revenue	96		%	62		%	91		%	87		%

Our segment results for the six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were as ~~follows (dollars in thousands):~~follows:


	Digital Media			Digital Experience			Publishing			Total
(dollars in millions)													Digital Media			Digital Experience			Publishing			Total
Six months ended May 29, 2020
Revenue													$	4,401		$	1,684		$	134		$	6,219
Cost of revenue													171			687			9			867
Gross profit													$	4,230		$	997		$	125		$	5,352
Gross profit as a percentage of revenue													96		%	59		%	93		%	86		%
Six months ended May 31, 2019
Revenue	$	3,666,794		$	1,526,818		$	151,614		$	5,345,226		$	3,667		$	1,527		$	151		$	5,345
Cost of revenue	138,929			655,383			10,462			804,774			139			656			10			805
Gross profit	$	3,527,865		$	871,435		$	141,152		$	4,540,452		$	3,528		$	871		$	141		$	4,540
Gross profit as a percentage of revenue	96		%	57		%	93		%	85		%	96		%	57		%	93		%	85		%
Six months ended June 1, 2018
Revenue	$	3,006,985		$	1,140,059		$	127,263		$	4,274,307
Cost of revenue	110,229			419,488			10,529			540,246
Gross profit	$	2,896,756		$	720,571		$	116,734		$	3,734,061
Gross profit as a percentage of revenue	96		%	63		%	92		%	87		%

Revenue by geographic area for the three and six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were as ~~follows (in thousands):~~follows:


	Three Months				Six Months				Three Months				Six Months
	2019		2018		2019		2018
(in millions)									2020		2019		2020		2019
Americas	$	1,599,176	$	1,239,553	$	3,109,071	$	2,410,234	$	1,811	$	1,599	$	3,608	$	3,109
EMEA	729,342		621,796		1,432,303		1,209,064		825		729		1,642		1,432
APAC	415,762		334,011		803,852		655,009		492		416		969		804
Total	$	2,744,280	$	2,195,360	$	5,345,226	$	4,274,307	$	3,128	$	2,744	$	6,219	$	5,345

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Revenue by major offerings in our Digital Media reportable segment for the three and six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were as ~~follows (in thousands):~~follows:


	Three Months				Six Months				Three Months				Six Months
	2019		2018		2019		2018
(in millions)									2020		2019		2020		2019
Creative Cloud	$	1,594,019	$	1,303,463	$	3,088,907	$	2,532,958	$	1,872	$	1,594	$	3,690	$	3,089
Document Cloud	296,132		242,961		577,887		474,027		360		296		711		578
Total	$	1,890,151	$	1,546,424	$	3,666,794	$	3,006,985	$	2,232	$	1,890	$	4,401	$	3,667

Subscription revenue by segment for the three and six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were as ~~follows (in thousands):~~follows:


	Three Months				Six Months				Three Months				Six Months
	2019		2018		2019		2018
(in millions)									2020		2019		2020		2019
Digital Media	$	1,773,669	$	1,425,919	$	3,437,308	$	2,760,578	$	2,135	$	1,774	$	4,193	$	3,437
Digital Experience	654,048		469,406		1,265,976		900,273		707		654		1,446		1,266
Publishing	28,380		27,806		57,780		55,638		32		28		60		58
Total	$	2,456,097	$	1,923,131	$	4,761,064	$	3,716,489	$	2,874	$	2,456	$	5,699	$	4,761

Contract Balances

~~Trade Receivables~~

A receivable is recorded when an unconditional right to invoice and receive payment exists, such that only the passage of time is required before payment of consideration is due. ~~Timing of revenue recognition may differ from the timing of invoicing to customers. Certain performance obligations may require payment before delivery of the license or service to the customer.~~ Included in trade receivables on the condensed consolidated balance sheets are unbilled receivable balances which have not yet been invoiced, and are typically related to license revenue or services which are delivered prior to invoicing occurring.

~~The opening~~ As of May 29, 2020, the balance of trade receivables, net of allowances for doubtful accounts, ~~as of December 1, 2018~~ was ~~$1.36~~$1.37 billion, inclusive of unbilled receivables of ~~$105.8~~$96 million. As of ~~May 31,~~November 29, 2019, the balance of trade receivables, net of allowances for doubtful accounts, was ~~$1.27~~$1.53 billion, inclusive of unbilled receivables of ~~$118.6~~$149 million.

~~Allowance for Doubtful Accounts~~

We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade ~~receivables. The allowance~~receivables and is based on both specific and general reserves. We regularly review our trade receivables allowance by considering such factors as historical experience, credit-worthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to pay and we specifically reserve for those deemed uncollectible.

The ~~opening balance of allowance for doubtful accounts as of December 1, 2018 was $15.0 million. As of May 31, 2019, the balance of~~ allowance for doubtful accounts was ~~$12.4 million.~~

~~Contract Assets~~$22 million and $10 million as of May 29, 2020 and November 29, 2019, respectively.

A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets are typically related to subscription and hosted service contracts where the transaction price allocated to the satisfied performance obligations exceeds the value of billings to date. Contract assets are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets.

~~The opening~~We regularly review contract asset balances for impairment, considering factors such as historical experience, credit-worthiness, age of the balance ~~of contract~~and other economic or business factors. Contract asset impairments were not material for the six months ended May 29, 2020. Contract assets were $76 million and $64 million as of ~~December 1, 2018 was $46.4 million. As of~~ May ~~31,~~29, 2020 and November 29, 2019, ~~the balance of contract assets was $41.5 million.~~

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

~~Deferred Revenue and Remaining Performance Obligations~~respectively.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services, including non-cancellable and non-refundable committed funds and refundable customer deposits. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. Customers are typically invoiced for these agreements in regular installments and revenue is recognized ratably over the contractual subscription period. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter. Deferred revenue does not represent the total contract value of annual or multi-year non-cancellable subscription agreements.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, such as invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and not to receive financing from our customers. Any potential financing fees are considered insignificant in the context of our contracts.

~~The adjusted opening balance of deferred revenue as of December 1, 2018 was $3.00 billion.~~ As of May ~~31, 2019,~~29, 2020, the balance of deferred revenue was ~~$3.13~~$3.46 billion, ~~inclusive of $222.2 million of non-cancellable and non-refundable committed funds and $47.0~~which includes $41 million of refundable customer deposits. Arrangements with some of our enterprise customers with non-cancellable and non-refundable committed funds provide ~~our customers~~ options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. ~~Refundable customer deposits represent arrangements in which the customer has a unilateral cancellation right for which we are obligated to refund amounts paid~~Non-cancellable and non-refundable committed funds related to ~~products or services not yet delivered or provided at~~these agreements comprised approximately 6% of the ~~time~~total deferred revenue.

As of ~~cancellation on a prorated basis.~~

~~Significant movements in~~November 29, 2019, the balance of deferred revenue balance during the period consisted of increases due to payments received prior to transfer of control of the underlying performance obligations to the customer and deferred revenue assumed through business combinations, which were offset by decreases due to revenue recognized in the period.was $3.50 billion. During the three and six months ended May ~~31, 2019,~~29, 2020, approximately ~~$0.8 billion~~$945 million and ~~$2.2~~$2.42 billion of revenue, respectively, was recognized that was included in the ~~adjusted opening~~ balance of deferred revenue as of ~~December 1, 2018.~~November 29, 2019.

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. ~~Transaction price allocated to the~~As of May 29, 2020, remaining performance obligation is influenced by several factors, including the timing of renewals and average contract terms. We applied practical expedients to exclude amounts related to performance obligations that are billed and recognized as they are delivered, optional purchases that do not represent material rights, sales- and usage-based royalties not yet consumed and any estimated amounts of variable consideration that are subject to constraint in accordance with the new revenue standard.

~~Remaining~~ performance obligations were approximately ~~$8.37 billion as of May 31, 2019, which includes $574.5 million of non-cancellable~~$9.92 billion. Non-cancellable and non-refundable ~~committed~~ funds

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

related to some of our enterprise customer ~~agreements.~~agreements referred to in the paragraph above comprised approximately 6% of the total remaining performance obligations. Approximately 74% of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.

~~Contract Acquisition Costs~~

~~We recognize an asset for the incremental~~Incremental costs of obtaining a contract with a customer are capitalized if we expect the benefit of those costs to be longer than one ~~year. We have determined that certain sales incentive programs meet the requirements~~year and primarily relate to ~~be capitalized.~~

~~The costs capitalized under the new revenue standard are primarily~~ sales commissions paid to our sales force personnel. Capitalized ~~costs may also include portions of fringe benefits and payroll taxes associated with compensation for incremental costs to acquire customer contracts and incentive payments to partners.~~

Capitalized costs to obtain a contract are amortized over the expected period of benefit, which we have determined, based on analysis, to be 5 years. Amortization of capitalized costs are included in our sales and marketing expense in our condensed consolidated statements of income.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

~~The opening balance of capitalized~~ contract acquisition costs as of December 1, 2018 was $413.2 million. As of May 31, 2019, the balance of capitalized contract acquisition costs was $455.1 million, of which $302.5 million was long-term and included in other assets in the condensed consolidated balance sheets. The remaining balance of the capitalized costs to obtain contracts were current andare included in prepaid expenses and other current ~~assets.~~

~~Refund Liabilities~~assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. Capitalized contract acquisition costs were $522 million and $474 million as of May 29, 2020 and November 29, 2019, respectively.

As part of our revenue reserves, we record refund liabilities for amounts that may be subject to future refunds, which include sales returns reserves and customer rebates and credits. Refund liabilities are included in accrued expenses on the condensed consolidated balance sheets.

~~The opening balance of refund~~Refund liabilities were $107 million and $126 million as of ~~December 1, 2018 was $75.3 million. As of~~ May ~~31,~~29, 2020 and November 29, 2019, ~~the balance of refund liabilities was $85.2 million.~~respectively.

NOTE 3. ACQUISITIONS

~~Allegorithmic~~

On January 23, 2019, we completed the acquisition of Allegorithmic, a ~~privately held~~privately-held 3D editing and authoring software company for gaming and ~~entertainment.~~entertainment, and integrated it into our Digital Media reportable segment. Prior to the acquisition, we held an equity interest in Allegorithmic that was accounted for as an equity-method investment. We acquired the remaining equity interest for approximately ~~$105.3~~$106 million in cash consideration. The total purchase price, inclusive of the acquisition-date fair-value of our pre-existing equity interest, was approximately ~~$159.7~~$161 million. ~~Following the closing, we began integrating Allegorithmic into our Digital Media reportable segment.~~

In conjunction with the acquisition, we separately recognized an investment gain of approximately ~~$41.5~~$42 million, which represents the difference between the ~~$54.4~~$55 million acquisition-date fair value of our pre-existing equity interest and our previous carrying amount.

Under the acquisition method of accounting, the total purchase price was preliminarily allocated to Allegorithmic’s net tangible and intangible assets based upon their estimated fair values as of January 23, 2019. During the three months ended May 31, 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to identifiable intangible assets and their related impact to goodwill. The total purchase price for Allegorithmic was preliminarily allocated to goodwill that is non-deductible for tax purposes of $124.7 million and to identifiable intangible assets of $44.8 million, with the remaining amount representing net liabilities assumed. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining to tax liabilities assumed including the calculation of deferred tax assets and liabilities.

~~Pro forma financial information has not been presented for this acquisition as the impact to our condensed consolidated financial statements was not material.~~

~~Marketo~~

On October 31, 2018, we completed the acquisition of Marketo, a privately held marketing cloud platform company, for approximately $4.73 billion of cash consideration. Adding Marketo’s engagement platform to Adobe Experience Cloud furthers our long-term plan for strategic growth in the Digital Experience segment and enables us to offer a comprehensive set of solutions to enable customers across industries and companies automate and orchestrate their marketing activities. Under the terms of the Share Purchase Agreement (“Purchase Agreement”), we acquired all of the issued and outstanding shares of capital stock of Milestone Topco, Inc., a Delaware corporation (“Topco”) and indirect parent company of Marketo, and other equity interests in Marketo. In connection with the acquisition, each Marketo equity award that was issued and outstanding was cancelled and extinguished in exchange for cash consideration. Also pursuant to the Purchase Agreement, upon closing of the transaction, cash was paid for the settlement of Marketo’s long-term incentive plan, the settlement of Marketo’s indebtedness and the acquisition of all remaining equity interests in Marketo K.K., a Japanese corporation and joint venture.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

In connection with the acquisition of Marketo, we entered into a credit agreement providing for a $2.25 billion senior unsecured term loan (“Term Loan”). The proceeds of the Term Loan were used to fund a portion of the purchase price of the acquisition and pay fees and expenses incurred in connection with the acquisition. The Term Loan funds were received on October 31, 2018 upon closing of the acquisition. ~~See Note 14 for further details regarding our Term Loan.~~

Following the closing, we began integrating Marketo into our Digital Experience reportable segment and have included the financial results of Marketo in our consolidated financial statements beginning on the acquisition date. The amounts of net revenue and net loss of Marketo included in our consolidated statements of income from the acquisition date through November 30, 2018 were not material. The direct transaction costs associated with the acquisition were also not material.

~~Purchase Price Allocation~~

~~Under the purchase accounting method, the total preliminary~~final purchase price was allocated to ~~Marketo’s~~Allegorithmic’s net tangible and intangible assets based upon their estimated fair values as of the acquisition date. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. ~~During~~Of the ~~six months ended May 31, 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to~~ total ~~estimated~~ purchase price, ~~identifiable intangible assets, net liabilities assumed and their related impact to goodwill.~~

The table below represents the preliminary purchase price allocation to the acquired net tangible and intangible assets of Marketo based on their estimated fair values as of the acquisition date and the associated estimated useful lives at that date. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining tax liabilities assumed including the calculation of deferred tax assets and liabilities.

(in thousands) Amount Weighted Average Useful Life (years)
Customer contracts and relationships $ 577,500
11
Purchased technology 444,500
7
Backlog 105,500
2
Non-competition agreements 12,100
2
Trademarks 328,500
9
Total identifiable intangible assets 1,468,100

Net liabilities assumed (194,588 ) N/A
Goodwill⁽¹⁾
3,459,256
N/A
Total estimated purchase price $ 4,732,768

^{_________________________________________}


⁽¹⁾	~~Non-deductible for tax-purposes.~~

~~Identifiable intangible assets~~ — Customer relationships consist of Marketo’s contractual relationships and customer loyalty related to their enterprise and commercial customers as well as technology partner relationships. The estimated fair value of the customer contracts and relationships was determined based on projected cash flows attributable to the asset. Purchased technology acquired primarily consists of Marketo’s cloud-based engagement marketing software platform. The estimated fair value of the purchased technology was determined based on the expected future cost savings resulting from ownership of the asset. Backlog relates to subscription contracts and professional services. Non-compete agreements include agreements with key Marketo employees that preclude them from competing against Marketo for a period of two years from the acquisition date. Trademarks include the Marketo trade name, which is well known in the marketing ecosystem. We amortize the fair value of these intangible assets on a straight-line basis over their respective estimated useful lives.

~~Goodwill~~ — Approximately $3.46 billion has been allocated to goodwill entirely to our Digital Experience reportable segment. Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant, acquiring a talented workforce and cost savings opportunities.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

~~Net liabilities assumed~~ ~~— Marketo’s tangible assets and liabilities as of October 31, 2018 were reviewed and adjusted to their fair value as necessary. The net liabilities assumed included, among other items, $102.6~~$126 million in accrued expenses, $74.8 million in deferred revenue and $182.6 million in deferred tax liabilities, which were partially offset by $54.9 million in cash and cash equivalents and $71.6 million in trade receivables acquired.

~~Deferred revenue~~ — Included in net liabilities assumed is Marketo’s deferred revenue which represents advance payments from customers related to subscription contracts and professional services. We estimated our obligation related to the deferred revenue using the cost build-up approach. The cost build-up approach determines fair value by estimating the direct and indirect costs related to supporting the obligation plus an assumed operating margin. The sum of the costs and assumed operating profit approximates, in theory, the amount that Marketo would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the near-term projected cost structure for subscription and professional services. As a result, we recorded an adjustment to reduce Marketo’s carrying value of deferred revenue to $74.8 million, which represents our estimate of the fair value of the contractual obligations assumed based on a preliminary valuation.

~~Taxes~~ ~~— As part of our accounting for the Marketo acquisition, a portion of the overall purchase price~~ was allocated to goodwill ~~and acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible~~that was non-deductible for tax ~~purposes. Thus, approximately $348.8~~purposes, $45 million ~~included in the net liabilities assumed, was established as a deferred tax liability for the future amortization of the~~to identifiable intangible assets and ~~was partially offset by other tax assets of $166.2 million, which primarily consist of net operating loss carryforwards.~~

~~Any impairment charges made in~~ the ~~future associated with goodwill will not be tax deductible and will result in an increased effective income tax rate in the quarter the impairment is recorded.~~

~~Magento~~

On June 18, 2018, we completed our acquisition of Magento Commerce (“Magento”), a privately-held commerce platform company. Following the closing, we began integrating Magento into our Digital Experience reportable segment.

The table below represents the final purchase price allocation to the acquired net assets of Magento based on their estimated fair values as of June 18, 2018 and the associated estimated useful lives at that date. During the first quarter of fiscal 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regardsremainder to net liabilities ~~assumed and their related~~assumed.

Pro forma financial information has not been presented as the impact to ~~goodwill.~~ our condensed consolidated financial statements was not material.

(in thousands) Amount Weighted Average Useful Life (years)
Customer contracts and relationships $ 208,000
8
Purchased technology 84,200
5
In-process research and development ⁽¹⁾
39,100
N/A
Trademarks 21,100
3
Other intangibles 43,400
3
Total identifiable intangible assets 395,800

Net liabilities assumed (68,182 ) N/A
Goodwill⁽²⁾
1,316,983
N/A
Total estimated purchase price $ 1,644,601

^{_________________________________________}


⁽¹⁾	Capitalized as purchased technology and are considered indefinite lived until the completion or abandonment of the associated research and development efforts. During the first quarter of fiscal 2019, one of the associated in-process research and development efforts was completed and another one was abandoned. The respective related amortization and write-off were each immaterial.


⁽²⁾	~~Non-deductible for tax-purposes.~~

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

NOTE 4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents consist of ~~instruments~~highly liquid marketable debt securities with remaining maturities of three months or less at the date of purchase. We classify ~~all of~~ our ~~cash equivalents and short-term~~ investments in marketable debt securities as “available-for-sale.” ~~In general, these investments are free of trading restrictions.~~ We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. Gains and losses are determined using the specific identification method and recognized when realized in our condensed consolidated statements of income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. ~~Gains and losses are determined using the specific identification method.~~

~~Cash, cash equivalents and short-term investments consisted of the following as of May 31, 2019 (in thousands):~~

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value
Current assets:
Cash $ 400,023
$ —
$ —
$ 400,023
Cash equivalents:
Corporate debt securities 144,563
—
(8 ) 144,555
Money market mutual funds 1,474,933
—
—
1,474,933
Municipal securities 1,000
—
—
1,000
Time deposits 57,400
—
—
57,400
U.S. agency securities 4,999
—
—
4,999
Total cash equivalents 1,682,895
—
(8 ) 1,682,887
Total cash and cash equivalents 2,082,918
—
(8 ) 2,082,910
Short-term fixed income securities:
Asset-backed securities 61,145
59
(80 ) 61,124
Corporate debt securities 1,314,844
804
(3,616 ) 1,312,032
Foreign government securities 2,399
—
(6 ) 2,393
Municipal securities 20,499
47
(26 ) 20,520
Total short-term investments 1,398,887
910
(3,728 ) 1,396,069
Total cash, cash equivalents and short-term investments $ 3,481,805
$ 910
$ (3,736 ) $ 3,478,979

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of ~~November 30, 2018 (in thousands):~~May 29, 2020:

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value
Current assets:
Cash $ 368,564
$ —
$ —
$ 368,564
Cash equivalents:

Money market mutual funds 1,234,188
—
—
1,234,188
Time deposits 40,023
—
—
40,023
Total cash equivalents 1,274,211
—
—
1,274,211
Total cash and cash equivalents 1,642,775
—
—
1,642,775
Short-term fixed income securities:
Asset-backed securities 41,875
—
(367 ) 41,508
Corporate debt securities 1,546,860
44
(24,696 ) 1,522,208
Foreign government securities 4,179
—
(24 ) 4,155
Municipal securities 18,601
1
(286 ) 18,316
Total short-term investments 1,611,515
45
(25,373 ) 1,586,187
Total cash, cash equivalents and short-term investments $ 3,254,290
$ 45
$ (25,373 ) $ 3,228,962



(in millions)	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	786	$	—	$	—		$	786
Cash equivalents:
Money market mutual funds	2,192		—		—			2,192
Time deposits	66		—		—			66
Total cash equivalents	2,258		—		—			2,258
Total cash and cash equivalents	3,044		—		—			3,044
Short-term fixed income securities:
Asset-backed securities	79		1		—			80
Corporate debt securities	1,207		10		(1		)	1,216
Municipal securities	11		—		—			11
Total short-term investments	1,297		11		(1		)	1,307
Total cash, cash equivalents and short-term investments	$	4,341	$	11	$	(1	)	$	4,351

Cash, cash equivalents and short-term investments consisted of the following as of November 29, 2019:



(in millions)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Current assets:
Cash	$	467	$	—	$	—	$	467
Cash equivalents:
Corporate debt securities	46		—		—		46
Money market mutual funds	2,049		—		—		2,049
Time deposits	88		—		—		88
Total cash equivalents	2,183		—		—		2,183
Total cash and cash equivalents	2,650		—		—		2,650
Short-term fixed income securities:
Asset-backed securities	89		—		—		89
Corporate debt securities	1,408		4		—		1,412
Municipal securities	18		—		—		18
U.S. Treasury securities	8		—		—		8
Total short-term investments	1,523		4		—		1,527
Total cash, cash equivalents and short-term investments	$	4,173	$	4	$	—	$	4,177

See Note 5 for further information regarding the fair value of our financial instruments.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months, as of May 31, 2019 and November 30, 2018 (in thousands):

2019 2018

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses
Corporate debt securities $ 178,253
$ (43 ) $ 538,109
$ (7,966 )
Asset-backed securities 5,501
—
6,696
(54 )
Municipal securities 1,942
—
6,599
(81 )
Total $ 185,696
$ (43 ) $ 551,404
$ (8,101 )

~~There were 58 securities and 369 securities in an unrealized loss position for less than twelve months at May 31, 2019 and at November 30, 2018, respectively.~~

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

We had immaterial gross unrealized losses related to our available-for-sale securities as of May 29, 2020 and November 29, 2019. The following table summarizes the fair value ~~and gross unrealized losses related to~~of our available-for-sale securities ~~aggregated by investment category,~~ that ~~were~~have been in a continuous unrealized loss position ~~for more than twelve months,~~ as of May ~~31, 2019~~29, 2020 and November ~~30, 2018 (in thousands):~~29, 2019:


	2019					2018
(in millions)											2020				2019
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Less Than Twelve Months		More Than Twelve Months		Less Than Twelve Months		More Than Twelve Months
Corporate debt securities	$	940,760	$	(3,581	)	$	969,701	$	(16,730	)	$	206	$	—	$	235	$	44
Asset-backed securities	24,847		(80		)	34,812		(313		)	2		—		7		7
Municipal securities	8,725		(26		)	11,532		(205		)	3		—		3		—
Foreign government securities	2,393		(6		)	4,154		(24		)
Total	$	976,725	$	(3,693	)	$	1,020,199	$	(17,272	)	$	211	$	—	$	245	$	51

There were ~~547 securities and 577~~0 securities in an unrealized loss position for more than twelve months at May ~~31, 2019~~29, 2020, and 38 securities in an unrealized loss position for more than twelve months at November 29, 2019. There were 90 securities and 115 securities in an unrealized loss position for less than twelve months at May 29, 2020 and at November ~~30, 2018,~~29, 2019, respectively.

The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of May ~~31, 2019 (in thousands):~~29, 2020:


	Amortized Cost		Estimated Fair Value
(in millions)					Amortized Cost		Estimated Fair Value
Due within one year	$	612,044	$	610,831	$	890	$	896
Due between one and two years	587,933		586,542		258		260
Due between two and three years	136,276		136,058		149		151
Due after three years	62,634		62,638
Total	$	1,398,887	$	1,396,069	$	1,297	$	1,307

We review our debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. The portion of the write-down related to credit loss would be recorded to ~~interest and~~ other income (expense), net in our condensed consolidated statements of income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. During the six months ended May 29, 2020 and May 31, 2019, ~~and June 1, 2018,~~ we did not consider any of our investments to be other-than-temporarily impaired.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

We measure certain financial assets and liabilities at fair value on a recurring basis. There have been no transfers between fair value measurement levels during the six months ended May ~~31, 2019.~~29, 2020.

The fair value of our financial assets and liabilities at May ~~31, 2019~~29, 2020 was determined using the following ~~inputs (in thousands):~~inputs:


	Fair Value Measurements at Reporting Date Using
(in millions)									Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate debt securities	$	144,555	$	—	$	144,555	$	—
Money market mutual funds	1,474,933		1,474,933		—		—		$	2,192	$	2,192	$	—	$	—
Municipal securities	1,000		—		1,000		—
Time deposits	57,400		57,400		—		—		66		66		—		—
U.S. agency securities	4,999		—		4,999		—
Short-term investments:
Asset-backed securities	61,124		—		61,124		—		80		—		80		—
Corporate debt securities	1,312,032		—		1,312,032		—		1,216		—		1,216		—
Foreign government securities	2,393		—		2,393		—
Municipal securities	20,520		—		20,520		—		11		—		11		—
Prepaid expenses and other current assets:
Foreign currency derivatives	30,241		—		30,241		—		38		—		38		—
Other assets:
Deferred compensation plan assets	81,749		4,121		77,628		—		99		8		91		—
Total assets	$	3,190,946	$	1,536,454	$	1,654,492	$	—	$	3,702	$	2,266	$	1,436	$	—


Liabilities:
Accrued expenses:
Foreign currency derivatives	$	2,149	$	—	$	2,149	$	—	$	5	$	—	$	5	$	—
Other liabilities:
Interest rate swap derivatives	2,964		—		2,964		—
Total liabilities	$	5,113	$	—	$	5,113	$	—

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at November ~~30, 2018~~29, 2019 was determined using the following ~~inputs (in thousands):~~ inputs:


	Fair Value Measurements at Reporting Date Using
(in millions)									Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate debt securities									$	46	$	—	$	46	$	—
Money market mutual funds	$	1,234,188	$	1,234,188	$	—	$	—	2,049		2,049		—		—
Time deposits	40,023		40,023		—		—		88		88		—		—
Short-term investments:
Asset-backed securities	41,508		—		41,508		—		89		—		89		—
Corporate debt securities	1,522,208		—		1,522,208		—		1,412		—		1,412		—
Foreign government securities	4,155		—		4,155		—
Municipal securities	18,316		—		18,316		—		18		—		18		—
U.S. Treasury securities									8		—		8		—
Prepaid expenses and other current assets:
Foreign currency derivatives	44,259		—		44,259		—		29		—		29		—
Other assets:
Deferred compensation plan assets	68,988		3,895		65,093		—		94		5		89		—
Total assets	$	2,973,645	$	1,278,106	$	1,695,539	$	—	$	3,833	$	2,142	$	1,691	$	—


Liabilities:
Accrued expenses:
Treasury lock derivatives									$	30	$	—	$	30	$	—
Foreign currency derivatives	$	816	$	—	$	816	$	—	3		—		3		—
Other liabilities:
Interest rate swap derivatives	9,744		—		9,744		—
Total liabilities	$	10,560	$	—	$	10,560	$	—	$	33	$	—	$	33	$	—

See Note 4 for further information regarding the fair value of our financial instruments.

Our fixed income available-for-sale debt securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of ~~A+.~~AA. We value these securities based on pricing from independent pricing vendors who use matrix pricing valuation techniques including market approach methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Inputs include quoted prices in active markets for identical assets or inputs other than quoted prices that are observable either directly or indirectly in determining fair value, including benchmark yields, issuer spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. We therefore classify all of our fixed income available-for-sale securities as Level 2. We perform routine procedures such as comparing prices obtained from multiple independent sources to ensure that appropriate fair values are recorded.

The fair values of our money market mutual funds and time deposits are based on the closing price of these assets as of the reporting date. We classify our money market mutual funds and time deposits as Level 1.

Our Level 2 over-the-counter foreign currency ~~and interest rate swap~~ derivatives are valued using pricing models and discounted cash flow methodologies based on observable foreign exchange and interest rate data at the measurement date.

Our deferred compensation plan assets consist of money market ~~mutual funds~~ and other mutual funds.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The fair value of our debt was $4.47 billion as of May 29, 2020, based on observable market prices in less active markets and categorized as Level 2. See Note 15 for further details regarding our debt.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

~~Assets~~NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS

We may use derivatives to partially offset our business exposure to foreign currency and ~~Liabilities Measured at Fair Value~~interest rate risk on ~~a Nonrecurring Basis~~expected future cash flows, and certain existing assets and liabilities. We do not use any of our derivative instruments for trading purposes.

~~The~~We enter into master netting arrangements to mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty. We do not offset fair value ~~of our senior notes was $1.95 billion as of May 31, 2019, based on observable market prices in less active markets and categorized as Level 2.~~ ~~See Note 14~~amounts recognized for ~~further details regarding our debt.~~

~~NOTE 6. DERIVATIVES AND HEDGING ACTIVITIES~~

~~Hedge Accounting and Hedging Programs~~

~~We recognize~~ derivative instruments and hedging activities as either assets or liabilities in our condensed consolidated balance sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

under master netting arrangements. We evaluate hedge effectiveness at the inception of the hedge prospectively as well as retrospectively, and record any ineffective portion of the hedging instruments in interest and other income (expense), net on our condensed consolidated statements of income. The net gain (loss) recognized in interest and other income (expense), net for cash flow hedges due to hedge ineffectiveness was insignificant for all fiscal years presented. The time value of purchased contracts is recorded in interest and other income (expense), net in our condensed consolidated statements of income.

~~The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance which are largely mitigated with~~also enter into collateral security agreements ~~that provide for~~with certain of our counterparties to exchange cash collateral ~~to be received or posted~~ when the net fair value of certain ~~financial~~derivative instruments fluctuates from contractually established thresholds. ~~In addition, we enter into master netting arrangements which have the ability to further limit credit-related losses with the same counterparty by permitting net settlement of transactions.~~

~~Balance Sheet Hedging~~—~~Hedges of Foreign Currency Assets~~Collateral posted is included in prepaid expenses and ~~Liabilities~~

~~We also hedge our net recognized foreign currency denominated~~other current assets and ~~liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes~~collateral received is included in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net inaccrued expenses on our condensed consolidated ~~statements of income. These contracts do not subject us to material~~ balance ~~sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.~~sheets.

Cash Flow ~~Hedging—~~Hedges ~~of Forecasted Foreign Currency Revenue~~

In countries outside the United States, we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge ~~certain cash flow exposures resulting from changes in these~~a portion of our forecasted foreign currency ~~exchange rates.~~denominated revenue. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. ~~We enter~~

In June 2019, in anticipation of refinancing our $2.25 billion term loan due April 30, 2020 (“Term Loan”) and $900 million 4.75% fixed interest rate senior notes due February 1, 2020 (“2020 Notes”), we entered into ~~these foreign exchange contracts to hedge a portion~~Treasury lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our ~~forecasted foreign currency denominated revenue~~future debt issuance. These derivative instruments hedged the impact of changes in the ~~normal course~~benchmark interest rate to future interest payments and were settled upon debt issuance in the first quarter of ~~business and accordingly, they are not speculative in nature.~~fiscal 2020. We incurred a loss related to the settlement of the instruments which is amortized to interest expense over the term of our debt due February 1, 2030. See Note 15 for further details regarding our debt.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in ~~the intrinsic~~fair value of these cash flow hedges in accumulated other comprehensive income (loss) in our condensed consolidated balance sheets, until the forecasted transaction occurs. When the forecasted transaction ~~occurs,~~affects earnings, we reclassify the related gain or loss on the foreign currency and Treasury lock cash flow ~~hedge~~hedges to ~~revenue.~~revenue and interest expense, respectively. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to ~~interest~~the same income statement line item as the hedged item. We evaluate hedge effectiveness at the inception of the hedge prospectively, and ~~other income (expense), net in our condensed consolidated statements of income at that time.~~on an ongoing basis both retrospectively and prospectively. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in ~~interest and~~the same income statement line item as the hedged item.

Effective in the third quarter of fiscal 2019, all changes in fair value of our foreign currency cash flow hedges are recorded in accumulated other comprehensive income (loss). Prior to this, we recorded the time value of purchased contracts in other income (expense), net in our condensed consolidated statements of income.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

Fair Value ~~Hedging -~~ Hedges ~~of Interest Rate Risk~~

InDuring the third quarter of fiscal 2014, we entered into interest rate swaps designated as fair value ~~hedges~~hedge related to our ~~$900 million 4.75% fixed interest rate senior notes due February 1,~~ 2020 ~~(“2020 Notes”). In effect, the~~Notes. The interest rate swaps ~~convert~~converted the fixed interest rate on the 2020 Notes to a floating interest rate based on the London Interbank Offered Rate (“LIBOR”). Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR rate plus a fixed number of basis points on the $900 million notional amount through February 1, 2020. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 1415 for further details regarding our debt.

The interest rate swaps ~~are~~were accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that ~~are~~were attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps ~~are~~were included in ~~interest and~~ other income (expense), net in our condensed consolidated statements of income.

During the first quarter of fiscal 2020, our 2020 Notes became due and were paid in conjunction with our debt refinancing. As of ~~March 1, 2019,~~May 29, 2020, the interest rate swap agreements had matured and were no longer recognized in our condensed consolidated financial statements.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Non-Designated Hedges

Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies. The changes in fair value of these contracts is recorded to other income (expense), net in our condensed consolidated statements of income. Changes in the fair value of the ~~interest rate swaps was added to~~underlying assets and liabilities associated with the ~~carrying~~hedged risk are generally offset by the changes in the fair value of ~~current debt in our condensed consolidated balance sheets.~~the related contracts.

The fair value of derivative instruments on our condensed consolidated balance sheets as of May ~~31, 2019~~29, 2020 and November ~~30, 2018~~29, 2019 were as ~~follows (in thousands):~~follows:


	2019				2018
(in millions)									2020				2019
	Fair Value Asset Derivatives		Fair Value Liability Derivatives		Fair Value Asset Derivatives		Fair Value Liability Derivatives		Fair Value Asset Derivatives		Fair Value Liability Derivatives		Fair Value Asset Derivatives		Fair Value Liability Derivatives
Derivatives designated as hedging instruments:
Foreign exchange option contracts^{(1) (2)}	$	27,254	$	—	$	40,191	$	—	$	32	$	—	$	26	$	—
Interest rate swap ⁽³⁾	—		2,964		—		9,744
Treasury lock⁽¹⁾									—		—		—		30
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts ⁽¹⁾	2,987		2,149		4,068		816		6		5		3		3
Total derivatives	$	30,241	$	5,113	$	44,259	$	10,560	$	38	$	5	$	29	$	33

^{_________________________________________}


⁽¹⁾	Fair value asset derivatives are included in prepaid expenses and other current assets and fair value liability derivatives are included in accrued expenses on our condensed consolidated balance sheets.


⁽²⁾	~~Hedging effectiveness~~Includes net derivatives gain expected to be recognized into ~~income~~revenue within the next ~~twelve~~18 months, of which $5 million is expected within the next 12 months.


⁽³⁾	~~Included in other liabilities~~ Gains (losses) on ~~our condensed consolidated balance sheets.~~

~~The effect of foreign currency~~ derivative instruments, ~~designated as cash flow hedges and~~net of ~~foreign currency derivative instruments not designated as hedges~~tax, recognized in our condensed consolidated statements of comprehensive income for the three and six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018 was~~were as ~~follows (in thousands):~~follows:

2019 2018
Foreign
Exchange
Option
Contracts Foreign
Exchange
Forward
Contracts Foreign
Exchange
Option
Contracts Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾
$ 16,765
$ —
$ 31,104
$ —
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾
$ 8,990
$ —
$ 337
$ —
Net gain (loss) recognized in income⁽³⁾
$ (12,127 ) $ —
$ (12,084 ) $ —
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾
$ —
$ 2,887
$ —
$ 2,784



	Three Months				Six Months
(in millions)	2020		2019		2020			2019
Derivatives in cash flow hedging relationships:
Foreign exchange option contracts	$	1	$	17	$	3		$	8
Treasury lock	$	—	$	—	$	(1	)	$	—

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The ~~effect~~effects of ~~foreign currency~~ derivative instruments ~~designated~~on our condensed consolidated statements of income for the three months ended May 29, 2020 and May 31, 2019 were as ~~cash flow hedges and~~follows:



(in millions)	2020								2019
	Revenue		Interest Expense			Other Income (Expense), Net			Revenue		Other Income (Expense), Net
Derivatives in cash flow hedging relationships:
Foreign exchange option contracts⁽¹⁾
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax	$	5	$	—		$	—		$	9	$	—
Amount excluded from effectiveness testing and ineffective portion	$	—	$	—		$	—		$	—	$	(12	)
Treasury lock
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax	$	—	$	(1	)	$	—		$	—	$	—
Derivatives not designated as hedging relationships:
Foreign exchange forward contracts	$	—	$	—		$	(5	)	$	—	$	3

The effects of ~~foreign currency~~ derivative instruments ~~not designated as hedges in~~on our condensed consolidated statements of income for the six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018 was~~were as ~~follows (in thousands):~~follows:

2019 2018
Foreign
Exchange
Option
Contracts Foreign
Exchange
Forward
Contracts Foreign
Exchange
Option
Contracts Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾
$ 8,308
$ —
$ 29,767
$ —
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾
$ 17,491
$ —
$ 1,359
$ —
Net gain (loss) recognized in income⁽³⁾
$ (24,269 ) $ —
$ (22,410 ) $ —
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾
$ —
$ 1,368
$ —
$ (877 )



(in millions)	2020								2019
	Revenue		Interest Expense			Other Income (Expense), Net			Revenue		Other Income (Expense), Net
Derivatives in cash flow hedging relationships:
Foreign exchange option contracts⁽¹⁾
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax	$	12	$	—		$	—		$	17	$	—
Amount excluded from effectiveness testing and ineffective portion	$	—	$	—		$	—		$	—	$	(24	)
Treasury lock
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax	$	—	$	(1	)	$	—		$	—	$	—
Derivatives not designated as hedging relationships:
Foreign exchange forward contracts	$	—	$	—		$	(7	)	$	—	$	1

^{_________________________________________}


⁽¹⁾	~~Net change~~Starting the third quarter of fiscal 2019, all changes in the fair value of ~~the effective portion classified~~our foreign currency cash flow hedges are recorded in accumulated other comprehensive ~~income (“OCI”).~~income.


⁽²⁾	~~Effective portion classified as revenue.~~


⁽³⁾	~~Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net.~~


⁽⁴⁾	~~Classified in interest and other income (expense), net.~~

~~Subsequent Event~~

Subsequent to May 31, 2019, in anticipation of refinancing our $2.25 billion Term Loan due April 30, 2020 and $900 million 2020 Notes due February 1, 2020, we entered into interest rate lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance. These derivative instruments hedge the impact of changes in the benchmark interest rate to future interest payments and will be terminated upon debt issuance. We will account for these instruments as cash flow hedges in the third quarter of fiscal 2019.

NOTE 7. GOODWILL ~~AND PURCHASED~~ AND OTHER INTANGIBLES

Goodwill as of May ~~31, 2019~~29, 2020 and November ~~30, 2018~~29, 2019 was $10.70 billion and ~~$10.58~~$10.69 billion, respectively. ~~The increase was primarily due to our acquisition of Allegorithmic in the first quarter of fiscal 2019.~~ During the second quarter of fiscal ~~2019,~~2020, we completed our annual goodwill impairment test associated with our reporting units and determined there was no impairment of goodwill.

~~Purchased~~ We continually monitor events and ~~other intangible assets subject~~changes in circumstances that could indicate that the fair value of any one of our reporting units may more likely than not have fallen below its respective carrying amount. We have not identified any such events or changes in circumstances since the performance of our annual goodwill impairment test that would require us to ~~amortization as of May 31, 2019 and November 30, 2018 were as follows (in thousands):~~

2019 2018
Cost Accumulated Amortization Net Cost Accumulated Amortization Net
Purchased technology $ 774,307
$ (170,752 ) $ 603,555
$ 750,286
$ (118,812 ) $ 631,474
Customer contracts and relationships $ 1,247,138
$ (397,340 ) $ 849,798
$ 1,329,432
$ (416,176 ) $ 913,256
Trademarks 384,855
(50,039 ) 334,816
384,855
(25,968 ) 358,887
Acquired rights to use technology 59,906
(46,683 ) 13,223
58,966
(48,770 ) 10,196
Backlog 147,000
(46,565 ) 100,435
147,300
(13,299 ) 134,001
Other intangibles 23,807
(8,485 ) 15,322
51,096
(29,909 ) 21,187
Total other intangible assets $ 1,862,706
$ (549,112 ) $ 1,313,594
$ 1,971,649
$ (534,122 ) $ 1,437,527
Purchased and other intangible assets, net $ 2,637,013
$ (719,864 ) $ 1,917,149
$ 2,721,935
$ (652,934 ) $ 2,069,001

perform another goodwill impairment test.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Other intangible assets subject to amortization as of May 29, 2020 and November 29, 2019 were as follows:



(in millions)	2020							2019
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Customer contracts and relationships	$	1,121	$	(398	)	$	723	$	1,219	$	(436	)	$	783
Purchased technology	759		(287		)	472		759		(223		)	536
Trademarks	384		(97		)	287		384		(73		)	311
Other	227		(174		)	53		227		(136		)	91
Other intangibles, net	$	2,491	$	(956	)	$	1,535	$	2,589	$	(868	)	$	1,721

Amortization expense related to ~~purchased~~other intangibles was $92 million and $189 million for the three and six months ended May 29, 2020, respectively. Comparatively, amortization expense related to other intangible assets was ~~$98.4~~$98 million and ~~$203.0~~$203 million for the three and six months ended May 31, 2019, respectively. ~~Comparatively, amortization expense related to purchased and other intangible assets was $34.6~~Of these amounts, $52 million and ~~$68.5~~$107 million were included in cost of revenue for the three and six months ended ~~June 1, 2018, respectively. Of these amounts, $55.4~~May 29, 2020, respectively, and $55 million and ~~$113.4~~$113 million were included in cost of ~~sales~~revenue for the three and six months ended May 31, 2019, ~~respectively, and $17.4 million and $34.0 million were included in cost of sales for the three and six months ended June 1, 2018,~~ respectively.

During the six months ended May ~~31, 2019,~~29, 2020, certain ~~purchased~~other intangibles associated with our previous acquisitions became fully amortized and were removed from the condensed consolidated balance sheets.

As of May ~~31, 2019,~~29, 2020, we expect amortization expense in future periods to be as ~~follows (in thousands):~~follows:


Fiscal Year		Purchased Technology		Other Intangible Assets
Remainder of 2019		$	63,578	$	131,537
2020		125,931		237,337
(in millions)							Other Intangibles
Remainder of 2020						Remainder of 2020	$	177
2021	2021	103,698		149,829		2021	255
2022	2022	86,880		134,436		2022	224
2023	2023	76,876		134,245		2023	214
2024						2024	202
Thereafter	Thereafter	146,592		526,210		Thereafter	463
Total expected amortization expense	Total expected amortization expense	$	603,555	$	1,313,594	Total expected amortization expense	$	1,535

NOTE 8. ACCRUED EXPENSES

Accrued expenses as of May ~~31, 2019~~29, 2020 and November ~~30, 2018~~29, 2019 consisted of the ~~following (in thousands):~~following:


	2019		2018
(in millions)					2020		2019
Accrued compensation and benefits	$	402,157	$	313,874	$	429	$	318
Accrued bonuses	143,380		216,007		163		222
Refund liabilities					107		126
Accrued corporate marketing					137		80
Accrued media costs	121,738		124,849		44		118
Sales and marketing allowances	48,737		44,968
Accrued corporate marketing	105,282		66,186
Accrued building rent	74,168		61,544
Taxes payable	63,106		57,525		74		83
Royalties payable	50,815		51,529		30		62
Fair value of derivatives					5		33
Accrued interest expense	29,887		29,481		32		29
Accrued building rent					—		99
Other	275,728		197,222		282		229
Accrued expenses	$	1,314,998	$	1,163,185	$	1,303	$	1,399

Accrued media costs primarily relate to our advertising platform offerings which are part of the Advertising Cloud. We accrue for media costs related to impressions purchased from third-party ad inventory sources. Other primarily includes general corporate accruals for local and regional expenses, sales returns reserves and foreign currency liability derivatives.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Accrued media costs primarily relate to our advertising platform offerings and we ceased pursuing transaction-driven Advertising Cloud deals during the second quarter of fiscal 2020. Other primarily includes general corporate accruals for local and regional expenses, including accruals for fees associated with the cancellation of corporate events. Beginning the first quarter of fiscal 2020, as a result of ASC 842 adoption, accrued building rent is recorded as a reduction to our operating lease right-of-use assets on our condensed consolidated balance sheets. See Note 1 for further information regarding our adoption of ASC 842.

NOTE 9. INCOME TAXES

In April 2020, we completed an intra-entity transfer of certain intellectual property rights (“IP rights”) in order to better align the ownership of these rights with how our business operates. The transfer did not result in a taxable gain; however, our foreign subsidiary recognized a deferred tax asset for the book and tax basis difference of the transferred IP rights. As a result of this transaction, we recorded a deferred tax asset, net of valuation allowance, and related tax benefit of $224 million based on the fair value of the transferred IP rights. The tax-deductible amortization related to the transferred IP rights will be recognized over the period of economic benefit.

NOTE 9.10. STOCK-BASED COMPENSATION

Restricted Stock Units

Restricted stock unit activity for the six months ended May ~~31, 2019~~29, 2020 was as ~~follows (in thousands):~~follows:



	~~2019~~
~~Beginning outstanding balance~~	~~8,668~~
~~Awarded~~	~~3,731~~
~~Released~~	~~(3,221~~	)
~~Forfeited~~	~~(386~~	)
~~Ending outstanding balance~~	~~8,792~~

Beginning January 2019, restricted stock units granted as part of our annual review process or for promotions will vest over four years. Restricted stock units granted as part of our annual review process or for promotions with grant dates prior to January 2019 continue to vest over three years.

~~Information regarding restricted stock units outstanding at May 31, 2019 and June 1, 2018 is summarized below:~~

Number of
Shares
(thousands)

Weighted
Average
Remaining
Contractual
Life
(years)

Aggregate
Intrinsic
Value^(*)
(millions)
2019
Restricted stock units outstanding 8,792
1.44 $ 2,381.8
Restricted stock units expected to vest 7,950
1.37 $ 2,153.5
2018

Restricted stock units outstanding 9,046
1.36 $ 2,273.3
Restricted stock units expected to vest 8,224
1.30 $ 2,066.9



	Number of Shares (in millions)		Weighted Average Grant Date Fair Value		Aggregate Fair Value⁽¹⁾ (in millions)
Beginning outstanding balance	8.6		$	211.95
Awarded	2.9		$	349.19
Released	(3.2	)	$	181.83
Forfeited	(0.3	)	$	244.45
Ending outstanding balance	8.0		$	271.65	$	3,095

Expected to vest	7.2		$	269.51	$	2,799

^{_________________________________________}


^(*)(1)	The ~~intrinsic~~aggregate fair value is calculated asusing the ~~market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values~~closing stock price as of May ~~31, 2019 and June 1, 2018 were $270.90 and $251.31, respectively.~~29, 2020 of $386.60.

The total fair value of restricted stock units vested during the six months ended May 29, 2020 was $1.11 billion.

Performance Shares

In the first quarter of fiscal ~~2019,~~2020, the Executive Compensation Committee approved the ~~2019~~2020 Performance Share Program, the terms of which are similar to prior year programs that are still outstanding. For information regarding our Performance ~~Shares Program~~Share Programs including the terms, see “Note ~~11.~~12. Stock-Based Compensation” of our Annual Report on Form 10-K for the fiscal year ended November ~~30, 2018.~~

In the first quarter of fiscal 2019, the Executive Compensation Committee also certified the actual performance achievement of participants in the 2016 Performance Share Program. Actual performance resulted in participants achieving 200% of target or approximately 0.8 million shares. The shares granted and achieved under the 2016 Performance Share Program fully vested on the three-year anniversary of the grant on January 25, 2019, if not forfeited.29, 2019.

As of May ~~31, 2019,~~29, 2020, the shares awarded under our 2020, 2019 ~~2018~~ and ~~2017~~2018 Performance Share Programs remain outstanding and are yet to be achieved.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

~~The following table sets forth the summary of performance shares~~Performance share activity for the six months ended May ~~31, 2019 (in thousands):~~ 29, 2020 was as follows:


	2019
	Shares Granted			Maximum Shares Eligible to Receive		Number of Shares (in millions)		Weighted Average Grant Date Fair Value		Aggregate Fair Value⁽¹⁾ (in millions)
Beginning outstanding balance	1,148			2,296		1.0		$	199.78
Awarded	722		⁽¹⁾	614		0.6		$	271.62
Achieved	(830	)	⁽²⁾	(830	)	(0.8	)	$	118.84
Forfeited	(23	)		(46	)	—		$	297.61
Ending outstanding balance	1,017			2,034		0.8		$	326.93	$	296

Expected to vest						0.7		$	319.93	$	263

^{_________________________________________}


⁽¹⁾	~~Included in~~The aggregate fair value is calculated using the ~~0.7 million shares awarded during the six months ended~~closing stock price as of May ~~31, 2019 were 0.4 million shares awarded for the final achievement~~29, 2020 of ~~the 2016 Performance Share program. The remaining awarded shares were for the 2019 Performance Share Program.~~$386.60.

⁽²⁾

Under our Performance Share Programs, participants generally have the ability to receive up to 200% of the target number of shares originally granted. Shares awarded during the six months ended May 29, 2020 include 0.4 million additional shares awarded for the final achievement of the 2017 Performance Share Program which was certified in the first quarter of fiscal 2020. The remaining awarded shares were for the 2020 Performance Share Program. Shares achieved during the six months ended May 29, 2020 resulted from 200% achievement of target for the 2017 Performance Share Program.

The total fair value of performance shares achieved during the six months ended May 29, 2020 was $264 million.

~~Shares achieved under our 2016 Performance Share Program resulted from 200% achievement of target.~~

Employee Stock Purchase Plan ~~Shares~~

~~There~~Prior to April 2020, shares of common stock purchased by eligible employees through our employee stock purchase plans were ~~no stock purchases~~issued under ~~the~~our 1997 Employee Stock Purchase Plan (“1997 ESPP”). In April 2020, our stockholders approved the 2020 Employee Stock Purchase Plan (“2020 ESPP”) ~~during~~which amended and restated the ~~three months ended~~1997 ESPP to increase the maximum number of shares of our common stock that may be issued under the plan.

As of May ~~31, 2019~~29, 2020, we had reserved 103.0 million shares of our common stock for issuance under the 2020 ESPP and ~~June 1, 2018, respectively.~~ approximately 13.3 million shares remain available for future issuance.

The assumptions used to value employee stock purchase rights during the six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were as follows:


	2019	2018	2020	2019
Expected life (in years)	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0
Volatility	35% - 37%	26% - 27%	24% - 29%	35% - 37%
Risk free interest rate	2.47% - 2.63%	1.54% - 1.89%	1.56% - 1.58%	2.47% - 2.63%

~~The expected life~~Employees purchased 0.4 million shares at an average price of ~~the ESPP shares is the average of the remaining purchase periods under each offering period.~~

~~Employees purchased~~$196.45 and 0.5 million shares at an average price of $129.23 ~~and 0.7 million shares at an average price of $91.74~~ for the six months ended May 29, 2020 and May 31, 2019, ~~and June 1, 2018,~~ respectively. The intrinsic value of shares purchased during the six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ was ~~$51.2~~$56 million and ~~$54.3~~$51 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

~~Stock Options~~

The Executive Compensation Committee of Adobe’s Board of Directors eliminated the use of stock option grants for all employees and the Board of Directors effective fiscal 2012 and fiscal 2014, respectively. However, we may assume the stock option plans of certain companies we acquire. As of May 31, 2019 we had 0.2 million stock options outstanding.

Compensation Costs

As of May ~~31, 2019,~~29, 2020, there was ~~$1.45~~$1.91 billion of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards and purchase rights which will be recognized over a weighted average period of ~~2.4~~2.3 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Total stock-based compensation costs included in our condensed consolidated statements of income for the three months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were as ~~follows (in thousands):~~follows:


		2019				2018
(in millions)											2020				2019
Income Statement Classifications		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards			Restricted Stock Units and Performance Share Awards		Stock Purchase Rights and Options		Restricted Stock Units and Performance Share Awards		Stock Purchase Rights and Options
Cost of revenue—subscription		$	1,500	$	6,491	$	729	$	4,526
Cost of revenue—services and support		1,757		4,152		1,647		2,680
Cost of revenue										Cost of revenue	$	14	$	3	$	11	$	3
Research and development	Research and development	8,771		86,123		5,301		63,608		Research and development	107		9		86		9
Sales and marketing	Sales and marketing	10,087		58,525		5,443		42,747		Sales and marketing	58		7		58		10
General and administrative	General and administrative	2,189		24,705		1,350		17,346		General and administrative	27		2		25		2
Total	Total	$	24,304	$	179,996	$	14,470	$	130,907	Total	$	206	$	21	$	180	$	24

Total stock-based compensation costs included in our condensed consolidated statements of income for the six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were as ~~follows (in thousands):~~follows:


		2019				2018
(in millions)											2020				2019
Income Statement Classifications		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards			Restricted Stock Units and Performance Share Awards		Stock Purchase Rights and Options		Restricted Stock Units and Performance Share Awards		Stock Purchase Rights and Options
Cost of revenue—subscription		$	2,890	$	11,673	$	1,497	$	8,470
Cost of revenue—services and support		3,755		7,969		3,663		5,666
Cost of revenue										Cost of revenue	$	26	$	6	$	19	$	7
Research and development	Research and development	17,216		161,942		10,649		117,681		Research and development	208		18		162		17
Sales and marketing	Sales and marketing	20,440		110,772		10,763		81,595		Sales and marketing	113		17		111		20
General and administrative	General and administrative	5,470		46,860		2,830		38,088		General and administrative	52		4		47		6
Total	Total	$	49,771	$	339,216	$	29,402	$	251,500	Total	$	399	$	45	$	339	$	50

NOTE ~~10.~~11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) and activity, net of related taxes, as of May ~~31, 2019~~29, 2020 were as ~~follows (in thousands):~~follows:


	November 30, 2018			Increase / Decrease			Reclassification Adjustments				May 31, 2019
(in millions)														November 29, 2019			Increase / Decrease			Reclassification Adjustments				May 29, 2020
Net unrealized gains / losses on available-for-sale securities:
Unrealized gains on available-for-sale securities	$	44		$	883		$	(16	)		$	911		$	4		$	7		$	—		⁽¹⁾	$	11
Unrealized losses on available-for-sale securities	(25,374		)	21,429			208				(3,737		)	—			(1		)	—				(1		)
Total net unrealized gains / losses on available-for-sale securities	(25,330		)	22,312			192			⁽¹⁾	(2,826		)
Net unrealized gains / losses on available-for-sale securities														4			6			—				10
Net unrealized gains / losses on derivative instruments designated as hedging instruments	21,732			8,308			(16,872		)	⁽²⁾	13,168			(22		)	2			(4		)	⁽²⁾	(24		)
Cumulative foreign currency translation adjustments	(144,532		)	(10,174		)	—				(154,706		)	(170		)	(11		)	—				(181		)
Total accumulated other comprehensive income (loss), net of taxes	$	(148,130	)	$	20,446		$	(16,680	)		$	(144,364	)	$	(188	)	$	(3	)	$	(4	)		$	(195	)

^{_________________________________________}


⁽¹⁾	Reclassification adjustments for gains / losses on available-for-sale securities are classified in ~~interest and~~ other income (expense), net.


⁽²⁾	Reclassification adjustments for gains / losses on ~~derivative instruments~~foreign currency hedges are classified in ~~revenue.~~revenue and reclassification adjustments for gains / losses on Treasury lock hedges are classified in interest expense.

Taxes related to each component of other comprehensive income (loss) for the three and six months ended May 29, 2020 and May 31, 2019 were not material.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

~~The following table sets forth the taxes related to each component of other comprehensive income for the three and six months ended May 31, 2019 and June 1, 2018 (in thousands):~~

Three Months Six Months
2019 2018 2019 2018
Derivatives designated as hedging instruments:
Reclassification adjustments on derivative instruments $ (98 ) $ (100 ) (193 ) (1,626 )
Subtotal derivatives designated as hedging instruments (98 ) (100 ) (193 ) (1,626 )
Foreign currency translation adjustments —
—
—
(1,742 )
Total taxes, other comprehensive income $ (98 ) $ (100 ) $ (193 ) $ (3,368 )

NOTE ~~11.~~12. STOCK REPURCHASE PROGRAM

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase shares in the open market or enter into structured repurchase agreements with third parties. In May 2018, our Board of Directors granted us an authority to repurchase up to $8 billion in common stock through the end of fiscal 2021.

During the six months ended May 29, 2020 and May 31, 2019, ~~and June 1, 2018,~~ we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling ~~$1.25~~$1.7 billion and $1$1.25 billion, respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount.

During the six months ended May 29, 2020, we repurchased approximately 5.0 million shares at an average price of $332.31 through structured repurchase agreements entered into during fiscal 2019 and the six months ended May 29, 2020. During the six months ended May 31, 2019 we repurchased approximately 4.5 million shares at an average price of $254.19 through structured repurchase agreements entered into during fiscal 2018 and the six months ended May 31, 2019. During the six months ended June 1, 2018 we repurchased approximately 4.3 million shares at an average price of $208.69 through structured repurchase agreements entered into during fiscal 2017 and the six months ended June 1, 2018.

For the six months ended May ~~31, 2019,~~29, 2020, the prepayments were classified as treasury stock on our condensed consolidated balance sheets at the payment date, though only shares physically delivered to us by May ~~31, 2019~~29, 2020 were excluded from the computation of earnings per share. As of May ~~31, 2019, $249.7~~29, 2020, $284 million of prepayment remained under this agreement.

Subsequent to May ~~31, 2019,~~29, 2020, as part of the May 2018 stock repurchase authority, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of ~~$750~~$500 million. Upon completion of the ~~$750~~$500 million stock repurchase agreement, ~~$5.85~~$2.9 billion remains under our May 2018 authority.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

NOTE ~~12.~~13. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended May 29, 2020 and May 31, ~~2019 and June 1, 2018 (in thousands, except per share data):~~2019:


	Three Months				Six Months				Three Months				Six Months
	2019		2018		2019		2018
(in millions, except per share data)									2020		2019		2020		2019
Net income	$	632,593	$	663,167	$	1,306,834	$	1,246,243	$	1,100	$	633	$	2,055	$	1,307
Shares used to compute basic net income per share	487,535		491,914		487,795		491,993		481.5		487.5		481.9		487.8
Dilutive potential common shares:
Unvested restricted stock units and performance share awards	4,141		6,212		4,931		7,019
ESPP and stock options	536		126		474		154
Restricted stock units and performance share awards									3.0		4.2		4.1		4.9
Stock purchase rights and options									0.3		0.5		0.3		0.5
Shares used to compute diluted net income per share	492,212		498,252		493,200		499,166		484.8		492.2		486.3		493.2
Basic net income per share	$	1.30	$	1.35	$	2.68	$	2.53	$	2.28	$	1.30	$	4.26	$	2.68
Diluted net income per share	$	1.29	$	1.33	$	2.65	$	2.50	$	2.27	$	1.29	$	4.23	$	2.65

Anti-dilutive potential common shares⁽¹⁾	78		25		309		76		0.6		0.1		0.4		0.3

^{_________________________________________}


⁽¹⁾	Potential common stock equivalents not included in the calculation of diluted net income per share as the effect would have been anti-dilutive.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE ~~13.~~14. COMMITMENTS AND CONTINGENCIES

Royalties

We have royalty commitments associated with the licensing of certain offerings. Royalty expense is generally based on a dollar amount per unit sold or a percentage of the underlying revenue.

Indemnifications

In the ordinary course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Legal Proceedings

In connection with disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Third-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements and service agreements.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

In addition to intellectual property disputes, we are subject to legal proceedings, claims and investigations in the ordinary course of business, including claims relating to commercial, employment and other matters. Some of these disputes and legal proceedings may include speculative claims for substantial or indeterminate amounts of damages. We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our financial statements. This determination is then reviewed and discussed with our Audit Committee and our independent registered public accounting firm.

We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically disclosed in this note, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate or provision for liability is immaterial.

All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be negatively affected in any particular period by the resolution of one or more of these counter-claims.

NOTE ~~14.~~15. DEBT

The carrying values of our borrowings as of May 29, 2020 and November 29, 2019 were as follows:



(dollars in millions)	Issuance Date	Due Date	Effective Interest Rate	May 29, 2020			November 29, 2019
4.75% 2020 Notes	February 2010	February 2020	4.92%	$	—		$	900
1.70% 2023 Notes	February 2020	February 2023	1.92%	500			—
1.90% 2025 Notes	February 2020	February 2025	2.07%	500			—
3.25% 2025 Notes	January 2015	February 2025	3.67%	1,000			1,000
2.15% 2027 Notes	February 2020	February 2027	2.26%	850			—
2.30% 2030 Notes	February 2020	February 2030	2.69%	1,300			—
Term Loan	October 2018	April 2020	2.47%	—			2,250
Total debt outstanding, at par				$	4,150		$	4,150
Less: Current portion of debt				—			(3,150		)
Unamortized discount and debt issuance costs				(36		)	(11		)
Carrying value of long-term debt				$	4,114		$	989

Current portion of debt, at par				$	—		$	3,150
Unamortized discount and debt issuance costs				—			(1		)
Carrying value of current debt				$	—		$	3,149

Term Loan ~~Credit Agreement~~

In October 2018, we entered into a credit agreement providing ~~for an up to~~a $2.25 billion senior unsecured term loan ~~for the purpose~~(“Term Loan”) with a maturity date of ~~partially funding the purchase price for our acquisition of Marketo and the related fees and expenses incurred in connection with the acquisition.~~April 30, 2020. The Term Loan funds were received on October 31, 2018 upon closing of the acquisition and will mature 18 months following the initial funding date. In addition, we incurred issuance costs of $0.7 million which are amortized to interest expense over the term using the straight-line method. The Term Loan ranksranked equally with our other unsecured and unsubordinated indebtedness. There ~~are~~were no scheduled principal amortization payments prior to maturity and the Term Loan ~~may~~could be prepaid and terminated at our election at any time without penalty or premium. At our election, the Term Loan ~~will bear~~bore interest at either (i) LIBOR plus a margin, based on our debt ratings, ranging from 0.500% to 1.000% or (ii) a base rate plus a margin, based on our debt ratings, ranging from 0.040% to 0.110%. The related issuance costs were amortized to interest expense over the Term Loan period using the effective interest method. Interest iswas payable periodically, in arrears, at the end of each interest period we elect.

~~For the six months ended May 31, 2019, we made interest payments of approximately $36.7 million.~~

The Term Loan ~~credit agreement contains customary representations, warranties, affirmative~~was paid and ~~negative covenants, events of default and indemnification provisions~~terminated in ~~favor of~~conjunction with our debt refinancing during the ~~lenders similar to those contained in the Revolving Credit Agreement, including the financial covenant. As of May 31, 2019, we were in compliance with all covenants.~~

~~During the second~~first quarter of fiscal 2019, we reclassified the carrying value of $2.25 billion as current debt on our condensed consolidated balance sheets, which represents the Term Loan, net of unamortized original issuance discount. We intend to refinance the Term Loan on or before the due date.2020.

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

~~Senior~~2020 Notes

In February 2010, we issued $900 million of 4.75% senior notes due February 1, 2020 (“2020 Notes”). ~~Our proceeds were $900 million and were net of an issuance discount of $5.5 million. In addition, we incurred issuance costs of $6.4 million. Both the~~The related discount and issuance costs ~~are being~~were amortized to interest expense over the term of the 2020 Notes using the effective interest method. The ~~effective interest rate including~~2020 Notes became due and were paid in conjunction with our debt refinancing during the ~~discount and issuance costs is 4.92%. Interest is payable semi-annually, in arrears, on February 1 and August 1, and commenced on August 1, 2010.~~first quarter of fiscal 2020.

~~In June 2014, we~~We entered into interest rate swaps with a total notional amount of $900 million designated as a fair value hedge related to our 2020 ~~Notes.~~Notes in fiscal 2014. The interest rate swaps effectively ~~convert~~converted the fixed interest rate on our 2020 Notes to a floating interest rate based on LIBOR. ~~Under the terms of the swap, we will pay monthly interest at the one-month LIBOR~~The interest rate ~~plus a fixed number~~swap agreements also matured during the first quarter of basis points on the $900 million notional amount. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. The fair value of the interest rate swaps is included in the carrying value of our debt in the condensed consolidated balance sheets.fiscal 2020. See Note 6 for further details regarding our interest rate swap derivatives.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Debt Refinancing

In ~~January 2015,~~February 2020, we issued ~~$1 billion~~$500 million of ~~3.25%~~1.70% senior notes due February 1, 2023 (“2023 Notes”), $500 million of 1.90% senior notes due February 1, 2025 (“1.90% 2025 Notes”), $850 million of 2.15% senior notes due February 1, 2027 (“2027 Notes”) and $1.30 billion of 2.30% senior notes due February 1, 2030 (“2030 Notes”). Interest is payable semi-annually, in arrears on February 1 and August 1 commencing on August 1, 2020. Our total proceeds were approximately ~~$989.3 million which is~~$3.14 billion, used for general corporate purposes including repayment of the 2020 Notes and Term Loan, and were net of an issuance discount of ~~$10.7~~$6 million. In addition, we incurred total issuance costs of ~~$7.9~~approximately $21 million. Both the discount and issuance costs are being amortized to interest expense over the ~~term~~respective terms of the ~~2025 Notes~~senior notes using the effective interest method. The effective interest rate including the discount, issuance costs and interest rate agreement is 3.67%. Interest is payable semi-annually, in arrears on February 1 and August 1, and commenced on August 1, 2015.

During the first quarter of fiscal 2019, we reclassified the 2020 Notes as current debt in our condensed consolidated balance sheet. As of May 31, 2019, the carrying value of the 2020 Notes was $896.1 million which includes the fair value of the interest rate swap and is net of debt issuance costs. We intend to refinance the 2020 Notes on or before the due date.

As of May 31, 2019, our outstanding notes payable consist of the 2020 Notes and 2025 Notes (“Notes”) with a total carrying value of $1.89 billion which includes the fair value of the interest rate swap and is net of debt issuance costs. Based on quoted prices in inactive markets, the total fair value of the Notes was $1.95 billion as of May 31, 2019 and excludes the effect of the fair value hedge of the 2020 Notes for which we entered into interest rate swaps as described above.

The Notes rank equally with our other unsecured and unsubordinated indebtedness. We may redeem the Notes at any time, subject to a make-whole premium. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Notes also include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances. As of May 31, 2019, we were in compliance with all of the covenants.

~~For the six months ended May 31, 2019, we made semi-annual interest payments on our Notes totaling $37.6 million.~~

~~Subsequent to May 31,~~In June 2019, in anticipation of ~~refinancing~~ our ~~Term Loan and 2020 Notes,~~debt refinancing, we entered into ~~interest rate~~Treasury lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance. These derivative instruments ~~hedge~~hedged the impact of changes in the benchmark interest rate to future interest ~~payments~~payments. Upon debt issuance, the Treasury lock agreements were settled and ~~will be terminated upon debt issuance.~~we incurred a loss which is amortized to interest expense over the term of our 2030 Notes using the effective interest method. See Note 6 for further details regarding our ~~interest rate~~Treasury lock agreements.

3.25% 2025 Notes

In January 2015, we issued $1 billion of 3.25% senior notes due February 1, 2025 (“3.25% 2025 Notes”) which remain outstanding as of May 29, 2020. The related discount and issuance costs were amortized to interest expense over the term of the 3.25% 2025 Notes using the effective interest method. Interest is payable semi-annually, in arrears on February 1 and August 1.

As of May 29, 2020, our outstanding notes payable consists of the 2023 Notes, 1.90% 2025 Notes, 3.25% 2025 Notes, 2027 Notes and 2030 Notes (collectively, the “Notes”). Based on quoted prices in inactive markets, the total fair value of our outstanding Notes was $4.47 billion as of May 29, 2020.

Our Notes rank equally with our other unsecured and unsubordinated indebtedness. We may redeem the notes at any time, subject to a make-whole premium. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The notes also include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances. As of May 29, 2020, we were in compliance with all of the covenants.

Revolving Credit Agreement

In October 2018, we entered into a credit agreement (“Revolving Credit Agreement”), providing for a five-year $1 billion senior unsecured revolving credit facility, which replaced our previous five-year $1 billion senior unsecured revolving credit agreement dated as of March 2, 2012 (as amended, the “Prior Revolving Credit Agreement”). In addition, we incurred issuance costs of ~~$0.8~~$1 million which is amortized to interest expense over the term using the straight-line method. The Revolving Credit Agreement provides for loans to Adobe and certain of its subsidiaries that may be designated from time to time as additional borrowers. Pursuant to the terms of the Revolving Credit Agreement, we may, subject to the agreement of lenders to provide additional commitments, obtain up to an additional $500 million in commitments, for a maximum aggregate commitment of $1.5 billion. At our election, loans under the Revolving Credit Agreement will bear interest at either (i) LIBOR plus a margin, based on our debt ratings, ranging from 0.585% to 1.015% or (ii) a base rate, which is defined as the highest of (a) the agent’s prime rate, (b) the federal funds effective rate plus 0.500% or (c) LIBOR plus 1.00% plus a margin, based on our debt ratings, ranging

~~ADOBE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

from 0.000% to 0.015%. In addition, facility fees determined according to our debt ratings are payable on the aggregate commitments, regardless of usage, quarterly in an amount ranging from 0.04% to 0.11% per annum. We are permitted to permanently reduce the aggregate commitment under the Revolving Credit Agreement at any time. Subject to certain conditions stated in the Revolving Credit Agreement, Adobe and any of its subsidiaries designated as additional borrowers may borrow, prepay and re-borrow amounts at any time during the term of the Revolving Credit Agreement.

The Revolving Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, certain merger and acquisition transactions, dispositions and other matters, all subject to certain exceptions. The financial covenant, based on a quarterly financial test, requires us not to exceed a maximum leverage ratio.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The facility will terminate and all amounts owing thereunder will be due and payable on the maturity date unless (a) the commitments are terminated earlier upon the occurrence of certain events, including an event of default, or (b) the maturity date is further extended upon our request, subject to the agreement of the lenders.

As of May ~~31, 2019,~~29, 2020, there were no outstanding borrowings under this Credit Agreement and we were in compliance with all covenants.

NOTE ~~15.~~16. LEASES

We lease certain facilities and data centers under non-cancellable operating lease arrangements that expire at various dates through 2031. We also have one land lease that expires in 2091. We account for lease and non-lease components as a single lease component for our facilities and data center leases. We apply the accounting requirements of ASC 842 to short-term leases. Therefore, leases with an initial term of 12 months or less are recorded on the balance sheet, with lease expense for these leases recognized on a straight-line basis over the lease term. Our lease agreements do not contain any material residual value guarantees, material variable payment provisions or material restrictive covenants.

Operating lease expense was $30 million and $59 million for the three and six months ended May 29, 2020, respectively, which we recognized in cost of revenue and operating expenses in our condensed consolidated statements of income. The operating lease expense includes variable lease costs and is net of sublease income, both of which are not material.

Supplemental cash flow information for the six months ended May 29, 2020 related to operating leases was as follows:



(in millions)
Cash paid for amounts included in the measurement of operating lease liabilities	$	48
Right-of-use assets obtained in exchange for operating lease liabilities	$	17

The weighted-average remaining lease term and weighted-average discount rate for our operating lease liabilities as of May 29, 2020 were 9 years and 2.34%, respectively.

As of May 29, 2020, the maturities of lease liabilities under operating leases are as follows:



(in millions)
Fiscal Year	Operating Leases⁽¹⁾
Remainder of 2020	$	42
2021	104
2022	82
2023	66
2024	54
Thereafter	302
Total lease liabilities	$	650
Less: Imputed interest	67
Present value of lease liabilities	$	583

^{_________________________________________}


⁽¹⁾	Operating lease payments exclude $57 million of legally binding minimum lease payments for leases signed but not yet commenced.

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Future minimum rental payments and future minimum sublease income for our operating leases as of November 29, 2019, prior to our adoption of the new leases standard, were as follows:



(in millions)	Operating Leases
Fiscal Year	Future Minimum Rental Payments		Future Minimum Sublease Income
2020	$	98	$	10
2021	92		9
2022	81		6
2023	69		2
2024	61		—
Thereafter	338		—
Total	$	739	$	27

NOTE 17. NON-OPERATING INCOME (EXPENSE)

Non-operating income (expense) for the three and six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ included the ~~following (in thousands):~~following:


	Three Months						Six Months						Three Months						Six Months
	2019			2018			2019			2018
Interest and other income (expense), net:
Interest income	$	16,278		$	25,771		$	32,349		$	48,401
Foreign exchange gains (losses)	(13,692		)	(14,222		)	(25,549		)	(20,111		)
Realized gains on fixed income investment	13			6			16			190
Realized losses on fixed income investment	(80		)	(81		)	(208		)	(386		)
Other	39			125			216			177
Interest and other income (expense), net	$	2,558		$	11,599		$	6,824		$	28,271
(in millions)													2020			2019			2020			2019
Interest expense	$	(40,577	)	$	(20,363	)	$	(81,170	)	$	(40,262	)	$	(28	)	$	(40	)	$	(61	)	$	(81	)
Investment gains (losses), net:
Realized investment gains	$	957		$	503		$	44,615		$	4,497		$	—		$	1		$	3		$	44
Realized investment losses	(130		)	—			(130		)	—			(1		)	—			(1		)	—
Unrealized investment gains	—			576			—			—			1			—			—			—
Unrealized investment losses	(1,583		)	—			(1,410		)	(422		)	—			(2		)	(5		)	(1		)
Investment gains (losses), net	$	(756	)	$	1,079		$	43,075		$	4,075		$	—		$	(1	)	$	(3	)	$	43
Other income (expense), net:
Interest income													$	11		$	16		$	30		$	32
Foreign exchange gains (losses)													1			(14		)	—			(25		)
Other income (expense), net													$	12		$	2		$	30		$	7
Non-operating income (expense), net	$	(38,775	)	$	(7,685	)	$	(31,271	)	$	(7,916	)	$	(16	)	$	(39	)	$	(34	)	$	(31	)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans, future growth, market opportunities, strategic initiatives, industry positioning, customer acquisition, the amount of recurring revenue, revenue growth and ~~revenue growth.~~the anticipated impact on our business of the COVID-19 pandemic and related public health measures. In addition, when used in this report, the words “will,” “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” “continues” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. Each of the forward-looking statements we make in this report involves risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” in Part II, Item 1A of this report. You should carefully review the risks described herein and in other documents we file from time to time with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for fiscal ~~2018.~~2019. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document, except as required by law.

BUSINESS OVERVIEW

Founded in 1982, Adobe Inc. is one of the largest and most diversified software companies in the world. We offer a line of products and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across personal computers, devices and media. We market our products and services directly to enterprise customers through our sales force and certain local field offices. We license our products to end users through app stores and our own website at www.adobe.com. We offer many of our products via a Software-as-a-Service (“SaaS”) model or a managed services model (both of which are referred to as hosted or cloud-based) as well as through term subscription and pay-per-use models. We also distribute certain products and services through a network of distributors, value-added resellers (“VARs”), systems integrators (“SIs”), independent software vendors (“ISVs”), retailers, software developers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. Our products run on personal and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”).

Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. Our executive offices and principal facilities are located at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000 and our website is www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov. The information posted to our website is not incorporated into this Quarterly Report on Form 10-Q.

OPERATIONS OVERVIEW

For our second quarter of fiscal ~~2019,~~2020, we ~~reported~~experienced strong ~~financial results~~demand across our Digital Media offerings consistent with the continued execution of our long-term plans ~~for~~with respect to this segment. In our ~~two strategic growth areas, Digital Media and~~ Digital Experience ~~while continuing~~segment, we continued to ~~market and license a broad~~experience growth in software-based subscription revenue across our portfolio of ~~products and solutions.~~offerings. In addition, we began the discontinuation of our transaction-driven Advertising Cloud offerings, which negatively impacted Digital Experience revenue growth during the quarter.

Digital Media

In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich and immersive content. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and syncing of files across users’ machines, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers.

We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by acquiring new users ~~on account~~as a result of low cost of entry and delivery of additional features and value to Creative Cloud, as well as keeping existing customers current on our latest release. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with users, attract more new customers, and grow our recurring and predictable revenue stream that is recognized ratably.

We continue to implement strategies that will accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new desktop and mobile applications, as well as targeted promotions and offers that attract past customers and potential users to try out and ultimately subscribe to Creative Cloud. Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our Creative products has been immaterial to our business.

We are also a market leader with our Adobe Document Cloud offerings built around our Adobe Acrobat family of products, including Adobe Acrobat Reader DC, and a set of integrated mobile apps and cloud-based document services, including Adobe Scan and Adobe Sign. Acrobat provides reliable creation and exchange of electronic documents, regardless of platform or application source type. Document Cloud, which we believe enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat DC and Adobe Sign, and a set of integrated services enabling users to create, review, approve, sign and track documents whether on a desktop or mobile device. Adobe Acrobat DC ~~with a touch-enabled user interface,~~ is offered both through subscription and perpetual licenses.

Annualized Recurring Revenue (“ARR”) is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue, unbilled backlog and ~~unbilled deferred revenue~~remaining performance obligation as ARR is a performance metric and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any material exchange rates changes. Our reported ARR results in the current fiscal ~~2019~~year are based on currency rates set at the ~~start~~beginning of ~~fiscal 2019~~the year and held constant throughout the year. We calculate ARR as follows:



Creative ARR	Annual Value of Creative Cloud Subscriptions and Services + Annual Creative ETLA Contract Value
Document Cloud ARR	Annual Value of Document Cloud Subscriptions and Services + Annual Document Cloud ETLA Contract Value
Digital Media ARR	Creative ARR + Document Cloud ARR

On December 1, 2018, the beginning of our fiscal year 2019, we adopted the requirements of the new revenue standard utilizing the modified retrospective method of transition. We began to report our financial results for fiscal 2019 under the new revenue standard. The impact of the adoption was not significant to our results of operations.

Creative ARR exiting the second quarter of fiscal ~~2019~~2020 was ~~$6.55~~$7.93 billion, up from ~~$5.92~~$7.25 billion at the end of fiscal ~~2018.~~2019. Document Cloud ARR exiting the second quarter of fiscal ~~2019~~2020 was ~~$921 million,~~$1.24 billion, up from ~~$791 million~~$1.08 billion at the end of fiscal ~~2018.~~2019. Total Digital Media ARR grew to ~~$7.47~~$9.17 billion at the end of the second quarter of fiscal ~~2019,~~2020, up from ~~$6.71~~$8.33 billion at the end of fiscal ~~2018.~~2019.

Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in the second quarter of fiscal ~~2019~~2020 was ~~$1.59~~$1.87 billion, up from ~~$1.30~~$1.59 billion in the second quarter of fiscal ~~2018,~~2019, representing ~~22%~~17% year-over-year growth. Document Cloud revenue in the second quarter of fiscal ~~2019~~2020 was ~~$296.2~~$360 million, up from ~~$243.0~~$296 million in the second quarter of fiscal ~~2018~~2019, representing 22% year-over-year growth and reflecting an increase in demand driven by the shift to remote work as ~~we continue~~well as our continued efforts to transition Document Cloud to a subscription-based model. Total Digital Media segment revenue grew to $2.23 billion in the second quarter of fiscal 2020, up from $1.89 billion in the second quarter of fiscal 2019, uprepresenting 18% year-over-year growth. These increases were driven by strong net new user growth, including those resulting from ~~$1.55 billion in~~ the ~~second quarter of fiscal 2018, representing 22% year-over-year growth.~~current work-from-home environment reflecting expanded digital engagement.

Digital Experience

We are a market leader in the fast-growing category addressed by our Digital Experience segment. Our Digital Experience business provides comprehensive solutions that include analytics, social marketing, targeting, media optimization, digital experience management, cross-channel campaign management, marketing automation, audience management, commerce, premium video delivery and monetization. These comprehensive solutions enable marketers to measure, personalize and optimize marketing campaigns and digital experiences across channels for optimal marketing performance.

~~Our hierarchy of solutions in the Digital Experience segment, available in our~~The Adobe Experience Cloud ~~consists~~applications, services and platform are designed to manage customer journeys, enable shoppable experiences and deliver intelligence for businesses of any size in any industry. Our differentiation and competitive advantage is strengthened by our ability to use the Adobe Experience Platform to connect our comprehensive set of solutions.

Adobe Experience Cloud is focused on delivering solutions for our enterprise customers across the following ~~cloud offerings:~~strategic growth pillars:


•	Data and insights. Our solutions deliver real-time customer profiles and intelligence across the customer journey. Our offerings include Adobe Analytics, Adobe Audience Manager, Adobe Experience Platform, Customer Journey Analytics and Real-time Customer Data Platform.


•	Content and commerce. We offer solutions to help customers manage, deliver, test, target and optimize content delivery and enable shopping experiences that scale from mid-market to enterprise businesses. Our offerings include Adobe Experience Manager, Adobe Target and Magento Commerce.


•	Customer journey management. Our solutions help businesses manage, personalize and orchestrate campaigns and customer journeys across B2E use cases. Our offerings include Adobe Campaign, Marketo Engage and Journey Orchestration.

~~Adobe~~During the second quarter of fiscal 2020, we began the discontinuation of our transaction-driven Advertising ~~Cloud—delivers an end-to-end platform for managing advertising across traditional TV and digital formats, and simplifies the delivery~~Cloud offerings, allowing us to focus our investment on strategic growth initiatives. We continue to offer our Advertising Cloud software solutions, but they are not expected to be areas of ~~video, display and search advertising across channels and screens.~~

Adobe Analytics Cloud—enables businesses to move from insights to actions in real time by uniquely integrating audiences as the core system of intelligence for the enterprise; makes data available across all Adobe clouds through the capture, aggregation, rationalization and understanding of vast amounts of disparate data and then translating that data into singular customer profiles; includes Adobe Analytics and Adobe Audience Manager.

Adobe Marketing Cloud—provides an integrated set of solutions to help marketers differentiate their brands and engage their customers, helping businesses manage, personalize, and orchestrate campaigns and customer journeys; includes Adobe Experience Manager (“AEM”), Adobe Campaign, Adobe Target, Marketo Engagement Platform and Adobe Primetime.

~~Adobe Commerce Cloud—provides digital commerce, order management and predictive intelligence based on a unified commerce platform enabling shopping experiences across a wide array of industries.~~revenue growth.

In addition to chief marketing officers, chief revenue officers and digital marketers, users of our ~~Adobe~~Digital Experience ~~Cloud~~ solutions include advertisers, campaign managers, ~~digital marketers,~~ publishers, data analysts, content managers, social marketers, marketing executives and ~~marketing~~information management and technology executives. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings. By combining the creativity of our Digital Media business with the science of our Digital Experience business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.

We utilize a direct sales force to market and license our ~~Adobe~~Digital Experience ~~Cloud~~ solutions, as well as an extensive ecosystem of partners, including marketing agencies, systems integrators and independent software vendors that help license and deploy our solutions to their customers. We have made significant investments to broaden the scale and size of all of these routes to market, and our recent financial results reflect the success of these investments.

~~We achieved record Adobe~~Digital Experience ~~Cloud~~ revenue was $826 million in the second quarter of ~~$783.5~~fiscal 2020, up from $784 million in the second quarter of fiscal 2019, representing ~~34%~~5% year-over-year growth. Driving ~~the~~this increase ~~in Adobe Experience Cloud revenue~~ was the increase in subscription revenue, ~~across our offerings~~ which grew to ~~$654.0~~$707 million in the second quarter of fiscal 2020 from $654 million in the second quarter of fiscal 2019, ~~from $469.4 million~~representing 8% year-over-year growth. We expect the decision to discontinue our transaction-driven Advertising Cloud offerings to continue to negatively impact revenue growth, but to also result in reductions in the ~~second quarter~~related cost of ~~fiscal 2018, representing 39% year-over-year growth. Largely contributing to the increase in~~revenue and improved Digital Experience ~~subscription revenue was revenue associated~~gross margin percentage.

COVID-19 UPDATE

In March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic. This global pandemic is having widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including physical distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes and closure of non-essential businesses. Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity. In March 2020, we took action to direct our teams to work from home, suspend travel and replace in-person events in 2020, such as Adobe Summit and MAX, with ~~Marketo’s Engagement Platform offerings~~digital events.

The broader implications of the pandemic on our results of operations and ~~Magento’s Commerce Cloud offerings.~~overall financial performance remain uncertain. The pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers or third-party business partners conduct business and as a result, we are experiencing more pronounced disruptions in our operations. We ~~expect~~have experienced and may continue to experience constrained supply or curtailed customer demand that ~~the addition~~could materially adversely impact our business, results of ~~Marketo~~operations and ~~Magento, and continued demand across our portfolio of Adobe Experience Cloud solutions, will drive revenue growth~~overall financial performance in future ~~years.~~periods.

Specifically during the quarter, we have experienced impact from delays in enterprise transactions and consulting services implementations. The economic challenges that enterprise customers in certain verticals experienced, as well as weakness in our commercial segment that targets small- and medium-sized businesses, have also adversely impacted our ability to close sales transactions. In addition, the significant global decline in advertising spending impacted our Advertising Cloud revenue.

While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the effect of the pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See Risk Factors for further discussion of the possible impact of the pandemic on our business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, business combinations and income taxes have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates and consequently, we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

~~Other than the addition of revenue recognition to our critical accounting policies below, there~~There have been no significant changes in our critical accounting policies and estimates during the six months ended May ~~31, 2019,~~29, 2020, as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November ~~30, 2018.~~29, 2019.

~~Revenue Recognition~~

~~Our contracts with customers~~The pandemic has created and may include multiple goods and services. For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services. Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligationscontinue to ~~be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require~~create significant judgment. We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided. In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams. We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own.

~~We believe that the assumptions, judgments and estimates involved~~uncertainty in the ~~accounting for revenue recognition discussed above, and those included~~macroeconomic environment which, in ~~our Annual Report on Form 10-K, have the greatest potential~~addition to other unforeseen effects of this pandemic, may adversely impact ~~on our condensed consolidated financial statements. These areas are key components of~~ our results of ~~operations~~operations. As a result, most of our estimates and ~~are based on complex rules requiring us~~assumptions may require increased judgment and carry a higher degree of variability and volatility. As events continue to ~~make judgments~~evolve and additional information becomes available, our estimates ~~so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed~~may change materially ~~from actual results.~~in future periods.

Recent Accounting Pronouncements

See Note 1 of our notes to condensed consolidated financial statements for information regarding recent accounting pronouncements that are of significance or potential significance to us.

RESULTS OF OPERATIONS

Our financial results for the second quarter of fiscal 2019 are presented in accordance with the new revenue standard that was adopted under the modified retrospective method at the beginning of fiscal 2019. Prior period results have not been restated which limits the comparability of our results of operations for the second quarter of fiscal 2019 when compared to the year-ago period. ~~See Note 1 of our notes to condensed consolidated financial statements for further details about our recent adoption.~~

Financial Performance Summary

Total Digital Media ARR of approximately ~~$7.47~~$9.17 billion as of May ~~31, 2019~~29, 2020 increased by ~~$763~~$843 million, or ~~11%~~10%, from ~~$6.71~~$8.33 billion as of November ~~30, 2018.~~29, 2019. The change in our Digital Media ARR is primarily due to ~~stronger~~ new user adoption of our Creative Cloud and Adobe Document Cloud offerings.

Creative revenue during the three months ended May ~~31, 2019~~29, 2020 of ~~$1.59~~$1.87 billion increased by ~~$290.6~~$278 million, or 17%, compared to the year-ago period. Document Cloud revenue during the three months ended May 29, 2020 of $360 million increased by $64 million, or 22%, compared to the year-ago period. The ~~increase was~~increases were primarily due to the increase in subscription revenue associated with our Creative Cloud and Document Cloud offerings.

~~Adobe~~Digital Experience ~~Cloud~~ revenue of ~~$783.5~~$826 million during the three months ended May ~~31, 2019~~29, 2020 increased by ~~$197.6~~$42 million, or ~~34%~~5%, compared to the year-ago period. The increase was primarily due to the increase in subscription revenue ~~driven~~across our offerings, offset in part by ~~the addition of Marketo and Magento,~~decreases in revenue associated with our transaction-driven Advertising Cloud offerings which we ~~acquired in~~began to discontinue during the ~~later part~~second quarter of fiscal ~~2018.~~2020.

~~Our total deferred revenue~~Remaining performance obligations of ~~$3.13~~$9.92 billion as of May ~~31, 2019~~29, 2020 increased by ~~$80.5~~$93 million, or 3%1%, from ~~$3.05~~$9.82 billion as of November ~~30, 2018~~29, 2019 primarily due to increases in new contracts and ~~the timing of~~ renewals ~~related to~~for our Digital ~~Experience offerings and acquired deferred revenue from Marketo and Magento.~~Media offerings.

Cost of revenue of ~~$407.5~~$415 million during the three months ended May ~~31, 2019~~29, 2020 increased slightly by ~~$126.1~~$8 million, or ~~45%~~2%, compared to the year-ago period primarily due to increases in ~~amortization of purchased intangibles and~~ hosting services and data center costs, offset in large part by decreases in Advertising Cloud media costs.

Operating expenses of ~~$1.59~~$1.70 billion during the three months ended May ~~31, 2019~~29, 2020 increased by ~~$371.7~~$110 million, or ~~31%~~7%, compared to the year-ago period primarily due to increases in base compensation and related benefits costs and stock-based compensation expense associated with headcount growth, ~~and marketing spend. Contributing to these increases were the additions of Magento and Marketo~~offset in ~~the later~~ part ~~of fiscal 2018.~~by decreases in travel-related expenses.

Net income of ~~$632.6 million~~$1.10 billion during the three months ended May ~~31, 2019 decreased~~29, 2020 increased by ~~$30.6~~$467 million, or 5%74%, compared to the year-ago period primarily due to increases in ~~provision for~~revenue and, to a lesser extent, the benefit from income taxes ~~and interest expense.~~resulting from an intra-entity transfer of certain intellectual property rights.

Net cash ~~flow~~flows from operations of ~~$2.12~~$2.51 billion during the six months ended May ~~31, 2019~~29, 2020 increased by ~~$156.8~~$386 million, or 8%18%, compared to the year-ago period primarily due to higher net income ~~coupled with a smaller increase in taxes payable.~~adjusted for the net effect of non-cash items.

Revenue for the Three and Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~


(dollars in millions)	Three Months								Six Months								Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change		2020			2019			% Change		2020			2019			% Change
Subscription	$	2,456.1		$	1,923.1		28	%	$	4,761.0		$	3,716.5		28	%	$	2,874		$	2,456		17	%	$	5,699		$	4,761		20	%
Percentage of total revenue	89		%	88		%			89		%	87		%			92		%	89		%			92		%	89		%
Product	152.8			151.0			1	%	323.4			322.6			*		128			153			(16	)%	271			323			(16	)%
Percentage of total revenue	6		%	7		%			6		%	8		%			4		%	6		%			4		%	6		%
Services and support	135.4			121.3			12	%	260.8			235.2			11	%	126			135			(7	)%	249			261			(5	)%
Percentage of total revenue	5		%	5		%			5		%	5		%			4		%	5		%			4		%	5		%
Total revenue	$	2,744.3		$	2,195.4		25	%	$	5,345.2		$	4,274.3		25	%	$	3,128		$	2,744		14	%	$	6,219		$	5,345		16	%

^{_________________________________________}


^(*)	~~Percentage is less than 1%.~~

Subscription Revenue by Segment

Our subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings, and related support, including Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud services. We primarily recognize subscription revenue ratably over the term of our agreements with customers, beginning with commencement of service. Subscription revenue related to certain offerings, where fees are based on a number of transactions or impressions per month and invoicing is aligned to the pattern of performance, customer benefit and consumption, are recognized on a usage basis.

We have the following reportable segments: Digital Media, Digital Experience and Publishing. Subscription revenue by reportable segment for the three and six months ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ is as follows:


(dollars in millions)	Three Months						Six Months						Three Months						Six Months
	2019		2018		% Change		2019		2018		% Change		2020		2019		% Change		2020		2019		% Change
Digital Media	$	1,773.7	$	1,425.9	24	%	$	3,437.2	$	2,760.6	25	%	$	2,135	$	1,774	20	%	$	4,193	$	3,437	22	%
Digital Experience	654.0		469.4		39	%	1,266.0		900.3		41	%	707		654		8	%	1,446		1,266		14	%
Publishing	28.4		27.8		2	%	57.8		55.6		4	%	32		28		14	%	60		58		3	%
Total subscription revenue	$	2,456.1	$	1,923.1	28	%	$	4,761.0	$	3,716.5	28	%	$	2,874	$	2,456	17	%	$	5,699	$	4,761	20	%

Our product revenue is comprised primarily of fees related to licenses for on-premise software purchased on a perpetual basis, for a fixed period of time or based on usage for certain of our OEM and royalty agreements. We primarily recognize product revenue at the point in time the software is available to the customer, provided all other revenue recognition criteria are met.

Our services and support revenue is comprised of consulting, training and maintenance and support, primarily related to the licensing of our enterprise ~~products and the sale of our cloud-hosted Adobe Experience Cloud services.~~offerings. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. We typically sell our consulting contracts on a time-and-materials and fixed fee basis. These revenues are recognized as the services are performed for time and materials contracts and on a relative performance basis for fixed fee contracts. Training revenues are recognized as the services are performed. Our maintenance and support offerings, which entitle customers to receive desktop product upgrades and enhancements or technical support, depending on the offering, are generally recognized ratably over the term of the arrangement as we satisfy the performance obligations to our customers.

Segment Information


(dollars in millions)	Three Months								Six Months								Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change		2020			2019			% Change		2020			2019			% Change
Digital Media	$	1,890.2		$	1,546.4		22	%	$	3,666.8		$	3,006.9		22	%	$	2,232		$	1,890		18	%	$	4,401		$	3,667		20	%
Percentage of total revenue	69		%	70		%			69		%	70		%			71		%	69		%			71		%	69		%
Digital Experience	783.5			586.0			34	%	1,526.8			1,140.1			34	%	826			784			5	%	1,684			1,527			10	%
Percentage of total revenue	28		%	27		%			28		%	27		%			27		%	28		%			27		%	28		%
Publishing	70.6			63.0			12	%	151.6			127.3			19	%	70			70			—	%	134			151			(11	)%
Percentage of total revenue	3		%	3		%			3		%	3		%			2		%	3		%			2		%	3		%
Total revenue	$	2,744.3		$	2,195.4		25	%	$	5,345.2		$	4,274.3		25	%	$	3,128		$	2,744		14	%	$	6,219		$	5,345		16	%

Digital Media

Revenue from Digital Media increased ~~$343.8~~$342 million and ~~$659.9~~$734 million during the three and six months ended May ~~31, 2019,~~29, 2020, as compared to the three and six months ended ~~June 1, 2018~~May 31, 2019 driven by increases in revenue associated with our Creative and Document Cloud offerings. During the second quarter of fiscal 2020, demand for our Creative and Document Cloud offerings increased amid the work-from-home environment reflecting expanded digital engagement.

Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during the three and six months ended May ~~31, 2019~~29, 2020 as compared to the ~~three and six months ended June 1, 2018~~year-ago periods primarily due to ~~an increase~~increases in ~~subscription revenue~~net new subscriptions across our Creative Cloud ~~offerings driven by the increase in net new subscriptions.~~offerings.

Adobe Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during the three and six months ended May ~~31, 2019~~29, 2020 as compared to the ~~year ago~~year-ago periods primarily due to increases in Document Cloud subscription ~~revenue.~~revenue driven by strong adoption of our Document Cloud offerings including Adobe Sign.

Digital Experience

Revenue from Digital Experience increased ~~$197.5~~$42 million and ~~$386.7~~$157 million during the three and six months ended May ~~31, 2019,~~29, 2020, as compared to the three and six months ended ~~June 1, 2018~~May 31, 2019 primarily due to ~~the~~increases in subscription revenue across our offering. These subscription revenue increases were offset in part by decreases in revenue associated with our ~~Marketo Engagement Platform and Magento Commerce~~transaction-driven Advertising Cloud offerings which ~~were both acquired in~~we began to discontinue during the ~~later part~~second quarter of fiscal ~~2018.~~2020. We expect that discontinuing these offerings will negatively impact Digital Experience revenue growth.

Geographical Information


(dollars in millions)	Three Months								Six Months								Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change		2020			2019			% Change		2020			2019			% Change
Americas	$	1,599.2		$	1,239.6		29	%	$	3,109.1		$	2,410.2		29	%	$	1,811		$	1,599		13	%	$	3,608		$	3,109		16	%
Percentage of total revenue	58		%	57		%			58		%	57		%			58		%	58		%			58		%	58		%
EMEA	729.3			621.8			17	%	1,432.3			1,209.1			18	%	825			729			13	%	1,642			1,432			15	%
Percentage of total revenue	27		%	28		%			27		%	28		%			26		%	27		%			26		%	27		%
APAC	415.8			334.0			24	%	803.8			655.0			23	%	492			416			18	%	969			804			21	%
Percentage of total revenue	15		%	15		%			15		%	15		%			16		%	15		%			16		%	15		%
Total revenue	$	2,744.3		$	2,195.4		25	%	$	5,345.2		$	4,274.3		25	%	$	3,128		$	2,744		14	%	$	6,219		$	5,345		16	%

Overall revenue during the three and six months ended May ~~31, 2019~~29, 2020 increased in all geographic regions as compared to the three and six months ended ~~June 1, 2018 primarily~~May 31, 2019 due to increases in Digital Media and Digital Experience revenue. Within each geographic region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above.

Included in the overall change in revenue for the three and six months ended May ~~31, 2019~~29, 2020 were impacts associated with foreign currency as shown below. Our currency hedging program is used to mitigate a portion of the foreign currency impact to revenue.


(in millions)	Three Months			Six Months			Three Months			Six Months
Revenue impact:	Increase/(Decrease)						Increase/(Decrease)
Euro	$	(22.5	)	$	(29.2	)	$	(17	)	$	(36	)
British Pound	(7.4		)	(11.2		)	(6		)	(8		)
Japanese Yen	(2.9		)	(1.5		)	4			7
Australian Dollar							(10		)	(15		)
Other currencies	(12.5		)	(18.2		)	(8		)	(12		)
Total revenue impact	(45.3		)	(60.1		)	(37		)	(64		)
Hedging impact:
Euro	7.3			13.2			5			11
British Pound	1.0			2.7
Japanese Yen	0.7			1.6			—			1
Total hedging impact	9.0			17.5			5			12
Total impact	$	(36.3	)	$	(42.6	)	$	(32	)	$	(52	)

During the three and six months ended May ~~31, 2019,~~29, 2020, the U.S. Dollar primarily strengthened against EMEA currencies and ~~other currencies~~the Australian Dollar as compared to the three and six months ended ~~June 1, 2018,~~May 31, 2019, which decreased revenue in U.S. Dollar equivalents. The foreign currency impact to revenue was offset in part by hedging gains primarily from our EMEA currencies hedging program.

Cost of Revenue for the Three and Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~


(dollars in millions)	Three Months								Six Months								Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change		2020			2019			% Change		2020			2019			% Change
Subscription	$	296.5		$	186.3		59	%	$	584.5		$	351.0		67	%	$	317		$	296		7	%	$	672		$	585		15	%
Percentage of total revenue	11		%	8		%			11		%	8		%			10		%	11		%			11		%	11		%
Product	9.3			10.8			(14	)%	21.5			23.7			(9	)%	9			9			—	%	16			21			(24	)%
Percentage of total revenue	*			*					*			1		%			*			*					*			*
Services and support	101.7			84.2			21	%	198.8			165.5			20	%	89			102			(13	)%	179			199			(10	)%
Percentage of total revenue	4		%	4		%			4		%	4		%			3		%	4		%			3		%	4		%
Total cost of revenue	$	407.5		$	281.3		45	%	$	804.8		$	540.2		49	%	$	415		$	407		2	%	$	867		$	805		8	%

^{_________________________________________}


^(*)	Percentage is less than 1%.

Subscription

Cost of subscription revenue consists of third-party royalties and expenses related to operating our network infrastructure, including depreciation expense, ~~and operating lease payments associated with computer equipment,~~ data center costs, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of certain intangible assets and allocated overhead. We enter into contracts with third parties for hosting services and use of data center facilities. Our data center costs largely consist of the amounts we pay to these third parties for rack space, power and similar items. Cost of subscription revenue also includes media costs related to impressions purchased from third-party ad inventory ~~sources for~~sources. We discontinued our transaction-driven Advertising Cloud ~~offerings.~~offerings in the second quarter of fiscal 2020, which we expect will result in reductions to media costs.

Cost of subscription revenue increased during the three and six months ended May ~~31, 2019~~29, 2020 as compared to the three and six months ended ~~June 1, 2018~~May 31, 2019 due to the following:

% Change
2019-2018
QTD % Change
2019-2018
YTD
Amortization of purchased intangibles 20 % 23 %
Hosting services and data center costs 14
15
Media costs 4
6
Royalty costs 6
5
Incentive compensation, cash and stock-based 4
4
Base compensation and related benefits associated with headcount 5
5
Software licenses 2
3
Various individually insignificant items 4
6
Total change 59 % 67 %

Amortization of purchased intangibles increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to amortization of intangible assets purchased through our acquisitions of Magento and Marketo in the later part of fiscal 2018. Hosted services and data center costs increased during the same period due to higher hosting costs for Digital Experience, including costs associated with our Magento and Marketo offerings.



	Components of % Change 2020-2019 QTD		Components of % Change 2020-2019 YTD
Hosting services and data center costs	7	%	8	%
Media costs	(6	)	—
Royalty costs	2		4
Incentive compensation, cash and stock-based	2		3
Base compensation and related benefits associated with headcount	3		2
Various individually insignificant items	(1	)	(2	)
Total change	7	%	15	%

Product

Cost of product revenue ~~includes product packaging,~~is primarily comprised of third-party royalties, ~~excess and obsolete inventory,~~ amortization related to purchased intangibles and acquired rights to use technology, excess and obsolete inventory, localization costs and the costs associated with the manufacturing of our products.

~~Cost of product revenue decreased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to decreases in localization costs.~~

Services and Support

Cost of services and support revenue is primarily comprised of employee-related costs and ~~associated~~other costs incurred to provide consulting services, training and product support.

Cost of services and support revenue ~~increased~~decreased during the three and six months ended May 29, 2020 as compared to the three and six months ended May 31, 2019 ~~as compared to the three and six months ended June 1, 2018~~primarily due to ~~the following:~~decreases in base compensation and related benefits associated with headcount, offset in part by increases in professional and consulting fees.

% Change
2019-2018
QTD % Change
2019-2018
YTD
Base compensation and related benefits associated with headcount 11 % 10 %
Incentive compensation, cash and stock-based 7
8
Professional and consulting fees (1 ) (1 )
Various individually insignificant items 4
3
Total change 21 % 20 %

Operating Expenses for the Three and Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~


(dollars in millions)	Three Months								Six Months								Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change		2020			2019			% Change		2020			2019			% Change
Research and development	$	476.0		$	374.1		27	%	$	940.6		$	722.9		30	%	$	532		$	476		12	%	$	1,064		$	941		13	%
Percentage of total revenue	17		%	17		%			18		%	17		%			17		%	17		%			17		%	18		%
Sales and marketing	848.9			646.2			31	%	1,630.5			1,227.1			33	%	901			849			6	%	1,758			1,630			8	%
Percentage of total revenue	31		%	29		%			31		%	29		%			29		%	31		%			28		%	31		%
General and administrative	219.3			178.0			23	%	435.4			348.5			25	%	224			219			2	%	495			435			14	%
Percentage of total revenue	8		%	8		%			8		%	8		%			7		%	8		%			8		%	8		%
Amortization of purchased intangibles	43.0			17.2			**		89.6			34.3			**
Amortization of intangibles																	40			43			(7	)%	82			90			(9	)%
Percentage of total revenue	2		%	1		%			2		%	1		%			1		%	2		%			1		%	2		%
Total operating expenses	$	1,587.2		$	1,215.5		31	%	$	3,096.1		$	2,332.8		33	%	$	1,697		$	1,587		7	%	$	3,399		$	3,096		10	%

^{_________________________________________}


^(**)	~~Percentage is not meaningful.~~

Research and Development

Research and development expenses consist primarily of salary and benefit expenses for software developers, contracted development efforts, third party fees for hosting services, related facilities costs and expenses associated with computer equipment used in software development.

Research and development expenses increased during the three and six months ended May ~~31, 2019~~29, 2020 as compared to the three and six months ended ~~June 1, 2018~~May 31, 2019 primarily due to the following:


	% Change 2019-2018 QTD		% Change 2019-2018 YTD		Components of % Change 2020-2019 QTD		Components of % Change 2020-2019 YTD
Incentive compensation, cash and stock-based	12	%	12	%	8	%	9	%
Base compensation and related benefits associated with headcount	9		10		4		4
Professional and consulting fees	4		4
Various individually insignificant items	2		4
Total change	27	%	30	%	12	%	13	%

We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced offerings and solutions. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our subscription and service offerings, applications and tools.

Sales and Marketing

Sales and marketing expenses consist primarily of salary and benefit expenses, amortization of contract acquisitions costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.

Sales and marketing expenses increased during the three and six months ended May ~~31, 2019~~29, 2020 as compared to the three and six months ended ~~June 1, 2018~~May 31, 2019 primarily due to the following:

% Change
2019-2018
QTD % Change
2019-2018
YTD
Marketing spend related to campaigns, events and overall marketing efforts 12 % 11 %
Base compensation and related benefits associated with headcount 9
10
Incentive compensation, cash and stock-based 5
5
Professional and consulting fees 1
2
Amortization of contract acquisition costs, including sales commissions 1
1
Various individually insignificant items 3
4
Total change 31 % 33 %



	Components of % Change 2020-2019 QTD		Components of % Change 2020-2019 YTD
Marketing spend related to campaigns, events and overall marketing efforts	5	%	5	%
Incentive compensation, cash-based	2		2
Base compensation and related benefits associated with headcount	1		1
Transaction fees	2		2
Travel	(4	)	(2	)
Total change	6	%	8	%

General and Administrative

General and administrative expenses consist primarily of compensation and benefit expenses, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.

General and administrative expenses increased during the three and six months ended May ~~31, 2019~~29, 2020 as compared to the three and six months ended ~~June 1, 2018~~May 31, 2019 primarily due to the following:


	% Change 2019-2018 QTD		% Change 2019-2018 YTD		Components of % Change 2020-2019 QTD		Components of % Change 2020-2019 YTD
Professional and consulting fees	5	%	9	%
Bad debt expense					7	%	3	%
Incentive compensation, cash and stock-based	7		6		3		3
Base compensation and related benefits associated with headcount	4		4		1		2
Software licenses	1		2
Charges related to cancellation of corporate events					(3	)	7
Travel					(2	)	(1	)
Maintenance and repairs					(2	)	(2	)
Various individually insignificant items	6		4		(2	)	2
Total change	23	%	25	%	2	%	14	%

~~Amortization of Purchased Intangibles~~

~~Amortization expenses~~Bad debt expense increased during the three and six months ended May ~~31, 2019~~29, 2020 as compared to the three and six months ended ~~June 1, 2018~~May 31, 2019 primarily due to ~~amortization expense associated with~~changes in the macroeconomic environment, including increased credit-related risk and volatility in market conditions.

During the six months ended May 29, 2020, we recorded charges related to the cancellation of corporate events including Adobe Summit due to concerns over the global pandemic. Certain of these charges were recovered during the three months ended May 29, 2020.

Amortization of Intangibles

Amortization expenses decreased during the three and six months ended May 29, 2020 as compared to the three and six months ended May 31, 2019 primarily due to certain acquired intangible assets ~~purchased through our acquisitions of Marketo and Magento in~~becoming fully amortized during the ~~later part of fiscal 2018.~~current period.

Non-Operating Income (Expense), Net for the Three and Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~


(dollars in millions)	Three Months								Six Months								Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change		2020			2019			% Change		2020			2019			% Change
Interest and other income (expense), net	$	2.6		$	11.6		(78	)%	$	6.8		$	28.3		(76	)%
Percentage of total revenue	*			1		%			*			1		%
Interest expense	(40.6		)	(20.4		)	99	%	(81.2		)	(40.3		)	101	%	$	(28	)	$	(40	)	(30	)%	$	(61	)	$	(81	)	(25	)%
Percentage of total revenue	(1		)%	(1		)%			(2		)%	(1		)%			(1		)%	(1		)%			(1		)%	(2		)%
Investment gains (losses), net	(0.8		)	1.1			**		43.1			4.1			**		—			(1		)	**		(3		)	43			**
Percentage of total revenue	*			*					1		%	*					*			*					*			1		%
Other income (expense), net																	12			2			**		30			7			**
Percentage of total revenue																	*			*					*			*
Total non-operating income (expense), net	$	(38.8	)	$	(7.7	)	**		$	(31.3	)	$	(7.9	)	**		$	(16	)	$	(39	)	**		$	(34	)	$	(31	)	**

^{_________________________________________}


^(*)	Percentage is less than 1%.


^(**)	Percentage is not meaningful.

~~Interest and Other Income (Expense), Net~~

Interest and other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Interest and other income (expense), net also includes gains and losses on fixed income investments and foreign exchange gains and losses other than any gains recorded to revenue from our hedging programs.

Interest and other income (expense), net decreased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to lower average invested balances.

Interest Expense

Interest expense represents interest associated with our ~~Term Loan, senior notes and interest rate swaps.~~debt instruments. Interest on our ~~Term Loan is payable periodically at the end of each interest period, whereas interest on our senior notes~~Notes is payable semi-annually, in arrears, on February 1 and August 1. Interest on our Term Loan, which was terminated in the first quarter of fiscal 2020, was payable periodically at the end of each interest period. Floating interest payments on the interest rate swaps, ~~are~~which matured in the first quarter of fiscal 2020, was paid ~~monthly. The~~monthly and the fixed-rate interest receivable on the swaps iswas received semi-annually concurrent with the ~~senior notes~~Notes interest payments.

Interest expense decreased during the three and six months ended May 29, 2020 as compared to the three and six months ended May 31, 2019 primarily due to lower average interest rates on our debt instruments. See ~~Notes 6~~ ~~and~~ 14Note 15 of our notes to condensed consolidated financial statements for further details regarding our ~~senior notes and interest rate swaps.~~debt instruments.

Interest expense increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to interest on our Term Loan which was entered into in the fourth quarter of fiscal 2018.

Investment Gains (Losses), Net

Investment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets which are classified as trading securities, and gains and losses associated with our direct and indirect investments in privately held companies.

Investment gains ~~increased~~decreased during the six months ended May ~~31, 2019~~29, 2020 as compared to the six months ended ~~June 1, 2018~~May 31, 2019 primarily due to the gain recognized upon our acquisition of the remaining interest in Allegorithmic in January 2019.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Other income (expense), net also includes realized gains and losses on fixed income investments and foreign exchange gains and losses.

Other income (expense), net increased during the three and six months ended May 29, 2020 as compared to the three and six months ended May 31, 2019 primarily due to our change in methodology of accounting for foreign currency cash flow hedges. Effective in the third quarter of fiscal 2019, expenses associated with the option premiums, which ~~was accounted for as an equity-method investment immediately before the acquisition.~~ ~~See Note 3 of our notes to condensed consolidated financial statements for further details regarding our acquisition of Allegorithmic.~~were previously recorded in other income (expense), net, are recorded in accumulated other comprehensive income.

Provision for (Benefit from) Income Taxes for the Three and Six Months Ended May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~


(dollars in millions)	Three Months								Six Months								Three Months							Six Months
	2019			2018			% Change		2019			2018			% Change		2020			2019			% Change	2020			2019			% Change
Provision	$	78.2		$	27.6		183	%	$	106.3		$	147.1		(28	)%
Provision for (benefit from) income taxes																	$	(100	)	$	78		**	$	(136	)	$	106		**
Percentage of total revenue	3		%	1		%			2		%	3		%			(3		)%	3		%		(2		)%	2		%
Effective tax rate	11		%	4		%			8		%	11		%			(10		)%	11		%		(7		)%	8		%

^{_________________________________________}


^(**)	Percentage is not meaningful.

Our effective tax ~~rate increased~~rates decreased by 7approximately 21 percentage points and 15 percentage points for the three and six months ended May ~~31, 2019,~~29, 2020, respectively, as compared to the three ~~months ended June 1, 2018, primarily due to U.S. federal~~ and state taxes associated with our current year international earnings resulting from the international provisions of the Tax Cuts and Jobs Act (“Tax Act”) effective in fiscal 2019. In addition, the effective tax rate for the three months ended June 1, 2018 was lower due to a change to our corporate tax structure from which we serve our foreign customers that provided us the ability to deduct more expenses against our earnings in the U.S., offset in part by an adjustment to the Tax Act provisional accounting.

~~Our effective tax rate decreased by 3 percentage points for the~~ six months ended May 31, ~~2019, as compared~~2019. The lower effective tax rates were primarily due to a one-time tax benefit resulting from an intra-entity transfer of certain intellectual property rights (“IP rights”). Our effective tax rates for the three and six months ended ~~June 1, 2018, as~~May 29, 2020 were lower than the ~~effective~~U.S federal statutory tax rate ~~for the six months ended June 1, 2018 included provisional accounting expenses for the effects~~ of ~~the Tax Act adoption, offset in part by the increase~~21% primarily due to the ~~above noted items.~~intra-entity transfer of IP rights, a favorable geographic mix of earnings and tax benefits related to stock-based compensation.

In April 2020, we completed an intra-entity transfer of certain IP rights in order to better align the ownership of these rights with how our business operates. The ~~Tax Act enacted~~transfer did not result in a taxable gain; however, our foreign subsidiary recognized a deferred tax asset for the book and tax basis difference of the transferred IP rights. As a result of this transaction, we recorded a deferred tax asset, net of valuation allowance, and related tax benefit of $224 million based on ~~December 22, 2017 lowered~~ the ~~statutory federal corporate income tax rate from 35%~~fair value of the transferred IP rights. The tax-deductible amortization related to ~~21% effective on January 1, 2018. Beginning in our fiscal 2019,~~ the ~~annual statutory federal corporate tax rate is 21% and certain~~transferred IP rights will be recognized over the period of economic benefit.

Certain international provisions of the U.S. Tax Act, such as a tax on global intangible low-tax income, a base erosion and anti-abuse tax and a special tax deduction for foreign-derived intangible income, ~~take effect.~~took effect in fiscal 2019. The U.S. Treasury Department has issued proposed regulations that could impact the calculation of taxes related to these ~~provisions and which are anticipated to be applicable on a retrospective basis.~~provisions. While the Company continues to evaluate the impact, such regulations have not been finalized and are subject to change. We ~~will~~ account for ~~new~~finalized regulations in the period of enactment.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we considered all available positive and negative evidence, including our past operating results, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. On the basis of this evaluation, we continue to maintain a valuation allowance ~~related primarily~~to reduce our deferred tax assets to the ~~realizability~~amount realizable. The total valuation allowance was $280 million as of May 29, 2020 and is primarily attributable to certain state and foreign ~~credits of $191.8 million as of the period ended May 31, 2019.~~credits.

We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. The ~~Tax Act~~current U.S. tax law provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax. As we repatriate the undistributed foreign earnings for use in the U.S., the distributions will generally not be subject to further U.S. federal tax.

During the remainder of fiscal 2020, we anticipate making an additional change to our international trading structure, which is also aimed to better align our ownership of certain IP rights with how our business operates. Under the current rules, this change, if completed, will result in the recording of an additional discrete tax benefit in the fiscal 2020 effective income tax rate related to the transferred IP rights, which is deductible in future periods. The net impact of such change is uncertain but is anticipated to adversely affect our effective income tax rate and cash flows in years beyond fiscal 2020. However, we expect cash paid for income taxes will be at a lower effective rate than our effective income tax rate for the provision for income taxes due to the future deductions on the transferred IP rights.

Accounting for Uncertainty in Income Taxes

The gross liabilities for unrecognized tax benefits excluding interest and penalties were ~~$197.8~~$175 million and ~~$156.2~~$198 million as of May 29, 2020 and May 31, 2019, ~~and June 1, 2018,~~ respectively. If the total unrecognized tax benefits at May 29, 2020 and May 31, 2019 ~~and June 1, 2018~~ were recognized in the future, ~~$135.5~~$114 million and ~~$99.8~~$136 million would decrease the respective effective tax rates.

The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately ~~$25.8~~$24 million and ~~$22.9~~$26 million for the ~~three~~six months ended May 29, 2020 and May 31, 2019, ~~and June 1, 2018,~~ respectively. These amounts were included in long-term income taxes payable in their respective years.

The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of ~~current and long-term~~our tax assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately ~~$40.0 million.~~$20 million over the next 12 months.

In addition, in ~~the United States,~~countries where we conduct business and in jurisdictions in which we are subject to tax, including those covered by governing bodies that enact tax laws applicable to us, such as the European Commission ~~countries in~~of the European Union, ~~and other countries where we do business,~~ we are subject to potential changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe. These countries, ~~and~~ other governmental bodies and intergovernmental economic organizations such as the Organization for Economic Cooperation and Development, have or could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in ~~our income tax returns filed in~~ such jurisdictions. In the current global tax policy environment, any changes in laws, regulations and interpretations related to these assertions could adversely affect our effective tax rates or result in other costs to us which could adversely affect our operations and financial results.

Moreover, we are subject to the continual examination of our income tax returns by the ~~U.S. Internal Revenue Service~~IRS and other domestic and foreign tax authorities. These tax examinations are expected to focus on our intercompany transfer pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for adjustments that may result from these examinations. We cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

LIQUIDITY AND CAPITAL RESOURCES

This data should be read in conjunction with our condensed consolidated statements of cash flows.


	As of					As of
(in millions)	May 31, 2019			November 30, 2018		May 29, 2020		November 29, 2019
Cash and cash equivalents	$	2,082.9		$	1,642.8	$	3,044	$	2,650
Short-term investments	$	1,396.1		$	1,586.2	$	1,307	$	1,527
Working capital	$	(2,344.5	)	$	555.9	$	1,485	$	(1,696	)
Stockholders’ equity	$	9,931.7		$	9,362.1	$	10,881	$	10,530

Working Capital

Working capital was $1.49 billion of a surplus as of May ~~31, 2019~~29, 2020 and ~~November 30, 2018 was $2.34~~$1.70 billion of a deficit ~~and $555.9 million~~as of ~~a surplus, respectively. The decrease was primarily due to~~November 29, 2019. During the ~~reclassification~~first quarter of ~~$3.15 billion total carrying value of~~fiscal 2020, we refinanced our $2.25 billion term loan due April 30, 2020 (“Term Loan”) and $900 million 4.75% senior notes due February 1, 2020 (“2020 Notes”) ~~to current liabilities. We intend to refinance our Term Loan and 2020 Notes on or before~~. See the ~~due dates.~~section titled “Cash Flows from Financing Activities” below.

A summary of our cash flows is as follows:


	Six Months Ended						Six Months Ended
(in millions)	May 31, 2019			June 1, 2018			May 29, 2020			May 31, 2019
Net cash provided by operating activities	$	2,122.7		$	1,966.0		$	2,509		$	2,123
Net cash used for investing activities	(121.8		)	(26.1		)
Net cash provided by (used for) investing activities							32			(122		)
Net cash used for financing activities	(1,556.0		)	(1,258.6		)	(2,134		)	(1,556		)
Effect of foreign currency exchange rates on cash and cash equivalents	(4.8		)	0.6			(13		)	(5		)
Net increase in cash and cash equivalents	$	440.1		$	681.9		$	394		$	440

Our primary source of cash is receipts from revenue and, to a lesser extent, proceeds from participation in the employee stock purchase plan. The primary uses of cash are our stock repurchase program as described below, payroll-related expenses, general operating expenses including marketing, travel and office rent, and cost of revenue. Other uses of cash include business acquisitions, ~~and~~ purchases of property and ~~equipment.~~equipment and payments for taxes related to net share settlement of equity awards.

Cash Flows from Operating Activities

Net cash provided by operating activities of ~~$2.12~~$2.51 billion for the six months ended May ~~31, 2019~~29, 2020 was primarily comprised of net income ~~plus~~adjusted for the net effect of non-cash items. The primary working capital sources of cash were net income ~~coupled~~together with ~~increases~~decreases in ~~deferred revenue and accrued expenses,~~trade receivables, which were offset in ~~large~~ part by ~~cash outflows due to an increase~~increases in prepaid expenses and other assets. ~~The increase~~Decreases in ~~deferred revenue was primarily driven by an increase in Digital Experience hosted services as well as increases related~~trade receivables were largely attributable to ~~Marketo and Magento. The increase in accrued expenses was primarily driven by increased accruals related to our employee stock purchase plan and marketing activities.~~strong collections during the first quarter of fiscal 2020. The primary working capital use of cash was due to increases in prepaid expenses and other assets driven by sales commissions paid and capitalized, increases in prepaid expenses ~~driven by~~due to the timing of billings and payments associated with certain vendors, and increases in prepaid payroll related to employee benefits.

Cash Flows from Investing Activities

Net cash ~~used for~~provided by investing activities of ~~$121.8~~$32 million for the six months ended May ~~31, 2019~~29, 2020 was primarily ~~due to purchases~~comprised of property and equipment and our acquisition of the remaining equity interest in Allegorithmic. We reclassified the deposit payment made in the first quarter of fiscal 2019 related to the procurement of a corporate jet to property and equipment upon our completion of the purchase during the second quarter of fiscal 2019. These cash outflows were offset primarily by proceeds from sales and maturities of short-term investments, net of purchases. ~~See Note 3 of our notes to condensed consolidated financial statements for further details regarding our acquisition of Allegorithmic.~~These cash inflows were largely offset by ongoing capital expenditures.

Cash Flows from Financing Activities

Net cash used for financing activities ~~of $1.56~~was $2.13 billion for the six months ended May ~~31, 2019 was primarily~~29, 2020. In February 2020, we issued $500 million of 1.70% senior notes due February 1, 2023 (“2023 Notes”), $500 million of 1.90% senior notes due February 1, 2025 (“1.90% 2025 Notes”), $850 million of 2.15% senior notes due February 1, 2027 (“2027 Notes”) and $1.30 billion of 2.30% senior notes due February 1, 2030 (“2030 Notes”). We used the proceeds to repay the Term Loan and 2020 Notes concurrently. See Note 15 of our notes to condensed consolidated financial statements for information regarding our debt refinancing.

Other financing activities during the six months ended May 29, 2020 include payments for our treasury stock repurchases and taxes paid related to the net share settlement of equity ~~awards, which were offset by proceeds from reissuance of treasury stock.~~awards. See the section titled “Stock Repurchase Program” ~~discussed~~ below.

We expect to continue our investing activities, including short-term and long-term investments, facilities expansion and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business.

Other Liquidity and Capital Resources Considerations

Our existing cash, cash equivalents and investment balances may fluctuate during fiscal ~~2019~~2020 due to changes in our planned cash outlay, including changes in incremental costs such as direct costs and integration costs related to our acquisitions.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the pandemic and other risks detailed in Part II, Item 1A titled “Risk Factors”. While the pandemic has not materially impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future. However, based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months.

We have a $1 billion senior unsecured revolving credit agreement (“Revolving Credit Agreement”) with a syndicate of lenders, providing for loans to us and certain of our subsidiaries through October 17, 2023. As of May ~~31, 2019,~~29, 2020, there were no outstanding borrowings under this Credit Agreement and the entire $1 billion credit line remains available for borrowing.

As of May ~~31, 2019,~~29, 2020, we have ~~a $2.25 billion Term Loan outstanding due April 30, 2020 and $1.90~~$4.15 billion senior notes outstanding, consisting of the ~~2020~~2023 Notes, 1.90% 2025 Notes, 2027 Notes, 2030 Notes, and the $1 billion of 3.25% senior notes due February 1, 2025 (“3.25% 2025 Notes,” and together with the ~~2020 Notes,~~aforementioned notes, “Notes”). The Notes ~~and Term Loan~~ rank equally with our other unsecured and unsubordinated indebtedness.

During the first quarter of fiscal 2019, we reclassified the 2020 Notes as current debt in our condensed consolidated balance sheets. As of May 31, 2019, the carrying value of the 2020 Notes was $896.1 million which includes the fair value of the interest rate swap and is net of debt issuance costs. During the second quarter of fiscal 2019, we reclassified the Term Loan with a carrying value of $2.25 billion, net of unamortized original issuance discount, as current debt on our condensed consolidated balance sheets. We intend to refinance the Term Loan and 2020 Notes on or before the due dates.

Subsequent to May 31, 2019, in anticipation of refinancing our Term Loan and 2020 Notes, we entered into interest rate lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance. These derivative instruments hedge the impact of changes in the benchmark interest rate to future interest payments and will be terminated upon debt issuance.

Our short-term investment portfolio is primarily invested in ~~asset-backed securities,~~ corporate debt securities, ~~foreign government~~asset-backed securities and municipal securities. We use professional investment management firms to manage a large portion of our invested cash.

Stock Repurchase Program

During the six months ended May 29, 2020 and May 31, 2019, ~~and June 1, 2018,~~ we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling ~~$1.25~~$1.7 billion and $1$1.25 billion, respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the expected foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

During the six months ended May 29, 2020, we repurchased approximately 5.0 million shares at an average price of $332.31 through structured repurchase agreements entered into during fiscal 2019 and the six months ended May 29, 2020. During the six months ended May 31, 2019, we repurchased approximately 4.5 million shares at an average price of $254.19 through structured repurchase agreements entered into during fiscal 2018 and the six months ended May 31, 2019. During the six months ended June 1, 2018 we repurchased approximately 4.3 million shares at an average price of $208.69 through structured repurchase agreements entered into during fiscal 2017 and the six months ended June 1, 2018.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of May ~~31, 2019~~29, 2020 consist of our Notes and obligations under operating leases, royalty agreements and various service agreements. Except as discussed below, there have been no other material changes in those obligations during the six months ended May ~~31, 2019.~~29, 2020. See Notes 1314, 15 and 1416 of our notes to condensed consolidated financial statements for more detailed information regarding our contractual ~~commitments.~~commitments.

~~Purchase~~Contractual Obligations

~~During~~In February 2020, we issued the ~~second~~2023 Notes, 1.90% 2025 Notes, 2027 Notes, and 2030 Notes. Concurrently, we settled our outstanding Term Loan and the 2020 Notes. The following table updates our Notes obligations as of May 29, 2020:



(in millions)	Payment Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Notes, including interest	$	4,812	$	99	$	697	$	1,680	$	2,336

As of May 29, 2020, the carrying value of our Notes was $4.11 billion. Interest is payable semi-annually, in arrears on February 1 and August 1. At May 29, 2020, our maximum commitment for interest payments was $662 million for the remaining duration of our outstanding Notes.

Covenants

Our Revolving Credit Agreement contains a financial covenant requiring us not to exceed a maximum leverage ratio. As of May 29, 2020, we were in compliance with this covenant. We believe this covenant will not impact our credit or cash in the coming fiscal ~~quarter~~year or restrict our ability to execute our business plan. Our Notes do not contain any financial covenants.

Under the terms of ~~2019,~~our Revolving Credit Agreement, we ~~amended two existing vendor agreements that include~~are not prohibited from paying cash dividends unless payment would trigger an ~~aggregated incremental minimum purchase commitment~~event of ~~$1.74 billion through May 2024. There were no other significant changes~~default or if one currently exists. We do not anticipate paying any cash dividends in ~~our purchase obligations during~~ the ~~six months ended May 31, 2019.~~foreseeable future.

Transition Taxes Liability

AsOur transition tax liability which was accrued as a result of the U.S. Tax Act ~~enacted on December 22, 2017, an accrued transition tax liability~~was approximately $390 million as of ~~approximately $0.5 billion~~May 29, 2020 and is payable in installments through fiscal 2026. The U.S. Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax. As we repatriate the undistributed foreign earnings for use in the U.S., the distributions will generally not be subject to further U.S. federal tax.

~~Term Loan~~

As of May 31, 2019, our Term Loan’s carrying value was $2.25 billion. At our election, the Term Loan will bear interest at either (i) the London Interbank Offered Rate (“LIBOR”) plus a margin, based on our debt ratings, ranging from 0.500% to 1.000% or (ii) a base rate plus a margin, based on our debt ratings, ranging from 0.040% to 0.110%. Interest is payable periodically, in arrears, at the end of each interest period we elect. Based on the LIBOR rate at May 31, 2019, our estimated maximum commitment for interest payments was $60.1 million for the remaining duration of the Term Loan.

~~Senior Notes~~

As of May 31, 2019, the carrying value of our Notes payable was $1.89 billion. Interest on our Notes is payable semi-annually, in arrears on February 1 and August 1. At May 31, 2019, our maximum commitment for interest payments was $237.8 million for the remaining duration of our Notes.

~~Covenants~~

Our Term Loan and Revolving Credit Agreement contain similar financial covenants requiring us not to exceed a maximum leverage ratio. As of May 31, 2019, we were in compliance with this covenant. We believe this covenant will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan. Our senior notes do not contain any financial covenants.

Under the terms of our Term Loan and Revolving Credit Agreement, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists. We do not anticipate paying any cash dividends in the foreseeable future.

Accounting for Uncertainty in Income Taxes

See Results of Operations, Provision for (Benefit from) Income Taxes above for our discussion on accounting for uncertainty in income taxes.

Royalties

We have certain royalty commitments associated with the licensing of certain offerings. Royalty expense is generally based on a dollar amount per unit sold or a percentage of the underlying revenue.

Indemnifications

In the normal course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been ~~significant~~material and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

To the extent permitted under Delaware law, we have agreements whereby we indemnify our directors and officers for certain events or occurrences while the director or officer is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~We believe that there~~There have been no material changes in our market risk exposures for the six months ended May ~~31, 2019,~~29, 2020, as compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended November ~~30, 2018.~~29, 2019.

ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation as of May ~~31, 2019,~~29, 2020, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Beginning in March 2020, our employees across all geographic regions have shifted to working from home due to the pandemic. We have performed an evaluation of our control environment, operating procedures, data and internal controls and

determined that the design of our processes and controls operated effectively throughout this shift to a work-from-home environment.

There were no changes in our internal control over financial reporting during the quarter ended May ~~31, 2019~~29, 2020 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 1314 of our notes to condensed consolidated financial statements for information regarding our legal proceedings.

ITEM 1A. RISK FACTORS

As previously discussed, our actual results could differ materially from our forward-looking statements. Below we discuss some of the factors that could cause these differences. These and many other factors described in this report could adversely affect our operations, performance and financial condition.

The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

The COVID-19 pandemic and related public health measures have materially affected how we and our customers are operating our businesses, and have materially affected our operating results. Due to our subscription-based business model, the effect of the pandemic may not be fully reflected in our results of operations until future periods. If the pandemic has a substantial impact on our employees’, partners’ or customers’ businesses and productivity, our results of operations and overall financial performance may be harmed. The global macroeconomic effects of the pandemic may persist for an indefinite period, even after the pandemic has subsided.

As a result of the pandemic, we have temporarily closed Adobe offices globally and have implemented certain travel restrictions. This global work-from-home operating environment has caused strain for, and may adversely impact the productivity of, certain employees, and these conditions may persist and harm our business, including our future operating results. Additionally, our efforts to re-open our offices safely may not be successful, could expose our personnel to health risks and will involve additional financial burdens. The pandemic may have long-term effects on the nature of the office environment and remote working, and this may present operational challenges that may adversely affect our business.

We have shifted all of our in-person customer events in 2020 to virtual-only experiences and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Our virtual customer, employee and industry events may not be as successful as in-person events. Moreover, the conditions caused by the pandemic have affected the rate of IT spending and may continue to adversely affect our customers’ ability or willingness to purchase our offerings. We have seen and may continue to see these conditions delay prospective customers’ purchasing decisions, adversely impact our ability to provide on-site consulting services to our customers, result in extended payment terms, reduce the value or duration of their subscription contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance.

Our operations have also begun to be negatively affected by a range of external factors related to the pandemic that are not within our control. Authorities throughout the world have implemented measures to contain or mitigate the spread of the virus, including physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives and shelter-in-place orders. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, which have impacted our business and results of operations, and may also delay the provisioning of our offerings.

The extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the pandemic, the extent and effectiveness of containment actions and the impact of these

and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

Finally, to the extent that the pandemic harms our business and results of operations, many of the other risks described in this “Risk Factors” section may be heightened.

Our competitive position and results of operations could be harmed if we do not compete effectively.

The markets for our products and services are characterized by intense competition, new industry standards, evolving distribution models, limited barriers to entry, disruptive technology developments, short product life cycles, customer price sensitivity, global market conditions and frequent product introductions (including alternatives with limited functionality available at lower costs or free of charge). Any of these factors could create downward pressure on pricing and gross margins and could adversely affect our renewal and upsell and cross-sell rates, as well as our ability to attract new customers. Our future success will depend on our continued ability to enhance and integrate our existing products and services, introduce new products and services in a timely and cost-effective manner, meet changing customer expectations and needs, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological developments. Furthermore, some of our competitors and potential competitors enjoy competitive advantages such as greater financial, technical, sales, marketing and other resources, broader brand awareness and access to larger customer bases. As a result of these advantages, potential and current customers might select the products and services of our competitors, causing a loss of our market share. In addition, consolidation has occurred among some of our competitors. Further consolidations in these markets may subject us to increased competitive pressures and may harm our results of operations.

For additional information regarding our competition and the risks arising out of the competitive environment in which we operate, see the section entitled “Competition” contained in Part I. Item 1 of our annual filing.

If we cannot continue to develop, acquire, market and offer new products and services or enhancements to existing products and services that meet customer requirements, our operating results could suffer.

The process of developing and acquiring new technology products and services and enhancing existing offerings is complex, costly and uncertain. If we fail to anticipate customers’ rapidly changing needs and expectations or adapt to emerging technological trends, our market share and results of operations could suffer. We must make long-term investments, develop, acquire or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products and services. If we misjudge customer needs in the future, our new products and services may not succeed and our revenues and earnings may be harmed. Additionally, any delay in the development, acquisition, marketing or launch of a new offering or enhancement to an existing offering could result in customer attrition or impede our ability to attract new customers, causing a decline in our revenue, earnings or stock price and weakening our competitive position.

We offer our products on a variety of hardware platforms. Consumers continue to migrate from personal computers to tablet and mobile devices. If we cannot continue adapting our products to tablet and mobile devices, or if our competitors can adapt their products more quickly than us, our business could be harmed. Releases of new devices or operating systems may make it more difficult for our products to perform or may require significant costs in order for us to adapt our solutions to such devices or operating systems. These potential costs and delays could harm our business.

Introduction of new technology could harm our business and results of operations.

The expectations and needs of technology consumers are constantly evolving. Our future success depends on a variety of factors, including our continued ability to innovate, introduce new products and services efficiently, enhance and integrate our products and services in a timely and cost-effective manner, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological developments. Integration of our products and services with one another and other companies’ offerings creates an increasingly complex ecosystem that is partly reliant on third parties. If any disruptive technology, or competing products, services or operating systems that are not compatible with our solutions, achieve widespread acceptance, our operating results could suffer and our business could be harmed.

The introduction of certain technologies may reduce the effectiveness of our products. For example, some of our products rely on third-party cookies, which are placed on individual browsers when consumers visit websites that contain advertisements. We use these cookies to help our customers more effectively advertise, gauge the performance of their advertisements and detect and prevent fraudulent activity. Consumers can block or delete cookies through their browsers or “ad-blocking” software or applications. The most common Internet browsers allow consumers to modify their browser settings to prevent cookies from being accepted by their browsers, or are set to block third-party cookies by default. Increased use of methods, software or applications that block cookies could harm our business.

Security breaches in data centers we manage, or third parties manage on our behalf, may compromise the confidentiality, integrity or availability of employee and customer data, which could expose us to liability and adversely affect our reputation and business.

We process and store significant amounts of employee and customer data, a large volume of which is hosted by third-party service providers. A security incident impacting our own data centers or those controlled by our service providers may compromise the confidentiality, integrity or availability of this data. Unauthorized access to or loss or disclosure of data stored by Adobe or our service providers may occur through physical break-ins, breaches of a secure network by an unauthorized party, software vulnerabilities or coding errors, employee theft or misuse or other misconduct. It is also possible that unauthorized access to or disclosure of employee or customer data may be obtained through inadequate use of security controls by customers or employees. Accounts created with weak or recycled passwords could allow cyber-attackers to gain access to employee or customer data. Additionally, failure by Adobe or our customers to remove the accounts of their own employees, or the granting of accounts ~~by the customer~~ in an uncontrolled manner, may allow for access by former or unauthorized ~~customer representatives.~~individuals. If there were an inadvertent disclosure of customer data, or ~~if a third party were to gain~~ unauthorized access to the data we possess on behalf of our customers, our operations could be disrupted, our reputation could be damaged and we could be subject to claims or other liabilities, regulatory investigations or fines. In addition, such perceived or actual unauthorized loss or disclosure of the information we collect, process or store, or breach of our security could damage our reputation, result in the loss of customers and harm our business.

We rely on data centers managed both by Adobe and third parties to host and deliver our services, as well as access, collect, process, use, transmit and store data, and any interruptions or delays in these hosted services, or failures in data collection or transmission, could expose us to liability and harm our business and reputation.

Much of our business relies on hardware and services that are hosted, managed and controlled directly by Adobe or third-party service providers, including our online store at adobe.com, Creative Cloud, Document Cloud and Experience Cloud solutions. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. If our business relationship with a third-party provider of hosting or content delivery services is negatively affected, or if one of our content delivery suppliers were to terminate its agreement with us without adequate notice, we might not be able to deliver the corresponding hosted offerings to our customers, which could subject us to reputational harm, costly and ~~time intensive~~time-intensive notification requirements, and cause us to lose customers and future business. In addition, the COVID-19 pandemic could potentially disrupt the supply chain of hardware needed to maintain these third-party systems and services or to run our business. Occasionally, we migrate data among data centers and to third-party hosted environments. If a transition among data centers or to third-party service providers encounters unexpected interruptions, unforeseen complexity or unplanned disruptions despite precautions undertaken during the process, this may impair our delivery of products and services to customers and result in increased costs and liabilities, which may harm our operating results and our business.

It is also possible that hardware or software failures or errors in our systems (or those of our third-party service providers) could result in data loss or corruption, cause the information that we collect or maintain to be incomplete or contain inaccuracies that our customers regard as significant, or cause us to fail to meet committed service levels or comply with regulatory notification requirements. Furthermore, our ability to collect and report data may be delayed or interrupted by a number of factors, including access to the Internet, the failure of our network or software systems, security breaches or significant variability in visitor traffic on customer websites. In addition, computer viruses, worms or other malware may harm our systems, causing us to lose data, and the transmission of computer viruses or other malware could expose us to litigation or regulatory investigation, and costly and ~~time intensive~~time-intensive notification requirements.

We may also find, on occasion, that we cannot deliver data and reports to our customers in near real time because of a number of factors, including significant spikes in customer activity on their websites or failures of our network or software, or the failure of our third-party service providers’ network or software. If we fail to plan infrastructure capacity appropriately and expand it proportionally with the needs of our customer base, and we experience a rapid and significant demand on the capacity of our data centers or those of third parties, service outages could occur, and our customers could suffer impaired performance of our services. Such a strain on our infrastructure capacity could subject us to regulatory and customer notification requirements, violations of service level agreement commitments, financial liabilities, result in customer dissatisfaction or harm our business. If we supply inaccurate information or experience interruptions in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed and we could lose customers as a result, or we could be found liable for damages or incur other losses.

Increasing regulatory focus on privacy and security issues and expanding laws could impact our business models and expose us to increased liability.

As a global company, Adobe is subject to global data privacy and security laws, regulations and codes of conduct that apply to our various business units. These laws and regulations may be inconsistent across jurisdictions and are subject to evolving and

differing (sometimes conflicting) interpretations. Government officials and regulators, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data. This increased scrutiny may result in new interpretations of existing laws, thereby further impacting Adobe’s business. Globally, new and emerging laws, such as the General Data Protection Regulation (“GDPR”) and the Network and Information Systems Directive (“NISD”) in Europe, state laws in the U.S. on privacy, data and related technologies, such as the California Consumer Privacy Act, as well as industry self-regulatory codes create new compliance obligations and expand the scope of potential liability, either jointly or severally with our customers and suppliers. While we have invested in readiness to comply with applicable requirements, these new and emerging laws, regulations and codes may affect our ability (and our enterprise customers’ ability) to reach current and prospective customers, to respond to both enterprise and individual customer requests under the laws (such as individual rights of access, correction and deletion of their personal information), and to implement our business models effectively. These new laws may also impact our innovation and business drivers in developing new and emerging technologies (e.g., artificial intelligence and machine learning). These requirements, among others, may impact demand for our offerings and force us to bear the burden of more onerous obligations in our contracts. Any perception of our practices, products or services as a violation of individual privacy rights may subject us to public criticism, class action lawsuits, reputational harm, or investigations or claims by regulators, industry groups or other third parties, all of which could disrupt our business and expose us to increased liability. Additionally, we collect and store information on behalf of our business customers and if our customers fail to comply with contractual obligations or applicable laws, it could result in litigation or reputational harm to us.

Transferring personal information across international borders is becoming increasingly complex. For example, European data transfers outside the European Economic Area are highly regulated. The mechanisms that we and many other companies rely upon for European data transfers (e.g., Privacy Shield and Model Clauses) are being contested in the European court system. We are closely monitoring developments related to requirements for transferring personal data outside the EUEuropean Union and other countries that have similar trans-border data flow requirements. These requirements may result in an increase in the obligations required to provide our services in the EUEuropean Union or in sanctions and fines for non-compliance. Several other countries, including Australia and Japan, have also established specific legal requirements for cross-border transfers of personal information. Other countries, such as India, are considering requirements for data localization (e.g., where personal data must remain in the country). If the mechanisms for transferring personal information from certain countries or areas, including Europe to the United States, should be found invalid or if other countries implement more restrictive regulations for cross-border data transfers (or do not permit data to leave the country of origin), such developments could ~~harm~~impact our business, financial condition and results of ~~operations.~~operations, in those jurisdictions.

Security vulnerabilities in our products and systems, or in our supply chain, could lead to reduced revenue or to liability claims.

Maintaining the security of our products ~~computers~~ and ~~networks~~services is a critical issue for us and our customers. Security threats to our information systems, end points and networks have the potential to impact our customers as well. Security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate ~~computer~~our end points, information systems and network security ~~measures and,~~measures. And, as we have previously disclosed, certain unauthorized parties have in the past managed to ~~breach~~gain access to and misuse some of our systems and software in order to access our end users’ authentication, payment and ~~payment~~personal information. In addition, cyber-attackers also develop and deploy viruses, worms, credential stuffing attack tools and other malicious software programs, some of which may be specifically designed to attack our products, services, information systems ~~computers~~ or networks. ~~Sophisticated hardware~~Hardware, software and operating system applications that we develop or procure from third parties may contain defects in design or manufacture, including bugs, vulnerabilities and other problems that could unexpectedly compromise the security of the system or impair a customer’s ability to operate or use our products. The costs to prevent, eliminate, ~~notify affected parties of,~~mitigate, or alleviate cyber- or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities are significant, and our efforts to address these problems, including notifying affected parties, may not be successful or may be delayed and could result in interruptions, delays, cessation of service and loss of existing or potential customers. It is impossible to predict the extent, frequency or impact these problems may have on us.

Outside parties have in the past and may in the future attempt to fraudulently induce our employees or users of our products or services to disclose sensitive, personal, or confidential information via illegal electronic spamming, phishing or other tactics. This existing risk is potentially compounded given the COVID-19 pandemic and the resulting shift to work-from-home arrangements for a large population of employees and contractors. Unauthorized parties may also attempt to gain physical access to our facilities in order to infiltrate our information systems or attempt to gain logical access to our products, services, or information systems for the purpose of exfiltrating content and data. These actual and potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information or sensitive, personal or confidential data about us, our employees, our customers or their end users, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the individuals affected to a risk of loss or misuse of this information. This may result in litigation and liability or fines, our compliance with costly and ~~time intensive~~time-intensive notice requirements, governmental inquiry or oversight or a loss of customer confidence, any of which could harm our business or damage our brand and reputation, possibly impeding our

present and future success in

retaining and attracting new customers and thereby requiring time and resources to repair our brand and reputation. These risks will likely increase as we expand our hosted offerings, integrate our products and services and store and process more data, including personal information.

These problems affect our products and services in particular because cyber-attackers tend to focus their efforts on popular offerings with a large user base, and we expect them to continue to do so. Critical vulnerabilities may be identified in some of our applications and services and those of our third-party service providers. These vulnerabilities could cause such applications and services to crash and could allow an attacker to access our or our users’ confidential or personal information or take control of the affected system, which could result in liability to us or limit our ability to conduct our business and deliver our products and services to customers. We devote significant resources to address security vulnerabilities through engineering more secure products, enhancing security and reliability features in our products and systems, code hardening, conducting rigorous penetration tests, deploying updates to address security vulnerabilities, reviewing our service providers’ security controls, reviewing and auditing our hosted services against independent security control frameworks (such as ISO 27001, SOC 2 and PCI), and improving our incident response time, but these security vulnerabilities cannot be totally eliminated. The cost of these steps could reduce our operating margins, and we may be unable to implement these measures quickly enough to prevent cyber-attackers from gaining unauthorized access into our systems and products. Despite our preventative efforts, actual or perceived security vulnerabilities in our products and systems may harm our reputation or lead to claims against us (and have in the past led to such claims), and could lead some customers to stop using certain products or services, to reduce or delay future purchases of products or services, or to use competing products or services. If we do not make the appropriate level of investment in our technology systems or if our systems become out-of-date or obsolete and we are not able to deliver the quality of data security customers require, our business could be adversely affected. Customers may also adopt security measures designed to protect their existing computer systems from attack, which could delay adoption of new technologies. Further, if we, our supply chain, or our customers are subject to a future attack, or our technology is used in a third-party attack, we could be subject to costly and ~~time intensive~~time-intensive notice requirements, and it may be necessary for us to take additional extraordinary measures and make additional expenditures to take appropriate responsive and preventative steps. Any of these events could adversely affect our revenue or margins. Moreover, delayed sales, lower margins or lost customers resulting from disruptions caused by cyber-attacks or preventative measures could adversely affect our financial results, stock price and reputation.

Some of our enterprise offerings have extended and complex sales cycles, which can make our sales cycles unpredictable.

Sales cycles for some of our enterprise offerings, including our Adobe Experience Cloud and Adobe Experience Platform solutions and ~~ETLAs~~Enterprise Term License Agreements (“ETLAs”) in our Digital Media business, are multi-phased and complex. The complexity in these sales cycles is due to several factors, including:

the need for our sales representatives to educate customers about the use and benefit of large-scale deployments of our products and services, including technical capabilities, security features, potential cost savings and return on investment;

the desire of organizations to undertake significant evaluation processes to determine their technology requirements prior to making information technology expenditures;

the need for our representatives to spend a significant amount of time assisting potential customers in their testing and evaluation of our products and services;

intensifying competition within the industry;

the negotiation of large, complex, enterprise-wide contracts;

the need for our customers to obtain requisition approvals from various decision makers within their organizations due to the complexity of our solutions touching multiple departments within customers’ organizations; and

customer budget constraints, economic conditions and unplanned administrative delays.

We spend substantial time and expense on our sales efforts without assurance that potential customers will ultimately purchase our solutions. Further, restrictions in place for the COVID-19 pandemic have resulted and could continue to result in our inability to negotiate in person. As we target our sales efforts at larger enterprise customers, these trends are expected to continue and could have a greater impact on our results of operations. Additionally, our enterprise sales pattern has historically been uneven, where a higher percentage of a quarter’s total sales occur during the final weeks of each quarter, which is common in our industry. Our extended sales cycle for these products and services makes it difficult to predict when a given sales cycle will close.

~~Subscription offerings could create risks related to the timing of revenue recognition.~~

We generally recognize revenue from subscription offerings ratably over the terms of their subscription agreements, which range from 1 to 36 months. As a result, most of the subscription revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Any reduction in new or renewed subscriptions in a quarter may not be reflected in our revenue results until a later quarter. Declines in new or renewed subscriptions may decrease our revenue in future quarters. Lower sales, reduced demand for our products and services, and increases in our attrition rate may not be fully reflected in our

results of operations until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenue from subscription-based or hosted services through additional sales in any period, as revenue from new customers will be recognized over the applicable subscription term.

Additionally, in connection with our sales efforts to enterprise customers and our use of ETLAs, a number of factors could affect our revenue, including longer-than-expected sales and implementation cycles, potential deferral of revenue and alternative licensing arrangements. If any of our assumptions about revenue from our subscription-based offerings prove incorrect, our actual results may vary materially from those anticipated.

If our customers fail to renew subscriptions in accordance with our expectations, our future revenue and operating results could suffer.

Our Adobe Experience Cloud, Creative Cloud and Document Cloud offerings typically involve subscription-based offerings pursuant to product and service agreements. Revenue from our subscription customers is generally recognized ratably over the term of their agreements, which typically range from 1 to 36 months. Our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, and customers may not renew their subscriptions at the same or higher level of service, for the same number of seats or for the same duration of time, if at all. Moreover, under certain circumstances, some of our customers have the right to cancel their agreements prior to the expiration of the terms. Our varied customer base combined with the flexibility we offer in the length of our subscription-based agreements complicates our ability to precisely forecast renewal rates. Therefore, we cannot provide assurance that we will be able to accurately predict future customer renewal rates.

Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services, our ability to continue enhancing features and functionality, the reliability (including uptime) of our subscription offerings, the prices of offerings and those offered by our competitors, the actual or perceived information security of our systems and services, decreases in the size of our customer base, reductions in our customers’ spending levels or declines in customer activity as a result of economic downturns or uncertainty in financial ~~markets.~~markets, including as a result of the COVID-19 pandemic. If our customers do not renew their subscriptions or if they renew on terms less favorable to us, our revenue may decline.

We face various risks associated with our operating as a multinational corporation.

As a global business that generates approximately 42% of our total revenue from sales to customers outside of the Americas, we are subject to a number of risks, including:

foreign currency fluctuations and controls;

international and regional economic, political and labor conditions, including any instability or security concerns abroad and the United Kingdom’s vote to exit the European Union (Brexit);

tax laws (including U.S. taxes on foreign subsidiaries);

increased financial accounting and reporting burdens and complexities;

changes in, or impositions of, legislative or regulatory requirements;

changes in laws governing the free flow of data across international borders;

failure of laws to protect our intellectual property rights adequately;

inadequate local infrastructure and difficulties in managing and staffing international operations;

delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers;

the imposition of governmental economic sanctions on countries in which we do business or where we plan to expand our business;

costs and delays associated with developing products in multiple languages;

operating in locations with a higher incidence of corruption and fraudulent business practices; and

other factors beyond our control, such as terrorism, war, natural disasters and pandemics, including fluctuations in the severity and duration of the COVID-19 pandemic and resulting restrictions on business activity which may vary significantly by region.

Some of our third-party business partners have international operations and are also subject to these risks and if our third-party business partners are unable to appropriately manage these risks, our business may be harmed. If sales to any of our customers outside of the Americas are reduced, delayed or canceled because of any of the above factors, our revenue may decline.

Our business could be harmed if we fail to effectively manage critical strategic third-party business relationships.

As our offerings expand and our customer base grows, our relationships with strategic partners become increasingly valuable. If our contractual relationships with these third parties were to terminate, or if we were unable to renew on favorable terms, our business could be harmed. This is especially the case when the third party’s offerings are integrated with our products and services, or where the third party’s offerings are difficult to substitute or replace. Alternative arrangements for such products and services may not be available to us, or on commercially reasonable terms, and we may experience business interruptions upon a transition to an alternative partner. The failure of third parties to provide acceptable products and services or to update their technology, including during the COVID-19 pandemic, may result in a disruption to our business operations and those of our customers, which may reduce our revenues and profits, cause us to lose customers and damage our reputation.

We may not realize the anticipated benefits of past or future investments or acquisitions, and integration of acquisitions may disrupt our business and management.

We may not realize the anticipated benefits of an investment or acquisition of a company, division, product or technology, each of which involves numerous risks. These risks include:

inability to achieve the financial and strategic goals for the acquired and combined businesses;

difficulty in, and the cost of, effectively integrating the operations, technologies, products or services, and personnel of the acquired business;

entry into markets in which we have minimal prior experience and where competitors in such markets have stronger market positions;

disruption of our ongoing business and distraction of our management and other employees from other opportunities and challenges;

inability to retain personnel of the acquired business;

inability to retain key customers, distributors, vendors and other business partners of the acquired business;

inability to take advantage of anticipated tax benefits;

incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

elevated delinquency or bad debt write-offs related to receivables of the acquired business we assume;

increased accounts receivables collection times and working capital requirements associated with acquired business models;

additional costs of bringing acquired companies into compliance with laws and regulations applicable to a multinational corporation;

difficulty in maintaining controls, procedures and policies during the transition and integration;

impairment of our relationships with employees, customers, partners, distributors or third-party providers of our technologies, products or services;

failure of our due diligence processes to identify significant problems, liabilities or other challenges of an acquired company or technology;

exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, such as claims from terminated employees, customers, former stockholders or other third parties;

incurring significant exit charges if products or services acquired in business combinations are unsuccessful;

inability to conclude that our internal controls over financial reporting are effective;

inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions;

the failure of strategic investments to perform as expected or to meet financial projections;

delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product and service offerings; and

incompatibility of business cultures.

Mergers and acquisitions of technology companies are inherently risky. If we do not complete an announced acquisition transaction or integrate an acquired business successfully and in a timely manner, we may not realize the benefits of the acquisition to the extent anticipated, and in certain circumstances an acquisition could harm our financial position.

Our ~~business could~~ability to acquire other businesses or technologies, make strategic investments or integrate acquired businesses effectively may also be ~~harmed if we fail to effectively manage critical strategic third-party business relationships.~~

As our offerings expand and our customer base grows, our relationships with strategic partners become increasingly valuable. If our contractual relationships with these third parties were to terminate, or if we were unable to renew on favorable terms, our business could be harmed. This is especiallyimpaired by the case when the third party’s offerings are integrated with our products and services, or where the third party’s offerings are difficult to substitute or replace. Alternative arrangements for such products and services may not be available to us, or on commercially reasonable terms, and we may experience business interruptions upon a transition to an alternative partner. The failure of third parties to provide acceptable products and services or to update their technology may result in a disruption to our business operations and those of our customers, which may reduce our revenues and profits, cause us to lose customers and damage our reputation.

~~We face various risks associated with our operating as a multinational corporation.~~

~~As a global business that generates approximately 42% of our total revenue from sales to customers outside~~effects of the ~~Americas, we are subject to a number of risks, including:~~

~~foreign currency fluctuations~~COVID-19 pandemic and ~~controls;~~

~~international and regional economic, political and labor conditions, including any instability or security concerns abroad;~~

~~tax laws (including U.S. taxes on foreign subsidiaries);~~

~~increased financial accounting and reporting burdens and complexities;~~

~~changes~~government actions in ~~or impositions of, legislative or regulatory requirements;~~

~~changes in laws governing the free flow of data across international borders;~~

~~failure of laws to protect our intellectual property rights adequately;~~

~~inadequate local infrastructure and difficulties in managing and staffing international operations;~~

~~delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers;~~

~~the imposition of governmental economic sanctions on countries in which we do business or where we plan to expand our business;~~

~~costs and delays associated with developing products in multiple languages;~~

~~operating in locations with a higher incidence of corruption and fraudulent business practices; and~~

~~other factors beyond our control, such as terrorism, war, natural disasters and pandemics.~~

Some of our third-party business partners have international operations and are also subject to these risks and if our third-party business partners are unable to appropriately manage these risks, our business may be harmed. If sales to any of our customers outsidelight of the ~~Americas are reduced, delayed or canceled because of any of the above factors, our revenue may decline.~~pandemic.

We are subject to risks associated with compliance with laws and regulations globally, which may harm our business.

We are a global company subject to varied and complex laws, regulations and customs, both domestically and internationally. These laws and regulations relate to a number of aspects of our business, including trade protection, import and export control, data and transaction processing security, payment card industry data security standards, records management, user-generated content hosted on websites we operate, privacy practices, data residency, corporate governance, anti-trust and competition, employee and third-party complaints, anti-corruption, gift policies, conflicts of interest, securities regulations and other regulatory requirements affecting trade and investment. The application of these laws and regulations to our business is often unclear and may at times conflict. For example, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us, including the Foreign Corrupt Practices Act. We cannot provide assurance that our employees, contractors, agents and business partners will not take actions in violation of our internal policies or U.S. laws. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business, and damage to our reputation.

In addition, approximately 48% of our employees are located outside the United States. Accordingly, we are exposed to changes in laws governing our employee relationships in various U.S. and foreign jurisdictions, including laws and regulations regarding wage and hour requirements, fair labor standards, employee data privacy, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes, which likely would have a direct impact on our operating costs.

Uncertainty about current and future economic conditions and other adverse changes in general political conditions in any of the major countries in which we do business could adversely affect our operating results.

As our business has grown, we have become increasingly subject to the risks arising from adverse changes in economic and political conditions, both domestically and globally, including trends toward protectionism and nationalism and other events beyond our control, such as the COVID-19 pandemic. Additionally, the business downturn caused by the pandemic may adversely impact the businesses and financial health of many of our customers and hurt their creditworthiness. As a result, current or potential customers may be unable to fund software purchases, which could cause them to delay, decrease or cancel purchases of our products and services. Uncertainty about the effects of current and future economic and political conditions on us, our customers, suppliers and partners makes it difficult for us to forecast operating results and to make decisions about future investments. If economic growth in countries where we do business slows, customers may delay or reduce technology purchases, advertising spending or marketing spending, and we have already experienced and may continue to experience the impact of a global decline in advertising spend as the pandemic continues to unfold. This could result in reductions in sales of our products and services, more extended sales cycles, slower adoption of new technologies and increased price competition. Among our customers are government entities, including the U.S. federal government, and our revenue could decline if spending cuts impact the government’s ability to purchase our products and services. Deterioration in economic conditions in any of the countries in which we do business could also cause slower or impaired collections on accounts receivable, which may adversely impact our liquidity and financial condition.

A disruption in financial markets could impair our banking partners, on which we rely for operating cash management and affect our derivative counterparties. Any of these events would likely harm our business, financial condition and results of operations.

Political instability or adverse political developments in or around any of the major countries in which we do business would also likely harm our business, financial condition and results of operations.

Subscription offerings could create risks related to the timing of revenue recognition.

We generally recognize revenue from subscription offerings ratably over the terms of their subscription agreements, which typically range from 1 to 36 months. As a result, most of the subscription revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Any reduction in new or renewed subscriptions in a quarter may not be reflected in our revenue results until a later quarter. Declines in new or renewed subscriptions may decrease our revenue in future quarters. Lower sales, reduced demand for our products and services, and increases in our attrition rate may not be fully reflected in our results of operations until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenue from subscription-based or hosted services through additional sales in any period, as revenue from new customers will be recognized over the applicable subscription term.

Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles, how the principles are interpreted, or the adoption of new accounting standards can have a significant effect on our reported results, and could even retroactively affect previously reported transactions, and may require that we make significant changes to our systems, processes and controls.

Changes resulting from these new standards may result in materially different financial results and may require that we change how we process, analyze and report financial information and that we change financial reporting controls. For additional information regarding these new standards, see the section titled “Recent Accounting Pronouncements Not Yet Effective” within Part ~~II.~~I. Item 8,1, Note 1. Basis of Presentation and Summary of Significant Accounting Policies.

Such changes in accounting principles may have an adverse effect on our business, financial position and income, or cause an adverse deviation from our revenue and profitability targets, which may negatively impact our financial results.

Changes in tax rules and regulations, or interpretations thereof, may adversely affect our effective tax rates.

We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. The U.S. Tax Cuts and Jobs Act (“Tax Act”), enacted into law on December 22, 2017, changed existing U.S. tax law applicable to us and included certain international provisions effective for us starting in fiscal 2019. The applicability and impact of these new tax provisions, ~~is dependent in part on~~and of other international tax law changes, ~~we may make~~will likely require us to respond by making change(s) to our international trading structure. The net impact of such ~~potential~~ change(s) is uncertain ~~and could~~but is anticipated to adversely affect our effective income tax rate and cash ~~flow~~flows in ~~future years.~~years beyond fiscal 2020.

Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to discrete items including, but not limited to, the effects of tax credits, net tax benefits from trading structure changes, tax benefits from stock-based compensation and settlements of tax examinations, and to net tax on earnings from foreign operations. Unanticipated changes in our tax rates could affect our future results

of operations. Our future effective tax rates ~~could~~are likely to be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in our repatriation policy, by changes in or our interpretation of tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by unexpected negative changes in business and market conditions that could reduce certain tax benefits, or by changes in the valuation of our deferred tax assets and liabilities.

In addition, in ~~the United States,~~countries where we conduct business and in jurisdictions in which we are subject to tax, including those covered by governing bodies that enact tax laws applicable to us, such as the European Commission ~~countries in~~of the European Union, ~~and other countries where we do business,~~ we are subject to potential changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe. These countries, ~~and~~ other governmental bodies and intergovernmental economic organizations such as the Organization for Economic Cooperation and Development, have or could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above ~~in our income tax returns filed~~ in such jurisdictions. In the current global tax policy environment, any changes in laws, regulations and interpretations related to these assertions could adversely affect our effective tax rates or result in other costs to us which could adversely affect our operations and financial results.

Moreover, we are subject to the continual examination of our income tax returns by the U.S. Internal Revenue Service and other domestic and foreign tax authorities. These tax examinations are expected to focus on our intercompany transfer pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for adjustments that may result from these examinations. We cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

~~Uncertainty about current~~If our products or platforms are used to create or disseminate objectionable content, particularly misleading content intended to manipulate public opinion, our brand reputation may be damaged, and ~~future economic conditions and other adverse changes in general political conditions in any of the major countries in which we do business could adversely affect our operating results.~~

As our business ~~has grown, we~~and financial results may be harmed.

We believe that our brands have ~~become increasingly subject~~significantly contributed to the ~~risks arising from adverse changes in economic~~success of our business. Maintaining and ~~political conditions, both domestically~~enhancing the brands within Adobe increases our ability to enter new categories and ~~globally. Uncertainty about~~launch new and innovative products that better serve the ~~effects~~needs of ~~current~~our customers. We also believe that maintaining and ~~future economic~~enhancing our brands is critical to expanding our base of customers. Our brands may be negatively affected by the use of our products or services to create or disseminate newsworthy content that is deemed to be misleading, deceptive, or intended to manipulate public opinion (e.g. “DeepFakes”), by the use of our products or services for illicit, objectionable, or illegal ends, or by our failure to respond appropriately and ~~political conditions on us,~~expeditiously to such uses of our ~~customers, suppliers~~products and partners makes it difficult for us to forecast operating results and to make decisions about future investments. If economic growth in countries where we do business slows, customers may delay or reduce technology purchases, advertising spending or marketing spending. This could result in reductions in salesservices. Such uses of our products and services ~~more extended sales cycles, slower adoption~~may also cause us to face claims related to defamation, rights of ~~new technologies~~publicity and ~~increased price competition. Among~~privacy, illegal content, misinformation and personal injury torts. Maintaining and enhancing our ~~customers are government entities, including the U.S. federal government,~~brands may require us to make substantial investments and these investments may not be successful. If we fail to appropriately respond to objectionable content created using our products or services or shared on our platforms, our users may lose confidence in our brands and our ~~revenue could decline if spending cuts impact the government’s ability to purchase our products and services. Deterioration in economic conditions in any of the countries in which we do~~ business ~~could also cause slower or impaired collections on accounts receivable, which may adversely impact our liquidity~~ and financial ~~condition.~~

Political instability or adverse political developments in or around any of the major countries in which we do business would also likely harm our business, results of operations and financial condition.may be adversely affected.

The success of some of our product and service offerings depends on our ability to continue to attract and retain customers of and contributors to our online marketplaces for creative content.

The success of some of our product and service offerings, such as Adobe Stock, depends on our ability to continue to attract new customers and contributors to these online marketplaces for creative content, as well as our ability to continue to retain existing customers and contributors. An increase in paying customers has generally resulted in more content from contributors, which increases the size of our collection and in turn attracts new paying customers. We rely on the functionality and features of our online marketplaces, the size and content of our collection and the effectiveness of our marketing efforts to attract new customers and contributors and retain existing ones. New technologies may render the features of our online marketplaces obsolete, our collection may fail to grow as anticipated or our marketing efforts may be unsuccessful, any of which may adversely affect our results of operations.

Our intellectual property portfolio is a valuable asset and we may not be able to protect our intellectual property rights, including our source code, from infringement or unauthorized copying, use or disclosure.

Our intellectual property portfolio is a valuable asset. Infringement or misappropriation of our patents, trademarks, trade secrets, copyrights and other intellectual property rights could result in lost revenues and ultimately reduce their value. Preventing unauthorized use or infringement of our intellectual property rights is inherently difficult. We actively combat software piracy as we enforce our intellectual property rights, but we nonetheless lose significant revenue due to illegal use of our software. If piracy

activities continue at historical levels or increase, they may further harm our business. We apply for patents in the U.S. and internationally to protect our newly created technology and if we are unable to obtain patent protection for the technology described in our pending patent, or if the patent is not obtained timely, this could result in revenue loss, adverse effects on operations and harm to our business. We offer our products and services in foreign countries and we may seek intellectual property protection from those foreign legal systems. Some of those foreign countries may not have as robust or comprehensive of intellectual property protection laws and schemes as those offered in the U.S. In some foreign countries, the mechanisms to enforce intellectual property rights may be inadequate to protect our technology, which could harm our business.

If unauthorized disclosure of our source code occurs through security breach, cyber-attack or otherwise, we could lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third parties to compete with our products by copying functionality, which could cause us to lose customers and could adversely affect our revenue and operating margins. We also seek to protect our confidential information and trade secrets through the use of non-disclosure agreements with our customers, contractors, vendors and partners. However, there is a risk that our confidential information and trade secrets may be disclosed or published without our authorization, and in these situations, enforcing our rights may be difficult or costly.

We may incur substantial costs defending against third parties alleging that we infringe their proprietary rights.

We have been, are currently, and may in the future be, subject to claims, negotiations and complex, protracted litigation relating to disputes regarding the validity or alleged infringement of third-party intellectual property rights, including patent rights. Intellectual property disputes and litigation are typically costly and can be disruptive to our business operations by diverting the attention of management and key personnel. We may not prevail in every lawsuit or dispute. Third-party intellectual property disputes, including those initiated by patent assertion entities, could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers, including contractual provisions under various license arrangements and service agreements. In addition, we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products, in some cases to fulfill contractual obligations with our customers. Any of these occurrences could significantly harm our business.

We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.

Our operating results are subject to fluctuations in foreign currency exchange rates due to the global scope of our business. Global economic events, including trade disputes, economic sanctions and emerging market volatility, and associated uncertainty may cause currencies to ~~fluctuate.~~fluctuate, and the impact of the COVID-19 pandemic may introduce further volatility. We attempt to mitigate a portion of these risks through foreign currency hedging based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We regularly review our program to partially hedge our exposure to foreign currency fluctuations and make adjustments as necessary. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.

Failure of our third-party customer service and technical support providers to adequately address customers’ requests could harm our business and adversely affect our financial results.

Our customers rely on our customer service support organization to resolve issues with our products and services. We outsource a substantial portion of our customer service and technical support activities to third-party service providers. We depend heavily on these third-party customer service and technical support representatives working on our behalf, and we expect to continue to rely heavily on third parties in the future. This strategy presents risks to our business due to the fact that we may not be able to influence the quality of support as directly as we would be able to do if our own employees performed these activities. Our customers may react negatively to providing information to, and receiving support from, third-party organizations, especially if these third-party organizations are based overseas. If we encounter problems with our third-party customer service and technical support providers, our reputation may be harmed, our ability to sell our offerings could be adversely affected, and we could lose customers and associated revenue.

Revenue, margin or earnings shortfalls or the volatility of the market generally may cause the market price of our stock to decline.

In the past, the market price for our common stock experienced significant fluctuations and it may do so in the future. A number of factors may affect the market price for our common stock, such as:

shortfalls in, or changes in expectations about, our revenue, margins, earnings, Annualized Recurring Revenue (“ARR”), sales of our ~~Adobe~~Digital Experience ~~Cloud~~ offerings, or other key performance metrics;

changes in estimates or recommendations by securities analysts;

whether our results meet analysts’ expectations;

compression or expansion of multiples used by investors and analysts to value high technology SaaS companies;

the announcement of new products or services, product enhancements, service introductions, strategic alliances or significant agreements by us or our competitors;

the loss of large customers or our inability to increase sales to existing customers, retain customers or attract new customers;

recruitment or departure of key personnel;

variations in our or our competitors’ results of operations, changes in the competitive landscape generally and developments in our industry;

general socio-economic, political or market conditions;

macroeconomic conditions and the economic impact of the COVID-19 pandemic; and

unusual events such as significant acquisitions by us or our competitors, divestitures, litigation, regulatory actions and other factors, including factors unrelated to our operating performance.

In addition, the market for technology stocks or the stock market in general may experience uneven investor confidence, which may cause the market price for our common stock to decline for reasons unrelated to our operating performance. Volatility in the market price of a company’s securities for a period of time may increase the company’s susceptibility to securities class action litigation. Oftentimes, this type of litigation is expensive and diverts management’s attention and resources which may adversely affect our business.

Contracting with government entities exposes us to additional risks inherent in the government procurement process.

We provide products and services, directly and indirectly, to a variety of government entities, both domestically and internationally. Risks associated with licensing and selling products and services to government entities include more extended sales and collection cycles, varying governmental budgeting processes and adherence to complex procurement regulations and other government-specific contractual requirements. We may be subject to audits and investigations relating to our government contracts and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, payment of fines, and suspension or debarment from future government business, as well as harm to our reputation and financial results.

If we are unable to recruit and retain key personnel, our business may be harmed.

Much of our future success depends on the continued service, availability and performance of our senior management. These individuals have acquired specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our business, especially if we have not been successful in developing adequate succession plans. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel across all levels of our organization. Our efforts to attract, develop, integrate and retain highly skilled employees with appropriate qualifications may be compounded by intensified restrictions on travel (including during the COVID-19 pandemic), immigration, or the availability of work visas. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense in many areas where our employees are located. We may experience higher compensation costs to retain senior management and experienced personnel that may not be offset by improved productivity or increased sales. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed.

We continue to hire personnel in countries where exceptional technical knowledge and other expertise are offered at lower costs, which increases the efficiency of our global workforce structure and reduces our personnel related expenditures. Nonetheless, as globalization continues, competition for these employees in these countries has increased, which may impact our ability to retain these employees and increase our expenses resulting from competitive compensation. We may continue to expand our international operations and international sales and marketing activities, which would require significant management attention and resources. We may be unable to scale our infrastructure effectively or as quickly as our competitors in these markets, and our revenue may not increase to offset these expected increases in costs and operating expenses, causing our results to suffer.

We believe that a critical contributor to our success to date has been our corporate culture, which we have built to foster innovation, teamwork and employee satisfaction. As we grow, including from the integration of employees and businesses acquired in connection with previous or future acquisitions, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our ability to retain and recruit personnel who are essential to our future success.

Failure to manage our sales, partner and distribution channels effectively could result in a loss of revenue and harm to our business.

We contract with a number of software distributors and other strategic partners, none of which isare individually responsible for a material amount of our total net revenue for any recent period. Nonetheless, if any single agreement with one of our distributors were terminated, any prolonged delay in securing a replacement distributor could have a negative impact on our results of operations.

Successfully managing our indirect distribution channel efforts to reach various customer segments for our products and services is a complex process across the broad range of geographies where we do business or plan to do business. Our distributors and other channel partners are independent businesses that we do not control. Notwithstanding the independence of our channel

partners, we face legal risk and potential reputational harm from the activities of these third parties including, but not limited to, export control violations, workplace conditions, corruption and anti-competitive behavior.

We cannot be certain that our distribution channel will continue to market or sell our products and services effectively. If our partner and distribution ~~channel is~~channels are not successful, we may lose sales opportunities, customers and revenue. Our distributors also sell our competitors’ products and services, and if they favor our competitors’ products or services for any reason, they may fail to market our products or services effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. We also distribute some products and services through our OEM channel, and if our OEMs decide not to bundle our applications on their devices, our results could suffer. In addition, the financial health of our distributors and partners and our continuing relationships with them are important to our success. Some of these distributors and partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency, the inability of such distributors and partners to obtain credit to finance access to or purchases of our products and services, or a delay in paying their obligations to us.

We also sell some of our products and services through our direct sales force. Risks associated with this sales channel include more extended sales and collection cycles associated with direct sales efforts, challenges related to hiring, retaining and motivating our direct sales force, and substantial amounts of ongoing training for sales representatives. Moreover, recent hires may not become as productive as we would like, as in most cases it takes a significant period of time before they achieve full productivity. Our business could be seriously harmed if our expansion efforts do not generate a corresponding significant increase in revenue and we are unable to achieve the efficiencies we anticipate. In addition, the loss of key sales employees could impact our customer relationships and future ability to sell to certain accounts covered by such employees.

If our goodwill or amortizable intangible assets become impaired, then we could be required to record a significant charge to earnings.

GAAP requires us to test for goodwill impairment at least annually. In addition, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include declines in stock price, market capitalization or cash flows, and slower growth rates in our industry. Depending on the results of our review, we could be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets were determined, negatively impacting our results of operations.

We have issued ~~$1.9~~$4.15 billion of notes in debt offerings ~~and have a $2.25 billion term loan,~~ and may incur other debt in the future, which may adversely affect our financial condition and future financial results.

We have ~~$1.9~~$4.15 billion in senior unsecured notes and ~~a $2.25 billion senior unsecured term loan outstanding. We also have~~ a $1 billion senior unsecured revolving credit agreement, which is currently undrawn. This debt may adversely affect our financial condition and future financial results by, among other things:

increasing our vulnerability to adverse changes in general economic and industry conditions;

requiring the dedication of a portion of our expected cash flow from operations to service our ~~indebtedness,~~debt, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and

limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

Our senior unsecured notes and senior unsecured credit ~~agreements impose~~agreement imposes restrictions on us and require us to maintain compliance with specified covenants. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the noteholders or lenders, then, subject to applicable cure periods, any outstanding ~~indebtedness~~debt may be declared immediately due and payable.

In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities, as well as the potential costs associated with a refinancing of our debt. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our revolving credit facility ~~and Term Loan~~ could increase. Downgrades in our credit ratings could also affect the terms of any such financing and restrict our ability to obtain additional financing in the future.

Catastrophic events may disrupt our business.

We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and website for our development, marketing, operations, support, hosted services and sales activities. In addition, some of our businesses rely on third-party hosted services, and we do not control the operation of third-party data center facilities serving our customers from around the world, which increases our vulnerability. A disruption, infiltration or failure of these systems or third-party hosted services in the event of a major earthquake, fire, flood, tsunami or other weather event, power loss, telecommunications failure, software or hardware malfunctions, pandemics (including the COVID-19 pandemic), cyber-attack, war, terrorist attack or other catastrophic event that our disaster recovery plans do not adequately address, could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data. Any of these events could prevent us from fulfilling our customers’ orders or could negatively impact a country or region in which we sell our products, which could in turn decrease that country’s or region’s demand for our products. Our corporate headquarters, a significant portion of our research and development activities, certain of our data centers and certain other critical business operations are located in the San Francisco Bay Area, and additional facilities where we conduct significant operations are located in the Salt Lake Valley Area, both of which are near major earthquake faults. A catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.

Climate change may have a long-term impact on our business.

While we seek to partner with organizations that mitigate their business risks associated with climate change, we recognize that there are inherent risks wherever business is conducted. Access to clean water and reliable energy in the communities where we conduct our business, whether for our offices or for our vendors, is a priority. Our major sites in California, Utah and India are vulnerable to ~~prolonged droughts due~~climate change effects. For example, in California, increasing intensity of drought throughout the state and annual periods of wildfire danger increase the probability of planned power outages in the communities where we work and live. While this danger has a low-assessed risk of disrupting normal business operations, it has the potential impact on employees’ abilities to ~~climate change. In~~commute to work and to stay connected. Climate-related events, including the ~~event~~increasing frequency of ~~a natural disaster that disrupts business due to limited access to these resources, we~~extreme weather events and their impact on U.S., India and other major regions’ critical infrastructure, have the potential to ~~experience losses to~~disrupt our business, our third-party suppliers, and/or the business of our customers, and ~~added~~may cause us to experience higher attrition, losses, and additional costs to maintain or resume operations. To accurately assess and take potential proactive action as appropriate, Adobe is aligned with the guidelines of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures recommendations and the Sustainability Accounting Standards Board environmental metrics.

Our investment portfolio may become impaired by deterioration of the financial markets.

Our cash equivalent and short-term investment portfolio as of May ~~31, 2019~~29, 2020 consisted of asset-backed securities, corporate debt securities, ~~foreign government securities,~~ money market mutual funds, municipal securities and time ~~deposits and U.S. agency securities.~~deposits. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.

Should financial market conditions worsen in the future, including from impacts of the COVID-19 pandemic, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of May ~~31, 2019,~~29, 2020, we had no material impairment charges associated with our short-term investment portfolio, and although we believe our current investment portfolio has little risk of material impairment, we cannot predict future market conditions, market liquidity or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Below is a summary of stock repurchases for the three months ended May ~~31, 2019.~~29, 2020. See Note 1112 of our notes to condensed consolidated financial statements for information regarding our stock repurchase program.


Period		Shares Repurchased	Average Price Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value that May Yet be Purchased Under the Plans					Total Number of Shares Repurchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value that May Yet be Purchased Under the Plans
		(in thousands, except average price per share)									(in millions, except average price per share)
Beginning repurchase authority⁽¹⁾	Beginning repurchase authority⁽¹⁾					$	7,509,146			Beginning repurchase authority⁽¹⁾					$	4,534
March 2, 2019—March 29, 2019
February 29, 2020—March 27, 2020										February 29, 2020—March 27, 2020
Shares repurchased	Shares repurchased	612	$	260.10	612	$	(159,146	)		Shares repurchased	0.9	$	341.71	0.9	$	(284	)
March 30, 2019—April 26, 2019
March 28, 2020 —April 24, 2020										March 28, 2020 —April 24, 2020
Shares repurchased	Shares repurchased	940	$	265.79	940	$	(250,000	)	⁽²⁾	Shares repurchased	0.9	$	308.91	0.9	$	(283	)	⁽²⁾
April 27, 2019—May 31, 2019
April 25, 2020—May 29, 2020										April 25, 2020—May 29, 2020
Shares repurchased	Shares repurchased	903	$	277.19	903	$	(250,263	)	⁽²⁾	Shares repurchased	0.8	$	348.27	0.8	$	(283	)	⁽²⁾
Total	Total	2,455			2,455	$	6,849,737			Total	2.6			2.6	$	3,684

^{_________________________________________}


⁽¹⁾	In May 2018, the Board of Directors granted authority to repurchase up to $8 billion in common stock through the end of fiscal 2021.


⁽²⁾	In March ~~2019,~~2020 we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of ~~$750~~$850 million. As of May ~~31, 2019,~~29, 2020, approximately ~~$249.7~~$284 million of the prepayment remained under this agreement.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

INDEX TO EXHIBITS

Incorporated by Reference**
Exhibit
Number
Exhibit Description Form Filing Date Exhibit Number SEC File No.
Filed
Herewith

3.1

Restated Certificate of Incorporation of Adobe
8-K 4/26/11 3.3
000-15175

3.2

Certificate of Amendment to Restated Certificate of Adobe
8-K 10/9/18 3.1
000-15175

3.3

Amended and Restated Bylaws
8-K 10/9/18 3.2
000-15175

4.1

Specimen Common Stock Certificate
10-K 1/25/19 4.1
000-15175

4.2

Form of Indenture dated as of January 25, 2010 by and between Adobe and Wells Fargo Bank, National Association, as trustee
S-3 2/26/16 4.1
333-209764

4.3

Form of Global Note for Adobe Systems Incorporated’s 4.750% Notes due 2020, together with Form of Officer’s Certificate setting forth the terms of the Note
8-K 1/26/10 4.1
000-15175

4.4

Form of Global Note for Adobe’s 3.250% Notes due 2025, together with Form of Officer’s Certificate setting forth the terms of the Note
8-K 1/26/15 4.1
000-15175

10.1A

Amended 1994 Performance and Restricted Stock Plan*
10-Q 4/9/10 10.1
000-15175

10.1B

Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*
10-K 1/23/09 10.3
000-15175

10.1C

Form of Restricted Stock Unit Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*
10-K 1/26/12 10.13
000-15175

10.2

1997 Employee Stock Purchase Plan, as amended*
10-Q 6/29/16 10.3
000-15175

10.3A

2003 Equity Incentive Plan, as amended*
8-K 4/13/18 10.2
000-15175

10.3B

Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan*
8-K 12/20/10 99.4
000-15175

10.3C

Form of Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan*
10-Q 10/7/04 10.11
000-15175

10.3D

Form of RSU Grant Notice and Award Agreement pursuant to 2003 Equity Incentive Plan*
8-K 1/26/18 10.6
000-15175

10.3E

Form of Restricted Stock Unit Grant Notice and Award Agreement pursuant to 2003 Equity Incentive Plan*
8-K 1/28/19 10.5
000-15175

10.3F

2016 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K 1/29/16 10.2
000-15175

Incorporated by Reference**
Exhibit
Number
Exhibit Description Form Filing Date Exhibit Number SEC File No.
Filed
Herewith

10.3G

Form of 2016 Performance Share Award Grant Notice and Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2016 Performance Share Program)*
8-K 1/29/16 10.3
000-15175

10.3H

2017 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K 1/27/17 10.2
000-15175

10.3I

Form of 2017 Performance Share Award Grant Notice and Award Agreement pursuant to 2017 Performance Share Program and 2003 Equity Incentive Plan*
8-K 1/27/17 10.3
000-15175

10.3J

2018 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K 1/26/18 10.2
000-15175

10.3K

Form of 2018 Performance Share Award Grant Notice and Award Agreement pursuant to 2018 Performance Share Program and 2003 Equity Incentive Plan*
8-K 1/26/18 10.3
000-15175

10.3L

2019 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K 1/28/19 10.2
000-15175

10.3M

Form of 2019 Performance Share Award Grant Notice and Award Agreement pursuant to 2019 Performance Share Program and 2003 Equity Incentive Plan*
8-K 1/28/19 10.3
000-15175

10.3N

Form of Director Initial Grant Restricted Stock Unit Award Agreement used in connection with the 2003 Equity Incentive Plan*
8-K 12/20/10 99.6
000-15175

10.3O

Form of Director Annual Grant Restricted Stock Unit Award Agreement used in connection with the 2003 Equity Incentive Plan*
8-K 12/20/10 99.7
000-15175

10.3P

Form of Director Annual Grant Stock Option Agreement used in connection with the 2003 Equity Incentive Plan*
8-K 12/20/10 99.8
000-15175

10.4

Retention Agreement between Adobe and Shantanu Narayen, effective December 5, 2014*
8-K 12/11/14 10.2
000-15175

10.5

Form of Indemnity Agreement*
10-Q 6/26/09 10.12
000-15175

10.6

Adobe Deferred Compensation Plan, as Amended and Restated*
10-K 1/20/15 10.19
000-15175

10.7

Credit Agreement, dated as of October 17, 2018, among Adobe Inc. and certain subsidiaries as Borrowers, JPMorgan Chase Bank, N.A., Wells Fargo Bank National Association, U.S Bank National Association, Societe Generale S.A. as Co-Syndication Agents, Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the Other Lenders Party Thereto
8-K 10/19/18 10.1
000-15175

Incorporated by Reference**
Exhibit
Number
Exhibit Description Form Filing Date Exhibit Number SEC File No.
Filed
Herewith

10.8

Credit Agreement, dated as of October 17, 2018, among Adobe Inc. as Borrower, JPMorgan Chase Bank, N.A. as Syndication Agent, Wells Fargo Bank National Association as Documentation Agent, Bank of America, N.A. as Administrative Agent, and the Other Lenders Party Thereto
8-K 10/19/18 10.2
000-15175

10.9

Omniture, Inc. 2006 Equity Incentive Plan and related forms*
10-Q 8/6/09 10.3
000-52076

10.10

Omniture, Inc. 2008 Equity Incentive Plan and related forms*
10-K 2/27/09 10.10
000-52076

10.11

Demdex, Inc. 2008 Stock Plan, as amended*
S-8 1/27/11 99.1
333-171902

10.12

EchoSign, Inc. 2005 Stock Plan, as amended*
S-8 7/29/11 99.1
333-175910

10.13

TypeKit, Inc. 2009 Equity Incentive Plan, as amended*
S-8 10/7/11 99.1
333-177229

10.14

Auditude, Inc. 2009 Equity Incentive Plan, as amended*
S-8 11/18/11 99.1
333-178065

10.15
��
Efficient Frontier, Inc. 2003 Stock Option/Stock Issuance Plan, as Amended and Restated*
S-8 1/27/12 99.1
333-179221

10.16A

Behance, Inc. 2012 Equity Incentive Plan*
S-8 1/23/13 99.1
333-186143

10.16B

Amendment No. 1 to the Behance, Inc. 2012 Equity Incentive Plan*
S-8 1/23/13 99.2
333-186143

10.17

Neolane 2008 Stock Option Plan*
S-8 8/27/13 99.1
333-190846

10.18

2012 Neolane Stock Option Plan for The United States*
S-8 8/27/13 99.2
333-190846

10.19A

Aviary, Inc. 2008 Stock Plan, as amended*
S-8 9/26/14 99.1
333-198973

10.19B

Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting)*
S-8 9/26/14 99.2
333-198973

10.19C

Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting, Non- U.S.)*
S-8 9/26/14 99.3
333-198973

10.20

Picasso Acquisition Holding 1, Inc. 2012 Stock Option and Grant Plan*
S-8 3/13/15 99.1

333-202732

10.21

TubeMogul, Inc. 2007 Equity Compensation Plan, as amended, and forms of agreement thereunder††*
S-1 3/26/14 10.2
333-194817

10.22

TubeMogul, Inc. 2014 Equity Incentive Plan, and forms of agreement thereunder††*
S-1A 7/7/14 10.3
333-194817

Incorporated by Reference**
Exhibit
Number
Exhibit Description Form Filing Date Exhibit Number SEC File No.
Filed
Herewith

10.23

MagentoTech LLC Unit Option Plan, as amended*
S-8 6/27/18 99.14
333-225922

10.24

Adobe Systems Incorporated 2017 Executive Severance Plan in the Event of a Change of Control*
8-K 12/14/17 10.1
000-15175

10.25

2016 Executive Annual Incentive Plan*
8-K 1/29/16 10.5
000-15175

10.26

2016 Executive Cash Performance Bonus Plan*
8-K 1/29/16 10.4
000-15175

10.27

2017 Executive Annual Incentive Plan*
8-K 1/27/17 10.5
000-15175

10.28

2018 Executive Annual Incentive Plan*
8-K 1/26/18 10.5
000-15175

10.29

2019 Executive Annual Incentive Plan*
8-K 1/28/19 10.4
000-15175

10.30

Description of 2016 Director Compensation*
10-K 1/19/16 10.32
000-15175

10.31

Description of 2017 Director Compensation*
10-K 1/20/17 10.32
000-15175

10.32

Description of 2018 Director Compensation*
10-K 1/22/18 10.29
000-15175

10.33

Description of 2019 and 2020 Director Compensation*
8-K 1/24/19 10.1
000-15175

10.34

Share Purchase Agreement by and among: Adobe, a Delaware corporation; Milestone Topco, Inc., a Delaware corporation; Vista Equity Partners Fund V, L.P., a Delaware limited partnership; Vista Equity Partners Fund V-A, L.P., a Cayman Island exempted limited partnership; Vista Equity Partners Fund V-B, L.P., a Cayman Island exempted limited partnership; VEPF V FAF, L.P., a Delaware limited partnership; Vista Equity Partners Fund V Executive, L.P., a Delaware limited partnership; Vista Equity Associates V, LLC, a Delaware limited liability company; Vista Equity Partners Fund VI, L.P., a Cayman Island exempted limited partnership; Vista Equity Partners Fund VI-A, L.P., a Cayman Island exempted limited partnership; VEPF VI FAF, L.P., a Cayman Island exempted limited partnership; and Vista Equity Partners Management, LLC, a Delaware limited liability company, as the Sellers’ Representative
8-K 9/21/18 2.1
000-15175

10.35A

2019 Equity Incentive Plan*
8-K 4/12/19 10.1
000-15175

10.35B

Form of Restricted Stock Unit Grant Notice and Award Agreement pursuant to 2019 Equity Incentive Plan*
X

10.35C

Form of Director Annual Grant Restricted Stock Unit Grant Notice and Award Agreement pursuant to 2019 Equity Incentive Plan*
X

31.1

Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934

X

Incorporated by Reference**

~~Exhibit~~

~~Number~~

~~Exhibit Description~~

~~Form~~

~~Filing Date~~

~~Exhibit Number~~

~~SEC File No.~~

~~Filed~~

~~Herewith~~

~~31.2~~

~~Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934~~

~~32.1~~

~~Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†~~

~~32.2~~

~~Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†~~

~~101.INS~~

~~XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~

~~101.SCH~~

~~XBRL Taxonomy Extension Schema~~

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation~~

~~101.LAB~~

~~XBRL Taxonomy Extension Labels~~

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation~~

~~101.DEF~~

~~XBRL Taxonomy Extension Definition~~

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

Filing Date

Exhibit Number

SEC File No.

Filed

Herewith

3.1

Restated Certificate of Incorporation of Adobe

8-K

4/26/11

3.3

000-15175

3.2

Certificate of Amendment to Restated Certificate of Adobe

8-K

10/9/18

3.1

000-15175

3.3

Amended and Restated Bylaws

8-K

10/9/18

3.2

000-15175

10.1

2020 Employee Stock Purchase Plan*

8-K

4/10/20

10.1

000-15175

10.2

2020 Executive Annual Incentive Plan, as amended and restated*

8-K

6/11/20

10.1

000-15175

31.1

Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2

Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1

Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†

32.2

Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†

101.INS

Inline XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation

101.LAB

Inline XBRL Taxonomy Extension Labels

101.PRE

Inline XBRL Taxonomy Extension Presentation

101.DEF

Inline XBRL Taxonomy Extension Definition

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

___________________________

Compensatory plan or arrangement.

~~References to Exhibits 10.9 and 10.10 are to filings made by Omniture, Inc.~~

†

The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

††

~~References to Exhibits 10.21 and 10.22 are to filings made by TubeMogul, Inc.~~

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	ADOBE INC.

	By:	/s/ JOHN MURPHY
		John Murphy
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

Date: June ~~26, 2019~~24, 2020

SUMMARY OF TRADEMARKS

The following trademarks of Adobe Inc. or its subsidiaries, which may be registered in the United States and/or other countries, are referenced in this Form 10-Q:

Adobe

Acrobat

Allegorithmic

Behance

Creative Cloud

Magento

Marketo

Reader

All other trademarks are the property of their respective owners.

7463



	As of November 30, 2018		ASC 606 Adoption Adjustments			As of December 1, 2018
Assets
Trade receivables, net of allowances for doubtful accounts	$	1,315,578	$	43,028		$	1,358,606
Prepaid expenses and other current assets	312,499		186,220			498,719
Other assets	186,522		273,421			459,943
Liabilities and Stockholders’ Equity
Accrued expenses	1,163,185		30,358			1,193,543
Deferred revenue, current	2,915,974		(52,842		)	2,863,132
Deferred income taxes	46,702		82,834			129,536
Retained earnings	$	11,815,597	$	442,319		$	12,257,916



	As reported		Adjustments			Balances without ASC 606 adoption impact
Revenue
Subscription	$	2,456,097	$	(6,444	)	$	2,449,653
Product	152,816		(19,148		)	133,668
Services and support	135,367		(304		)	135,063
Total revenue	2,744,280		(25,896		)	2,718,384
Operating expenses
Sales and marketing	848,927		8,068			856,995
Provision for income taxes	78,179		(3,747		)	74,432
Net income	$	632,593	$	(30,370	)	$	602,223
Basic net income per share	$	1.30	$	(0.06	)	$	1.24
Diluted net income per share	$	1.29	$	(0.07	)	$	1.22



(in thousands)	Amount			Weighted Average Useful Life (years)
Customer contracts and relationships	$	577,500		11
Purchased technology	444,500			7
Backlog	105,500			2
Non-competition agreements	12,100			2
Trademarks	328,500			9
Total identifiable intangible assets	1,468,100
Net liabilities assumed	(194,588		)	N/A
Goodwill⁽¹⁾	3,459,256			N/A
Total estimated purchase price	$	4,732,768



	2019					2018
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts		Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾	$	16,765		$	—	$	31,104		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾	$	8,990		$	—	$	337		$	—
Net gain (loss) recognized in income⁽³⁾	$	(12,127	)	$	—	$	(12,084	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾	$	—		$	2,887	$	—		$	2,784



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2019
Restricted stock units outstanding	8,792	1.44	$	2,381.8
Restricted stock units expected to vest	7,950	1.37	$	2,153.5
2018
Restricted stock units outstanding	9,046	1.36	$	2,273.3
Restricted stock units expected to vest	8,224	1.30	$	2,066.9



			Incorporated by Reference**
Exhibit Number		Exhibit Description	Form	Filing Date	Exhibit Number	SEC File No.	Filed Herewith

10.8		Credit Agreement, dated as of October 17, 2018, among Adobe Inc. as Borrower, JPMorgan Chase Bank, N.A. as Syndication Agent, Wells Fargo Bank National Association as Documentation Agent, Bank of America, N.A. as Administrative Agent, and the Other Lenders Party Thereto	8-K	10/19/18	10.2	000-15175

10.9		Omniture, Inc. 2006 Equity Incentive Plan and related forms*	10-Q	8/6/09	10.3	000-52076

10.10		Omniture, Inc. 2008 Equity Incentive Plan and related forms*	10-K	2/27/09	10.10	000-52076

10.11		Demdex, Inc. 2008 Stock Plan, as amended*	S-8	1/27/11	99.1	333-171902

10.12		EchoSign, Inc. 2005 Stock Plan, as amended*	S-8	7/29/11	99.1	333-175910

10.13		TypeKit, Inc. 2009 Equity Incentive Plan, as amended*	S-8	10/7/11	99.1	333-177229

10.14		Auditude, Inc. 2009 Equity Incentive Plan, as amended*	S-8	11/18/11	99.1	333-178065

10.15	��	Efficient Frontier, Inc. 2003 Stock Option/Stock Issuance Plan, as Amended and Restated*	S-8	1/27/12	99.1	333-179221

10.16A		Behance, Inc. 2012 Equity Incentive Plan*	S-8	1/23/13	99.1	333-186143

10.16B		Amendment No. 1 to the Behance, Inc. 2012 Equity Incentive Plan*	S-8	1/23/13	99.2	333-186143

10.17		Neolane 2008 Stock Option Plan*	S-8	8/27/13	99.1	333-190846

10.18		2012 Neolane Stock Option Plan for The United States*	S-8	8/27/13	99.2	333-190846

10.19A		Aviary, Inc. 2008 Stock Plan, as amended*	S-8	9/26/14	99.1	333-198973

10.19B		Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting)*	S-8	9/26/14	99.2	333-198973

10.19C		Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting, Non- U.S.)*	S-8	9/26/14	99.3	333-198973

10.20		Picasso Acquisition Holding 1, Inc. 2012 Stock Option and Grant Plan*	S-8	3/13/15	99.1	333-202732

10.21		TubeMogul, Inc. 2007 Equity Compensation Plan, as amended, and forms of agreement thereunder††*	S-1	3/26/14	10.2	333-194817

10.22		TubeMogul, Inc. 2014 Equity Incentive Plan, and forms of agreement thereunder††*	S-1A	7/7/14	10.3	333-194817