Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.

ACQUISITIONS

During fiscal 2018, we completed our acquisitions of Marketo, a privately held marketing cloud platform company, for $4.74 billion and Magento, a privately held commerce platform company, for $1.64 billion. As of the end of fiscal 2018, we are continuing to integrate Marketo and Magento into our Digital Experience reportable segment.

During fiscal 2017, we completed our acquisition of TubeMogul, a publicly held video advertising platform company, for $560.8 million. As of the end of fiscal 2018, we have integrated TubeMogul into our Digital Experience reportable segment.

We also completed other immaterial business acquisitions during the fiscal years presented.

See Note 2 of our Notes to Consolidated Financial Statements for pro forma financial information related to the Marketo acquisition. Pro forma information has not been presented for our other acquisitions during the fiscal years presented as the impact to our Consolidated Financial Statements was not material.

Subsequent to November 30, 2018, we acquired the remaining interest in Allegorithmic SAS (“Allegorithmic”), a privately held 3D editing and authoring software company for gaming and entertainment, for approximately $105.0 million in cash consideration. Allegorithmic will be integrated into our Digital Media reportable segment for financial reporting purposes in the first quarter of fiscal 2019.

See Note 2 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our 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 business combinations and income taxes have the greatest potential impact on our 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, 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 materially from actual results.

Business Combinations

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:

•	future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;

•	historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;

•	the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio;

•	the expected use of the acquired assets; and

•	discount rates.

In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed. The estimated fair value of these obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities.

Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, 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. We expect future examinations 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 potential adjustments that may result from such examinations. We believe such estimates to be reasonable; however, the final determination of any of these examinations could significantly impact the amounts provided for income taxes in our Consolidated Financial Statements.

Recent Accounting Pronouncements

See Note 1 of our Notes to Consolidated Financial Statements for information regarding recent accounting pronouncements that are of significance, or potential significance to us.

RESULTS OF OPERATIONS

Overview of 2018

For fiscal 2018, we reported strong financial results consistent with the continued execution of our long-term plans for our two strategic growth areas, Digital Media and Digital Experience (formerly Digital Marketing), while continuing to market and license a broad portfolio of products and solutions.

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-based services including storage and syncing of files across users’ machines, 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 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 cloud-based document services, including 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 and unbilled deferred revenue 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 fiscal 2018 are based on currency rates set at the start of fiscal 2018 and held constant throughout the year. We calculate ARR as follows:

Creative ARR	Annual Value of Creative Cloud Subscriptions and Services + Annual Digital Publishing Suite Contract Value + 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

Creative ARR exiting fiscal 2018 was $6.03 billion, up from $4.77 billion at the end of fiscal 2017. Document Cloud ARR exiting fiscal 2018 was $801 million, up from $614 million at the end of fiscal 2017. Total Digital Media ARR grew to $6.83 billion at the end of fiscal 2018, up from $5.39 billion at the end of fiscal 2017. Revaluing our ending ARR for fiscal 2018 using currency rates at the beginning of fiscal 2019, our Digital Media ARR at the end of fiscal 2018 would be $6.71 billion or approximately $123 million lower than the ARR reported above.

Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in fiscal 2018 was $5.34 billion, up from $4.17 billion in fiscal 2017 and representing 28% year-over-year growth. Document Cloud revenue in fiscal 2018 was $981.8 million, up from $836.7 million in fiscal 2017 and representing 17% year-over-year revenue growth as we continue to transition Document Cloud to a subscription-based model. Total Digital Media segment revenue grew to $6.33 billion in fiscal 2018, up from $5.01 billion in fiscal 2017 and representing 26% year-over-year growth.

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 Adobe Experience Cloud, consists of the following cloud offerings:

•	Adobe Advertising Cloud—delivers an end-to-end platform for managing advertising across traditional TV and digital formats, and simplifies the delivery 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.

•	Magento 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. This cloud offering was integrated into the Adobe Experience Cloud after our acquisition of privately held Magento in June 2018.

In addition to chief marketing officers, chief revenue officers and digital marketers, users of our Adobe Experience Cloud solutions include advertisers, campaign managers, digital marketers, publishers, data analysts, content managers, social marketers and marketing 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.

In October 2018, we acquired privately held marketing cloud platform company Marketo. We began integrating Magento, as discussed above, and Marketo into our Digital Experience business in the second half of fiscal 2018.

We utilize a direct sales force to market and license our Adobe 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 Experience Cloud revenue of $2.44 billion in fiscal 2018, up from $2.03 billion in fiscal 2017 which represents 20% year-over-year growth. Driving the increase in Adobe Experience Cloud revenue was the increase in subscription revenue across our offerings which grew to $1.95 billion in fiscal 2018 from $1.55 billion in fiscal 2017, representing 26% year-over-year growth. Also contributing to the increase in Digital Experience subscription revenue, to a lesser extent, was revenue associated with Magento’s commerce platform offerings and Marketo’s marketing cloud platform offerings. We expect that the addition of Marketo and Magento, and continued demand across our portfolio of Adobe Experience Cloud solutions, will drive revenue growth in future years.

Financial Performance Summary for Fiscal 2018

•	Total Digital Media ARR of approximately $6.83 billion as of November 30, 2018 increased by $1.44 billion, or 27%, from $5.39 billion as of December 1, 2017. The change in our Digital Media ARR was primarily due to strong adoption of our Creative Cloud and Adobe Document Cloud offerings.

•	Creative revenue of $5.34 billion increased by $1.17 billion, or 28%, during fiscal 2018, from $4.17 billion in fiscal 2017. The increase was primarily due to the increase in subscription revenue associated with our Creative Cloud offerings.

•	Adobe Experience Cloud revenue of $2.44 billion increased by $413.4 million, or 20%, during fiscal 2018, from $2.03 billion in fiscal 2017. The increase was primarily due to the increase in subscription revenue across our offerings.

•	Our total deferred revenue of $3.05 billion as of November 30, 2018 increased by $559.1 million, or 22%, from $2.49 billion as of December 1, 2017. The increase was primarily due to increases in new contracts and the timing of renewals related to our Digital Media offerings and, to a lesser extent, deferred revenue assumed from Magento and Marketo.

•	Cost of revenue of $1.19 billion increased by $184.5 million, or 18%, during fiscal 2018, from $1.01 billion in fiscal 2017. The increase was primarily due to increases in media rebill costs associated with our Advertising Cloud offerings and hosting services and data center costs.

•	Operating expenses of $4.99 billion increased by $871.7 million, or 21%, during fiscal 2018, from $4.12 billion in fiscal 2017. The increase was primarily due to increases in base compensation and related benefits costs and stock-based compensation expense associated with headcount growth.

•	Net income of $2.59 billion increased by $896.8 million, or 53%, during fiscal 2018 from $1.69 billion in fiscal 2017 primarily due to increases in subscription revenue and, to a lesser extent, the decrease in the provision for income taxes.

•	Net cash flow from operations of $4.03 billion during fiscal 2018 increased by $1.12 billion, or 38%, from $2.91 billion during fiscal 2017 primarily due to higher net income.

Revenue (dollars in millions)

Revenue for fiscal 2016 benefited from an extra week in the first quarter of fiscal 2016 due to our 52/53-week financial calendar whereby fiscal 2016 was a 53-week year compared with fiscal 2018 and 2017, which were 52-week years.

		Fiscal 2018				Fiscal 2017				Fiscal 2016				% Change 2018-2017			% Change 2017-2016
Subscription		$	7,922.2			$	6,133.9			$	4,584.8			29	%		34	%
Percentage of total revenue		88		%		84		%		78		%
Product		622.1				706.7				800.5				(12	)%		(12	)%
Percentage of total revenue		7		%		10		%		14		%
Services and support		485.7				460.9				469.1				5	%		(2	)%
Percentage of total revenue		5		%		6		%		8		%
Total revenue		$	9,030.0			$	7,301.5			$	5,854.4			24	%		25	%

Our subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings including Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud services. We recognize subscription revenue ratably over the term of agreements with our customers, beginning with commencement of service.

We have the following reportable segments—Digital Media, Digital Experience and Publishing. Subscription revenue by reportable segment for fiscal 2018, 2017 and 2016 is as follows (dollars in millions):

		Fiscal 2018				Fiscal 2017				Fiscal 2016				% Change 2018-2017			% Change 2017-2016
Digital Media		$	5,857.7			$	4,480.8			$	3,370.8			31	%		33	%
Digital Experience		1,949.3				1,552.5				1,123.2				26	%		38	%
Publishing		115.2				100.6				90.8				15	%		11	%
Total subscription revenue		$	7,922.2			$	6,133.9			$	4,584.8			29	%		34	%

In fiscal 2018, we moved our legacy enterprise offerings from our Digital Experience segment into Publishing. Prior year information in the table above has been reclassified to reflect this change. See below for additional details.

Our services and support revenue is comprised of consulting, training and maintenance and support, primarily related to the licensing of our enterprise offerings and the sale of our hosted Adobe Experience Cloud services. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. 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.

Segments

In fiscal 2018, we categorized our products into the following reportable segments:

•

Digital Media—Our Digital Media segment provides tools and solutions that enable individuals, small and medium businesses and enterprises to create, publish, promote and monetize their digital content anywhere. Our customers include traditional content creators, web application developers and digital media professionals, as well as their management in marketing departments and agencies, companies and publishers. Our customers also include knowledge workers who create, collaborate on and distribute documents.

•

Digital Experience—Our Digital Experience segment provides solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. Our customers include digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers, chief information officers and chief revenue officers. This segment also includes our Marketo marketing cloud platform offerings and Magento commerce platform offerings, both acquired in fiscal 2018.

•	Publishing—Our Publishing segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to our legacy type and OEM printing businesses. It also includes our web conferencing and document and forms platforms.

In fiscal 2018, we moved our legacy enterprise offerings—Adobe Connect web conferencing platform and Adobe LiveCycle, an enterprise document and forms platform—from our Digital Experience segment into Publishing, in order to more closely align our Digital Experience business with the strategic growth opportunity. Prior year information in the tables below have been reclassified to reflect this change.

Segment Information (dollars in millions)

		Fiscal 2018				Fiscal 2017				Fiscal 2016				% Change 2018-2017			% Change 2017-2016
Digital Media		$	6,325.3			$	5,010.6			$	3,941.0			26	%		27	%
Percentage of total revenue		70		%		69		%		67		%
Digital Experience		2,443.7				2,030.3				1,631.4				20	%		24	%
Percentage of total revenue		27		%		28		%		28		%
Publishing		261.0				260.6				282.0				—	%		(8	)%
Percentage of total revenue		3		%		3		%		5		%
Total revenue		$	9,030.0			$	7,301.5			$	5,854.4			24	%		25	%

Fiscal 2018 Revenue Compared to Fiscal 2017 Revenue

Digital Media

Revenue from Digital Media increased $1.31 billion during fiscal 2018 as compared to fiscal 2017, primarily driven by increases in revenue associated with our Creative offerings.

Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during fiscal 2018. The increase was primarily due to an increase in subscription revenue across all of our Creative Cloud offerings driven by the increase in net new subscriptions.

Adobe Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during fiscal 2018 as compared to fiscal 2017 primarily due to increases in subscriptions revenue driven by strong adoption of our Document Cloud.

Digital Experience

Revenue from Digital Experience increased $413.4 million during fiscal 2018, as compared to fiscal 2017 primarily due to subscription revenue growth associated with our Adobe Experience Cloud offerings. The increase in subscription revenue was primarily driven by continued adoption of our AEM offerings which is part of our Marketing Cloud and growth in revenue associated with our Analytics Cloud. Also contributing to the increase in subscription revenue, but to a lesser extent, was revenue associated with our Magento Commerce Cloud and Advertising Cloud.

Fiscal 2017 Revenue Compared to Fiscal 2016 Revenue

Digital Media

Revenue from Digital Media increased $1.07 billion during fiscal 2017 as compared to fiscal 2016, primarily driven by increases in revenue associated with our creative offerings.

Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during fiscal 2017 as compared to fiscal 2016. The increase was primarily due to an increase in subscription revenue associated with our Creative Cloud offerings driven by increases in individual, team and enterprise subscriptions. Also contributing to the increase in revenue was revenue growth associated with our Creative Cloud Photography Plan subscription offering.

Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during fiscal 2017 as compared to fiscal 2016 primarily due to increases in Document Cloud subscription revenue, offset in part by expected declines in revenue associated with our perpetually licensed Acrobat offering. Also contributing to the increase in Document Cloud revenue was an increase in Adobe Sign revenue.

Digital Experience

Revenue from Digital Experience increased $398.9 million during fiscal 2017, as compared to fiscal 2016 primarily due to subscription revenue growth associated with our Adobe Experience Cloud. The increase in subscription revenue was driven by strong performance with our Marketing Cloud offerings, which include AEM and Adobe Campaign, and our Analytics Cloud offerings, which includes Audience Manager. Also contributing to the increase in Adobe Experience Cloud revenue were increases in revenue associated with our Advertising Cloud offerings, including TubeMogul which we acquired in fiscal 2017.

Geographical Information (dollars in millions)

		Fiscal 2018				Fiscal 2017				Fiscal 2016				% Change 2018-2017			% Change 2017-2016
Americas		$	5,116.8			$	4,216.5			$	3,400.1			21	%		24	%
Percentage of total revenue		57		%		58		%		58		%
EMEA		2,550.0				1,985.1				1,619.2				28	%		23	%
Percentage of total revenue		28		%		27		%		28		%
APAC		1,363.2				1,099.9				835.1				24	%		32	%
Percentage of total revenue		15		%		15		%		14		%
Total revenue		$	9,030.0			$	7,301.5			$	5,854.4			24	%		25	%

Fiscal 2018 Revenue by Geography Compared to Fiscal 2017 Revenue by Geography

Overall revenue during fiscal 2018 increased in all geographic regions as compared to fiscal 2017 primarily 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. Further, the overall increase in EMEA revenue during fiscal 2018 was positively impacted by the relative weakening of the U.S. Dollar against EMEA currencies as discussed below.

Fiscal 2017 Revenue by Geography Compared to Fiscal 2016 Revenue by Geography

Overall revenue during fiscal 2017 increased in all geographic regions as compared to fiscal 2016 primarily 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. The overall increase in EMEA revenue was slightly offset by declines due to the relative strength of the U.S. Dollar against EMEA currencies as discussed below.

Included in the overall change in revenue for fiscal 2018 and fiscal 2017 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)	Fiscal 2018				Fiscal 2017
Revenue impact:	Increase/(Decrease)
Euro	$	96.3			$	(2.3	)
British Pound	21.6				(46.1		)
Japanese Yen	2.8				4.0
Other currencies	1.9				6.1
Total revenue impact	122.6				(38.3		)
Hedging impact:
Euro	29.1				13.7
British Pound	11.3				7.1
Japanese Yen	8.2				12.1
Total hedging impact	48.6				32.9
Total impact	$	171.2			$	(5.4	)

During fiscal 2018, the U.S. Dollar weakened against EMEA currencies, which positively impacted revenue in U.S. Dollar equivalents. In addition, we had $48.6 million in hedging gains from our EMEA currency hedging programs during fiscal 2018.

During fiscal 2017, the U.S. Dollar strengthened against the British Pound, which negatively impacted revenue in EMEA measured in U.S. Dollar equivalents. The net foreign currency impact to revenue was offset in part by hedging gains from our EMEA and Japanese Yen currencies hedging programs during fiscal 2017.

See Note 17 of our Notes to the Consolidated Financial Statements for further geographic information.

Backlog

Deferred revenue on our consolidated balance sheet consists of billings and payments received in advance of revenue recognition for our products and solutions and does not represent the total contract value of existing annual or multi-year, non-cancellable commercial subscription, SaaS and managed services agreements or government contracts with fiscal funding clauses. Unbilled deferred revenue represents expected future billings that are contractually committed under our existing subscription, SaaS and managed services agreements that have not been invoiced and are not recorded in deferred revenue within our financial statements. Our presentation of unbilled deferred revenue backlog may differ from that of other companies in the industry. As of November 30, 2018, we had unbilled deferred revenue backlog, including that of our fiscal 2018 acquisitions, of approximately $5.05 billion of which approximately 40% to 50% is not reasonably expected to be billed during fiscal 2019. Comparatively, we had unbilled deferred revenue backlog of approximately $3.94 billion as of December 1, 2017, of which approximately 40% to 50% was not reasonably expected to be billed during fiscal 2018.

We expect that the amount of unbilled deferred revenue backlog will change from period to period due to certain factors, including the timing and duration of large customer subscriptions, SaaS and managed service agreements, varying billing cycles of these agreements, the timing of customer renewals, the timing of when unbilled deferred revenue backlog is to be billed, changes in customer financial circumstances and foreign currency fluctuations. Additionally, the unbilled deferred revenue backlog for multi-year subscription agreements that are billed annually is typically higher at the beginning of the contract period, lower prior to renewal and typically increases when the agreement is renewed. Accordingly, fluctuations in unbilled deferred revenue backlog may not be a reliable indicator of future business prospects and the related revenue associated with these contractual commitments.

Cost of Revenue (dollars in millions)

		Fiscal 2018				Fiscal 2017				Fiscal 2016				% Change 2018-2017			% Change 2017-2016
Subscription		$	807.2			$	623.0			$	461.9			30	%		35	%
Percentage of total revenue		9		%		9		%		8		%
Product		46.0				57.1				68.9				(19	)%		(17	)%
Percentage of total revenue		1		%		1		%		1		%
Services and support		341.8				330.4				289.1				3	%		14	%
Percentage of total revenue		4		%		5		%		5		%
Total cost of revenue		$	1,195.0			$	1,010.5			$	819.9			18	%		23	%

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 our Adobe Advertising Cloud offerings.

Cost of subscription revenue increased due to the following:

	% Change 2018-2017			% Change 2017-2016
Media rebill costs	8	%		9	%
Hosting services and data center costs	8			7
Royalty costs	4			6
Base compensation and related benefits associated with headcount	1			6
Incentive compensation, cash and stock-based	3			5
Amortization of purchased intangibles	2			2
Depreciation expense	—			(1	)
Software licenses	2			—
Various individually insignificant items	2			1
Total change	30	%		35	%

Product

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

Cost of product revenue decreased during fiscal 2018 and fiscal 2017 as compared to the corresponding year-ago periods primarily due to decreased royalty costs as a result of declines in obligations to certain key vendors for technology use.

Services and Support

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

Cost of services and support revenue increased due to the following:

	% Change 2018-2017			% Change 2017-2016
Base compensation and related benefits associated with headcount	1	%		13	%
Incentive compensation, cash and stock-based	1			1
Professional and consulting fees	—			(3	)
Various individually insignificant items	1			3
Total change	3	%		14	%

Compensation costs increased during fiscal 2017 as compared to fiscal 2016 primarily due to increases in headcount resulting from decreased usage of outside consultants that were providing consulting and training services to customers.

Operating Expenses (dollars in millions)

		Fiscal 2018				Fiscal 2017				Fiscal 2016				% Change 2018-2017			% Change 2017-2016
Research and development		$	1,537.8			$	1,224.1			$	976.0			26	%		25	%
Percentage of total revenue		17		%		17		%		17		%
Sales and marketing		2,620.8				2,197.6				1,910.2				19	%		15	%
Percentage of total revenue		29		%		30		%		33		%
General and administrative		744.9				624.7				576.2				19	%		8	%
Percentage of total revenue		8		%		9		%		10		%
Amortization of purchased intangibles		91.1				76.5				78.5				19	%		(3	)%
Percentage of total revenue		1		%		1		%		1		%
Total operating expenses		$	4,994.6			$	4,122.9			$	3,540.9			21	%		16	%

Research and Development, Sales and Marketing and General and Administrative Expenses

Research and development, sales and marketing and general and administrative expenses increased during fiscal 2018 as compared to fiscal 2017 due to increases in base compensation and related benefits costs and stock-based compensation expenses associated with headcount growth.

Research and development, sales and marketing and general and administrative expenses increased during fiscal 2017 as compared to fiscal 2016 primarily due to increases in base compensation and related benefits costs driven by headcount increases and stock-based compensation expense.

Research and Development

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

Research and development expenses increased due to the following:

	% Change 2018-2017			% Change 2017-2016
Base compensation and related benefits associated with headcount	14	%		11	%
Incentive compensation, cash and stock-based	8			9
Professional and consulting fees	3			4
Various individually insignificant items	1			1
Total change	26	%		25	%

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, 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 as a percentage of revenue during fiscal 2018 decreased slightly compared to fiscal 2017 primarily due to our revenue growing at a faster pace compared with the increases in sales and marketing expenses.

Sales and marketing expenses increased due to the following:

	% Change 2018-2017			% Change 2017-2016
Base compensation and related benefits associated with headcount	7	%		5	%
Incentive compensation, cash and stock-based	6			2
Professional and consulting fees	—			2
Marketing spending related to product launches and overall marketing efforts	2			4
Various individually insignificant items	4			2
Total change	19	%		15	%

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 due to the following:

	% Change 2018-2017			% Change 2017-2016
Professional and consulting fees	10	%		1	%
Base compensation and related benefits associated with headcount	2			2
Incentive compensation, cash and stock-based	5			3
Facilities and telecom	2			2
Total change	19	%		8	%

Professional and consulting fees increased from fiscal 2018 as compared to fiscal 2017 primarily due to incurred transaction costs associated with our acquisitions of Magento and Marketo both of which closed in fiscal 2018.

Amortization of Purchased Intangibles

During the last several years, we have completed a number of business combinations and asset acquisitions. As a result of these acquisitions, we purchased intangible assets that are being amortized over their estimated useful lives ranging from one to fourteen years.

Amortization expense increased during fiscal 2018 as compared to fiscal 2017. The increase was primarily due to amortization of intangible assets purchased through our acquisitions of Magento and Marketo in the third and fourth quarter of fiscal 2018, respectively, and partially offset by certain fully amortized acquired intangible assets from previous acquisitions. We expect that intangible assets purchased through our acquisitions of Magento and Marketo will continue to increase our amortization expense in future periods.

Amortization expense remained relatively consistent during fiscal 2017 as compared to fiscal 2016. The decreases associated with certain fully amortized acquired intangible assets from previous acquisitions were offset by increases associated with intangible assets purchased through our acquisition of TubeMogul in the first quarter of fiscal 2017.

Non-Operating Income (Expense), Net (dollars in millions)

		Fiscal 2018				Fiscal 2017				Fiscal 2016				% Change 2018-2017			% Change 2017-2016
Interest and other income (expense), net		$	39.5			$	36.4			$	13.5			9	%		170	%
Percentage of total revenue		**				**				**
Interest expense		(89.2		)		(74.4		)		(70.4		)		20	%		6	%
Percentage of total revenue		(1		)%		(1		)%		(1		)%
Investment gains (losses), net		3.2				7.5				(1.6		)		*			*
Percentage of total revenue		**				**				**
Total non-operating income (expense), net		$	(46.5	)		$	(30.5	)		$	(58.5	)		52	%		(48	)%

---

(*) Percentage is not meaningful.

(**) Percentage is less than 1%.

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 increased in fiscal 2017 as compared to fiscal 2016 due to higher average invested balances and interest rates and a decline in foreign exchange hedging costs.

Interest Expense

Interest expense primarily represents interest associated with our term loan, senior notes and interest rate swaps. In October 2018, we entered into a credit agreement providing for a $2.25 billion senior unsecured term loan for the purpose of partially funding the purchase price for our acquisition of Marketo. Interest on our Term Loan is payable periodically at the end of each interest period, whereas interest on our senior notes is payable semi-annually, in arrears, on February 1 and August 1. Floating interest payments on the interest rate swaps are paid monthly. The fixed-rate interest receivable on the swaps is received semi-annually concurrent with the senior notes interest payments. See Notes 5 and 15 of our Notes to Consolidated Financial Statements for further details regarding our interest rate swaps and debt, respectively.

Interest expense increased during fiscal 2018 as compared to fiscal 2017 primarily due to higher short-term floating interest rates on interest rate swaps and higher average debt balances.

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.

Provision for Income Taxes (dollars in millions)

		Fiscal 2018				Fiscal 2017				Fiscal 2016				% Change 2018-2017			% Change 2017-2016
Provision		$	203.1			$	443.7			$	266.4			(54	)%		67	%
Percentage of total revenue		2		%		6		%		5		%
Effective tax rate		7		%		21		%		19		%

Our effective tax rate decreased by approximately 14 percentage points during fiscal 2018 as compared to fiscal 2017. The lower effective tax rate was primarily due to the effects of the Tax Act enacted on December 22, 2017 and 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.

Our effective tax rate increased by approximately two percentage points during fiscal 2017 as compared to fiscal 2016. The increase was partially related to a one-time tax cost associated with licensing acquired company assets to our trading subsidiaries, offset in part by the recognition of excess tax benefits due to our adoption of new accounting guidance related to

stock-based compensation and the completion of certain income tax examinations. In addition to the above noted items, the effective tax rate for fiscal 2016 included tax benefits recognized as a result of the completion of certain income tax examinations, and to a lesser extent, a one-time tax benefit related to the retroactive reinstatement of the fiscal 2015 U.S. Research and Development credit.

The above noted Tax Act transitions the U.S. tax system to a new territorial system and lowers the statutory corporate tax rate from 35% to 21%. Reduction of the statutory federal corporate tax rate to 21% became effective on January 1, 2018. In fiscal 2018, our statutory federal corporate tax rate is a blended rate of 22.2%, which will be reduced to 21% in fiscal 2019 and thereafter.

During fiscal 2018, we recorded tax charges for the impact of the Tax Act effects using the current available information and technical guidance on the interpretations of the Tax Act. As permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we recorded provisional estimates and have subsequently finalized our accounting analysis based on the guidance, interpretations, and data available as of November 30, 2018. Adjustments made in the fourth quarter of fiscal 2018 upon finalization of our accounting analysis were not material to our Consolidated Financial Statements.

As a result of the reduction in the federal corporate tax rate, we remeasured our deferred taxes and recorded a tax charge of $10 million based on the tax rate that is expected to apply when such deferred taxes are settled or realized in future periods. To calculate the remeasurement of deferred taxes, we estimated when the existing deferred taxes will be settled or realized.

As part of the adoption of a new territorial tax system we recorded a transition tax expense of $176 million on deferred foreign earnings, long-term income taxes payable of $504 million, other tax liabilities of $19 million, and a reduction in our deferred tax liabilities of $347 million. We intend to elect to pay the federal transition tax over a period of eight years as permitted by the Tax Act. As a result, we reclassified $40 million from long-term income taxes payable to short-term income taxes payable for the first installment payment due in fiscal 2019.

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. As part of the adoption of a territorial tax system, the Tax Act also provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017 that were not subject to the one-time transition tax. As we repatriate the undistributed earnings of our foreign subsidiaries for use in the U.S., the earnings from our foreign subsidiaries will generally not be subject to U.S. federal tax.

See Note 9 of our Notes to the Consolidated Financial Statements for further information on our provision for income taxes.

Accounting for Uncertainty in Income Taxes

The gross liabilities for unrecognized tax benefits excluding interest and penalties were $196.2 million, $172.9 million and $178.4 million for fiscal 2018, 2017 and 2016, respectively. If the total unrecognized tax benefits at November 30, 2018, December 1, 2017 and December 2, 2016 were recognized, $145.2 million, $135.0 million and $144.5 million would decrease the respective effective tax rates, which were net of estimated $51.0 million, $37.9 million, and $33.9 million federal benefits related to deducting certain payments on future federal and state tax returns for fiscal 2018, 2017, and 2016, respectively.

The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $24.6 million and $23.6 million for fiscal 2018 and 2017, 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 of short-term and long-term assets, liabilities and income taxes payable. 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 effect in underlying unrecognized tax benefits ranging from $0 to approximately $45 million.

LIQUIDITY AND CAPITAL RESOURCES

This data should be read in conjunction with our Consolidated Statements of Cash Flows.

	As of
(in millions)	November 30, 2018				December 1, 2017
Cash and cash equivalents	$	1,642.8			$	2,306.1
Short-term investments	$	1,586.2			$	3,513.7
Working capital	$	555.9			$	3,720.4
Stockholders’ equity	$	9,362.1			$	8,459.9

A summary of our cash flows is as follows:

(in millions)	Fiscal 2018				Fiscal 2017				Fiscal 2016
Net cash provided by operating activities	$	4,029.3			$	2,912.9			$	2,199.7
Net cash used for investing activities	(4,685.3		)		(442.9		)		(960.0		)
Net cash used for financing activities	(5.6		)		(1,183.7		)		(1,090.7		)
Effect of foreign currency exchange rates on cash and cash equivalents	(1.7		)		8.5				(14.2		)
Net increase (decrease) in cash and cash equivalents	$	(663.3	)		$	1,294.8			$	134.8

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.

Cash Flows from Operating Activities

For fiscal 2018, net cash provided by operating activities of $4.03 billion was primarily comprised of net income plus the net effect of non-cash items, including adjustments to deferred income taxes related to the Tax Act. The primary working capital sources of cash were net income coupled with increases to taxes payable and deferred revenue. The increase in income taxes payable was primarily driven by the one-time transition tax recorded pursuant to the Tax Act. The increase in deferred revenue was principally due to increases in Digital Media site and term licenses and from our acquisition of Magento and Marketo in the third and fourth quarters of fiscal 2018, respectively. The primary working capital use of cash was the increase in prepaid expenses driven by the timing of billings and payments of maintenance and support services associated with our licensed technologies and increases in prepaid insurance.

For fiscal 2017, net cash provided by operating activities of $2.91 billion was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue and accrued expenses. The increase in deferred revenue was primarily due to increased subscriptions for our Creative Cloud offerings and increases in Digital Experience hosted services. The increase in accrued expenses is primarily due to the increase in accruals for compensation costs and employee benefits driven by headcount growth, and increased accrued media costs associated with our Advertising Cloud offerings, including TubeMogul. The primary working capital uses of cash were increases in trade receivables, payments of trade payables assumed as part of the TubeMogul acquisition, and a decrease in income taxes payable. Trade receivables increased primarily due to revenue linearity, higher revenue levels, and increased media receivables attributable to TubeMogul. Income taxes payable decreased primarily due to taxes paid in excess of the tax provision increase.

For fiscal 2016, net cash provided by operating activities of $2.20 billion was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue and accrued expenses. The increase in deferred revenue was primarily due to increased subscriptions for our Creative Cloud offerings and increases in Digital Experience hosted services. The increase in accrued expenses is primarily due to the increase in accruals for compensation costs and employee benefits driven by the increase in headcount. The primary working capital uses of cash were increases in trade receivables, prepaid expenses and other current assets, and a decrease in income taxes payable. Trade receivables increased primarily due to higher revenue levels. Prepaid expenses and other current assets increased primarily due to advanced tax payments made in the fourth quarter of fiscal 2016. Income taxes payable decreased primarily due to the completion of certain income tax audits in fiscal 2016, offset in part by increases to the tax provision in excess of taxes paid.

Cash Flows from Investing Activities

For fiscal 2018, net cash used for investing activities of $4.69 billion was primarily due to our acquisitions of Magento and Marketo during the third and fourth quarter of fiscal 2018, respectively. Other uses of cash included purchases of property and equipment and short-term investments. These cash outflows were offset in part by proceeds from sales and maturities of short-term investments.

For fiscal 2017, net cash used for investing activities of $442.9 million was primarily due to purchases of short-term investments and our acquisition of TubeMogul. Other uses of cash included purchases of property and equipment, including the Almaden Tower and long-term investments and other assets. These cash outflows were offset in part by sales and maturities of short-term investments.

For fiscal 2016, net cash used for investing activities of $960.0 million was primarily due to purchases of short-term investments. Other uses of cash represented purchases of property and equipment, purchases of long-term investments and other assets, and an immaterial acquisition. These cash outflows were offset in part by sales and maturities of short-term investments.

See Note 2 of our Notes to Consolidated Financial Statements for more detailed information regarding our acquisitions.

Cash Flows from Financing Activities

For fiscal 2018, net cash used for financing activities was $5.6 million. Primary uses of cash were payments made for our treasury stock repurchases and taxes related to net share settlement of equity awards. These were offset by the proceeds of our $2.25 billion senior unsecured term loan (the “Term Loan”) which partially funded our acquisition of Marketo. Funds were received net of issuance costs on October 31, 2018 upon closing of the acquisition. The Term Loan will mature 18 months following the initial funding date.

For fiscal 2017, net cash used for financing activities of $1.18 billion was primarily due to payments for our treasury stock repurchases and costs associated with the issuance of treasury stock, offset in part by proceeds from the issuance of treasury stock.

For fiscal 2016, net cash used for financing activities of $1.09 billion was primarily due to payments for our treasury stock repurchases and costs associated with the issuance of treasury stock, offset in part by proceeds from the issuance of treasury stock and excess tax benefits from stock-based compensation.

See Note 2 of our Notes to Consolidated Financial Statements for more detailed information regarding our acquisitions. See the section titled “Stock Repurchase Program” discussed below.

We expect to continue our investing activities, including short-term and long-term investments, venture capital, 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 due to changes in our planned cash outlay, including changes in incremental costs such as direct 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 risks detailed in Part I, Item 1A titled “Risk Factors.” 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.

On October 17, 2018, we entered into a credit agreement (the “Revolving Credit Agreement”) with a syndicate of lenders, providing for a five-year $1 billion senior unsecured revolving credit facility, which replaces our previous five-year $1 billion senior unsecured revolving credit agreement dated as of March 2, 2012. The new credit agreement continues to provide for loans to us and certain of our subsidiaries through October 17, 2023. As of November 30, 2018, there were no outstanding borrowings under this credit agreement and the entire $1 billion credit line remains available for borrowing.

As of November 30, 2018, we have a $2.25 billion Term Loan outstanding due April 30, 2020. As of November 30, 2018, the amount outstanding under our senior notes was $1.9 billion, consisting of $900 million of 4.75% senior notes due February 1, 2020 (the “2020 Notes”) and $1 billion of 3.25% senior notes due February 1, 2025 (the “2025 Notes,” and together with the 2020 Notes, the “Notes”). The Notes and Term Loan rank equally with our other unsecured and unsubordinated indebtedness.

Subsequent to November 30, 2018, we acquired the remaining interest in Allegorithmic for approximately $105.0 million in cash consideration. See Note 2 of our Notes to Consolidated Financial Statements for more detailed information regarding our acquisition of Allegorithmic.

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

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 January 2017, our Board of Directors approved a stock repurchase program granting us authority to repurchase up to $2.5 billion in common stock through the end of fiscal 2019. In May 2018, our Board of Directors granted us additional authority to repurchase up to $8.0 billion in common stock through the end of fiscal 2021.

During fiscal 2018, 2017 and 2016, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $2.05 billion, $1.10 billion, and $1.08 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 our estimate of 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.

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.

The following is a summary of our stock repurchases executed with large financial institutions during fiscal 2018, 2017 and 2016 (in thousands, except average per share amounts):

Board Approval Date		Repurchases Under the Plan		2018							2017							2016
		Shares			Average				Shares			Average				Shares			Average
January 2015		Structured repurchases		—			$	—			4,263			$	118.00			10,428			$	97.16
January 2017		Structured repurchases		8,686			$	230.43			3,923			$	151.80			—			$	—
Total shares				8,686			$	230.43			8,186			$	134.20			10,428			$	97.16
Total cost				$2,001,500							$1,098,595							$1,013,131

For fiscal 2018, 2017 and 2016, the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 30, 2018, December 1, 2017 and December 2, 2016 were excluded from the computation of earnings per share. As of November 30, 2018, $150.0 million of prepayments from our May 2018 authority remained under the agreement.

Subsequent to November 30, 2018, as part of the $8 billion stock repurchase authority, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $500 million. This amount will be classified as treasury stock on our Consolidated Balance Sheets. Upon completion of the $500 million stock repurchase agreement, $7.35 billion remains under our May 2018 authority. As of November 30, 2018, there is no remaining balance under our January 2017 authority.

See Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for share repurchases during the quarter ended November 30, 2018.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of November 30, 2018 consist of obligations under operating leases, royalty agreements and various service agreements. See Note 14 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments.

Transition Taxes Liability

As a result of the Tax Act enacted on December 22, 2017, all historical undistributed foreign subsidiary earnings were subject to a mandatory one-time transition tax. During fiscal 2018, we recorded a transition tax liability of $504 million and other tax liabilities, including state, of $6 million. Under an election of the Tax Act, the transition tax is payable over eight years beginning in fiscal 2019, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. As we repatriate the undistributed earnings of our foreign subsidiaries for use in the U.S., the earnings from our foreign subsidiaries will generally not be subject to U.S. federal tax. We continuously evaluate the future cash needs of our global operations to determine the amount of foreign earnings that is not necessary to be permanently reinvested in our foreign subsidiaries.

Contractual Obligations

The following table summarizes our contractual obligations as of November 30, 2018 (in millions):

		Payment Due by Period
		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Notes and Term Loan, including interest		$	4,538.5			$	153.3			$	3,271.2			$	65.0			$	1,049.0
Operating lease obligations		666.5				79.4				156.1				119.1				311.9
Purchase obligations		733.8				346.3				335.3				48.2				4.0
Total		$	5,938.8			$	579.0			$	3,762.6			$	232.3			$	1,364.9

Term Loan

As of November 30, 2018, 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 November 30, 2018, our estimated maximum commitment for interest payments was $112.8 million for the remaining duration of the Term Loan.

Senior Notes

As of November 30, 2018, our outstanding Notes payable consist of the 2020 Notes and 2025 Notes with a total carrying value of $1.88 billion. Interest on our Notes is payable semi-annually, in arrears on February 1 and August 1. At November 30, 2018, our maximum commitment for interest payments under the Notes was $275.4 million for the remaining duration of our Notes. In June 2014, we entered into interest rate swaps that effectively converted the fixed interest rate on our 2020 Notes to a floating interest rate based on LIBOR plus a fixed number of basis points through February 1, 2020.

Covenants

Our Term Loan and Revolving Credit Agreement contain similar financial covenants requiring us not to exceed a maximum leverage ratio. As of November 30, 2018, we were in compliance with the covenants. We believe these covenants will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan. Our 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 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 and products. 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 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 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.