filings.toolsItem 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADOBE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
| August 30, 2024 | December 1, 2023 | ||||||||||
| (Unaudited) | (*) | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 7,193 | $ | 7,141 | |||||||
| Short-term investments | 322 | 701 | |||||||||
| Trade receivables, net of allowances for doubtful accounts of $17 and $16, respectively | 1,802 | 2,224 | |||||||||
| Prepaid expenses and other current assets | 1,399 | 1,018 | |||||||||
| Total current assets | 10,716 | 11,084 | |||||||||
| Property and equipment, net | 1,969 | 2,030 | |||||||||
| Operating lease right-of-use assets, net | 368 | 358 | |||||||||
| Goodwill | 12,814 | 12,805 | |||||||||
| Other intangibles, net | 858 | 1,088 | |||||||||
| Deferred income taxes | 1,548 | 1,191 | |||||||||
| Other assets | 1,557 | 1,223 | |||||||||
| Total assets | $ | 29,830 | $ | 29,779 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Trade payables | $ | 318 | $ | 314 | |||||||
| Accrued expenses | 1,848 | 1,942 | |||||||||
| Debt | 1,499 | — | |||||||||
| Deferred revenue | 5,779 | 5,837 | |||||||||
| Income taxes payable | 130 | 85 | |||||||||
| Operating lease liabilities | 70 | 73 | |||||||||
| Total current liabilities | 9,644 | 8,251 | |||||||||
| Long-term liabilities: | |||||||||||
| Debt | 4,128 | 3,634 | |||||||||
| Deferred revenue | 127 | 113 | |||||||||
| Income taxes payable | 585 | 514 | |||||||||
| Operating lease liabilities | 381 | 373 | |||||||||
| Other liabilities | 420 | 376 | |||||||||
| Total liabilities | 15,285 | 13,261 | |||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.0001 par value; 2 shares authorized; none issued | — | — | |||||||||
| Common stock, $0.0001 par value; 900 shares authorized; 601 shares issued; 445 and 455 shares outstanding, respectively | — | — | |||||||||
| Additional paid-in capital | 13,026 | 11,586 | |||||||||
| Retained earnings | 36,911 | 33,346 | |||||||||
| Accumulated other comprehensive income (loss) | (309) | (285) | |||||||||
| Treasury stock, at cost (156 and 146 shares, respectively) | (35,083) | (28,129) | |||||||||
| Total stockholders’ equity | 14,545 | 16,518 | |||||||||
| Total liabilities and stockholders’ equity | $ | 29,830 | $ | 29,779 |
(*) The condensed consolidated balance sheet as of December 1, 2023 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 millions, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| August 30, 2024 | September 1, 2023 | August 30, 2024 | September 1, 2023 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Subscription | $ | 5,180 | $ | 4,631 | $ | 15,156 | $ | 13,521 | |||||||||||||||
| Product | 82 | 96 | 305 | 346 | |||||||||||||||||||
| Services and other | 146 | 163 | 438 | 494 | |||||||||||||||||||
| Total revenue | 5,408 | 4,890 | 15,899 | 14,361 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Subscription | 413 | 447 | 1,324 | 1,317 | |||||||||||||||||||
| Product | 6 | 7 | 19 | 23 | |||||||||||||||||||
| Services and other | 135 | 126 | 399 | 380 | |||||||||||||||||||
| Total cost of revenue | 554 | 580 | 1,742 | 1,720 | |||||||||||||||||||
| Gross profit | 4,854 | 4,310 | 14,157 | 12,641 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 1,022 | 881 | 2,945 | 2,584 | |||||||||||||||||||
| Sales and marketing | 1,431 | 1,337 | 4,228 | 3,983 | |||||||||||||||||||
| General and administrative | 366 | 353 | 1,073 | 1,041 | |||||||||||||||||||
| Acquisition termination fee | — | — | 1,000 | — | |||||||||||||||||||
| Amortization of intangibles | 43 | 42 | 127 | 126 | |||||||||||||||||||
| Total operating expenses | 2,862 | 2,613 | 9,373 | 7,734 | |||||||||||||||||||
| Operating income | 1,992 | 1,697 | 4,784 | 4,907 | |||||||||||||||||||
| Non-operating income (expense): | |||||||||||||||||||||||
| Interest expense | (51) | (27) | (119) | (85) | |||||||||||||||||||
| Investment gains (losses), net | 12 | 6 | 34 | 12 | |||||||||||||||||||
| Other income (expense), net | 89 | 67 | 241 | 157 | |||||||||||||||||||
| Total non-operating income (expense), net | 50 | 46 | 156 | 84 | |||||||||||||||||||
| Income before income taxes | 2,042 | 1,743 | 4,940 | 4,991 | |||||||||||||||||||
| Provision for income taxes | 358 | 340 | 1,063 | 1,046 | |||||||||||||||||||
| Net income | $ | 1,684 | $ | 1,403 | $ | 3,877 | $ | 3,945 | |||||||||||||||
| Basic net income per share | $ | 3.78 | $ | 3.07 | $ | 8.63 | $ | 8.62 | |||||||||||||||
| Shares used to compute basic net income per share | 445 | 456 | 449 | 458 | |||||||||||||||||||
| Diluted net income per share | $ | 3.76 | $ | 3.05 | $ | 8.58 | $ | 8.59 | |||||||||||||||
| Shares used to compute diluted net income per share | 448 | 459 | 452 | 459 |
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| August 30, 2024 | September 1, 2023 | August 30, 2024 | September 1, 2023 | ||||||||||||||||||||
| Increase/(Decrease) | Increase/(Decrease) | ||||||||||||||||||||||
| Net income | $ | 1,684 | $ | 1,403 | $ | 3,877 | $ | 3,945 | |||||||||||||||
| Other comprehensive income (loss), net of taxes: | |||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Unrealized gains / losses on available-for-sale securities | 3 | 5 | 10 | 19 | |||||||||||||||||||
| Reclassification adjustment for recognized gains / losses on available-for-sale securities | — | — | — | 5 | |||||||||||||||||||
| Net increase (decrease) from available-for-sale securities | 3 | 5 | 10 | 24 | |||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Unrealized gains / losses on derivative instruments | (60) | 8 | (59) | — | |||||||||||||||||||
| Reclassification adjustment for realized gains / losses on derivative instruments | 1 | (4) | 9 | (28) | |||||||||||||||||||
| Net increase (decrease) from derivatives designated as hedging instruments | (59) | 4 | (50) | (28) | |||||||||||||||||||
| Foreign currency translation adjustments | 23 | 3 | 16 | 12 | |||||||||||||||||||
| Other comprehensive income (loss), net of taxes | (33) | 12 | (24) | 8 | |||||||||||||||||||
| Total comprehensive income, net of taxes | $ | 1,651 | $ | 1,415 | $ | 3,853 | $ | 3,953 |
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
| Three Months Ended August 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at May 31, 2024 | 601 | $ | — | $ | 12,504 | $ | 35,227 | $ | (276) | (152) | $ | (32,612) | $ | 14,843 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 1,684 | — | — | — | 1,684 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | — | — | — | — | (33) | — | — | (33) | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock under stock compensation plans | — | — | 48 | — | — | 1 | 48 | 96 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (5) | (2,519) | (2,519) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 474 | — | — | — | — | 474 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at August 30, 2024 | 601 | $ | — | $ | 13,026 | $ | 36,911 | $ | (309) | (156) | $ | (35,083) | $ | 14,545 |
| Three Months Ended September 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at June 2, 2023 | 601 | $ | — | $ | 10,717 | $ | 30,609 | $ | (297) | (145) | $ | (26,191) | $ | 14,838 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 1,403 | — | — | — | 1,403 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | — | — | — | — | 12 | — | — | 12 | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock under stock compensation plans | — | — | 36 | — | — | 2 | 48 | 84 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (2) | (1,003) | (1,003) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 442 | — | — | — | — | 442 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at September 1, 2023 | 601 | $ | — | $ | 11,195 | $ | 32,012 | $ | (285) | (145) | $ | (27,146) | $ | 15,776 |
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
| Nine Months Ended August 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 1, 2023 | 601 | $ | — | $ | 11,586 | $ | 33,346 | $ | (285) | (146) | $ | (28,129) | $ | 16,518 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,877 | — | — | — | 3,877 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | — | — | — | — | (24) | — | — | (24) | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock under stock compensation plans | — | — | 48 | (312) | — | 3 | 100 | (164) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (13) | (7,053) | (7,053) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,392 | — | — | — | — | 1,392 | ||||||||||||||||||||||||||||||||||||||||||
| Value of shares in deferred compensation plan | — | — | — | — | — | — | (1) | (1) | ||||||||||||||||||||||||||||||||||||||||||
| Balances at August 30, 2024 | 601 | $ | — | $ | 13,026 | $ | 36,911 | $ | (309) | (156) | $ | (35,083) | $ | 14,545 |
| Nine Months Ended September 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 2, 2022 | 601 | $ | — | $ | 9,868 | $ | 28,319 | $ | (293) | (139) | $ | (23,843) | $ | 14,051 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,945 | — | — | — | 3,945 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | — | — | — | — | 8 | — | — | 8 | ||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock under stock compensation plans | — | — | 36 | (252) | — | 4 | 103 | (113) | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (10) | (3,407) | (3,407) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,291 | — | — | — | — | 1,291 | ||||||||||||||||||||||||||||||||||||||||||
| Value of shares in deferred compensation plan | — | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at September 1, 2023 | 601 | $ | — | $ | 11,195 | $ | 32,012 | $ | (285) | (145) | $ | (27,146) | $ | 15,776 |
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| Nine Months Ended | |||||||||||
| August 30, 2024 | September 1, 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 3,877 | $ | 3,945 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation, amortization and accretion | 639 | 650 | |||||||||
| Stock-based compensation | 1,392 | 1,291 | |||||||||
| Reduction of operating lease right-of-use assets | 56 | 54 | |||||||||
| Deferred income taxes | (341) | (276) | |||||||||
| Unrealized losses (gains) on investments, net | (24) | (7) | |||||||||
| Other non-cash items | 9 | — | |||||||||
| Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | |||||||||||
| Trade receivables, net | 414 | 217 | |||||||||
| Prepaid expenses and other assets | (799) | (787) | |||||||||
| Trade payables | 2 | (47) | |||||||||
| Accrued expenses and other liabilities | (162) | (153) | |||||||||
| Income taxes payable | 116 | 749 | |||||||||
| Deferred revenue | (44) | 69 | |||||||||
| Net cash provided by operating activities | 5,135 | 5,705 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Maturities of short-term investments | 379 | 754 | |||||||||
| Proceeds from sales of short-term investments | 9 | 215 | |||||||||
| Purchases of property and equipment | (135) | (313) | |||||||||
| Purchases of long-term investments, intangibles and other assets | (125) | (34) | |||||||||
| Proceeds from sale of long-term investments and other assets | 2 | 1 | |||||||||
| Net cash provided by investing activities | 130 | 623 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repurchases of common stock | (7,000) | (3,400) | |||||||||
| Proceeds from re-issuance of treasury stock | 361 | 314 | |||||||||
| Taxes paid related to net share settlement of equity awards | (525) | (387) | |||||||||
| Proceeds from issuance of debt | 1,997 | — | |||||||||
| Repayment of debt | — | (500) | |||||||||
| Other financing activities, net | (56) | 8 | |||||||||
| Net cash used for financing activities | (5,223) | (3,965) | |||||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | 10 | 2 | |||||||||
| Net change in cash and cash equivalents | 52 | 2,365 | |||||||||
| Cash and cash equivalents at beginning of period | 7,141 | 4,236 | |||||||||
| Cash and cash equivalents at end of period | $ | 7,193 | $ | 6,601 | |||||||
| Supplemental disclosures: | |||||||||||
| Cash paid for income taxes, net of refunds | $ | 1,389 | $ | 590 | |||||||
| Cash paid for interest | $ | 94 | $ | 103 | |||||||
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 (the “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 generally accepted accounting principles in the United States (“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 December 1, 2023 on file with the SEC (our “Annual Report”).
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. Actual results may differ materially from these estimates.
Significant Accounting Policies
There have been no 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
In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The updated standard is effective for our annual periods beginning in fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026. Early adoption is permitted. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes, which prescribes standardized categories and disaggregation of information in the reconciliation of provision for income taxes, requires disclosure of disaggregated income taxes paid, and modifies other income tax-related disclosure requirements. The updated standard is effective for us beginning with our fiscal year 2026 annual reporting period. Early adoption is permitted. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures.
With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the nine months ended August 30, 2024, 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
Segment Information
Our segment results for the three months ended August 30, 2024 and September 1, 2023 were as follows:
| (dollars in millions) | Digital Media | Digital Experience | Publishing and Advertising | Total | |||||||||||||||||||
| Three months ended August 30, 2024 | |||||||||||||||||||||||
| Revenue | $ | 3,995 | $ | 1,354 | $ | 59 | $ | 5,408 | |||||||||||||||
| Cost of revenue | 137 | 395 | 22 | 554 | |||||||||||||||||||
| Gross profit | $ | 3,858 | $ | 959 | $ | 37 | $ | 4,854 | |||||||||||||||
| Gross profit as a percentage of revenue | 97 | % | 71 | % | 63 | % | 90 | % | |||||||||||||||
| Three months ended September 1, 2023 | |||||||||||||||||||||||
| Revenue | $ | 3,594 | $ | 1,229 | $ | 67 | $ | 4,890 | |||||||||||||||
| Cost of revenue | 161 | 397 | 22 | 580 | |||||||||||||||||||
| Gross profit | $ | 3,433 | $ | 832 | $ | 45 | $ | 4,310 | |||||||||||||||
| Gross profit as a percentage of revenue | 96 | % | 68 | % | 67 | % | 88 | % |
Our segment results for the nine months ended August 30, 2024 and September 1, 2023 were as follows:
| (dollars in millions) | Digital Media | Digital Experience | Publishing and Advertising | Total | |||||||||||||||||||
| Nine months ended August 30, 2024 | |||||||||||||||||||||||
| Revenue | $ | 11,719 | $ | 3,970 | $ | 210 | $ | 15,899 | |||||||||||||||
| Cost of revenue | 489 | 1,187 | 66 | 1,742 | |||||||||||||||||||
| Gross profit | $ | 11,230 | $ | 2,783 | $ | 144 | $ | 14,157 | |||||||||||||||
| Gross profit as a percentage of revenue | 96 | % | 70 | % | 69 | % | 89 | % | |||||||||||||||
| Nine months ended September 1, 2023 | |||||||||||||||||||||||
| Revenue | $ | 10,500 | $ | 3,627 | $ | 234 | $ | 14,361 | |||||||||||||||
| Cost of revenue | 455 | 1,200 | 65 | 1,720 | |||||||||||||||||||
| Gross profit | $ | 10,045 | $ | 2,427 | $ | 169 | $ | 12,641 | |||||||||||||||
| Gross profit as a percentage of revenue | 96 | % | 67 | % | 72 | % | 88 | % |
Revenue by geographic area for the three and nine months ended August 30, 2024 and September 1, 2023 were as follows:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Americas | $ | 3,241 | $ | 2,943 | $ | 9,539 | $ | 8,601 | |||||||||||||||
| EMEA | 1,405 | 1,229 | 4,085 | 3,615 | |||||||||||||||||||
| APAC | 762 | 718 | 2,275 | 2,145 | |||||||||||||||||||
| Total | $ | 5,408 | $ | 4,890 | $ | 15,899 | $ | 14,361 |
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Revenue by major offerings in our Digital Media reportable segment for the three and nine months ended August 30, 2024 and September 1, 2023 were as follows:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Creative Cloud | $ | 3,188 | $ | 2,909 | $ | 9,380 | $ | 8,522 | |||||||||||||||
| Document Cloud | 807 | 685 | 2,339 | 1,978 | |||||||||||||||||||
| Total Digital Media revenue | $ | 3,995 | $ | 3,594 | $ | 11,719 | $ | 10,500 |
Subscription revenue by segment for the three and nine months ended August 30, 2024 and September 1, 2023 were as follows:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Digital Media | $ | 3,921 | $ | 3,506 | $ | 11,474 | $ | 10,225 | |||||||||||||||
| Digital Experience | 1,231 | 1,096 | 3,599 | 3,208 | |||||||||||||||||||
| Publishing and Advertising | 28 | 29 | 83 | 88 | |||||||||||||||||||
| Total subscription revenue | $ | 5,180 | $ | 4,631 | $ | 15,156 | $ | 13,521 |
Contract Balances
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. 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. As of August 30, 2024, the balance of trade receivables, net of allowances for doubtful accounts, was $1.80 billion, inclusive of unbilled receivables of $83 million. As of December 1, 2023, the balance of trade receivables, net of allowances for doubtful accounts, was $2.22 billion, inclusive of unbilled receivables of $80 million.
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables and is based on both specific and general reserves. We maintain general reserves on a collective basis by considering factors such as historical experience, credit-worthiness, the age of the trade receivable balances, current economic conditions and a reasonable and supportable forecast of future economic conditions. The allowance for doubtful accounts was $17 million and $16 million as of August 30, 2024 and December 1, 2023, respectively.
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. 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. We regularly review contract asset balances for impairment, considering factors such as historical experience, credit-worthiness, age of the balance, current economic conditions and a reasonable and supportable forecast of future economic conditions. Contract asset impairments were not material for the nine months ended August 30, 2024. Contract assets were $214 million and $141 million as of August 30, 2024 and December 1, 2023, 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. As of August 30, 2024, the balance of deferred revenue was $5.91 billion, which includes $44 million of refundable customer deposits. Arrangements with some of our enterprise customers with non-cancellable and non-refundable committed funds provide options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Non-cancellable and non-refundable committed funds related to these agreements comprised approximately 4% of the total deferred revenue.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of December 1, 2023, the balance of deferred revenue was $5.95 billion. During the three and nine months ended August 30, 2024, approximately $1.07 billion and $5.43 billion of revenue, respectively, was recognized that was included in the balance of deferred revenue as of December 1, 2023.
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. As of August 30, 2024, remaining performance obligations were approximately $18.14 billion. Non-cancellable and non-refundable funds related to some of our enterprise customer agreements referred to above comprised approximately 4% of the total remaining performance obligations. Approximately 69% 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.
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 and primarily relate to sales commissions paid to our sales force personnel. Capitalized contract acquisition costs 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. Capitalized contract acquisition costs were $717 million and $656 million as of August 30, 2024 and December 1, 2023, respectively.
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. Refund liabilities were $107 million and $111 million as of August 30, 2024 and December 1, 2023, respectively.
NOTE 3. ACQUISITIONS
Figma
On September 15, 2022, we entered into a definitive merger agreement under which we intended to acquire Figma, Inc. (“Figma”) for approximately $20 billion, comprised of approximately half cash and half stock.
On December 17, 2023, we entered into a mutual termination agreement with Figma to terminate the proposed merger. In accordance with the terms of the termination agreement, we paid Figma a termination fee of $1 billion. The termination fee was recorded in operating expenses in our condensed consolidated statements of income during the nine months ended August 30, 2024, and was not tax-deductible for financial statement purposes.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid marketable securities with remaining maturities of three months or less at the date of purchase. We classify our investments in marketable debt securities as “available-for-sale.” We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and unrealized non-credit-related losses of marketable debt securities are included in accumulated other comprehensive income, net of taxes, in our condensed consolidated balance sheets. Unrealized credit-related losses are recorded to other income (expense), net in our condensed consolidated statements of income with a corresponding allowance for credit-related losses 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.
Cash, cash equivalents and short-term investments consisted of the following as of August 30, 2024:
| (in millions) | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Cash | $ | 571 | $ | — | $ | — | $ | 571 | |||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | 6,622 | — | — | 6,622 | |||||||||||||||||||
| Total cash and cash equivalents | 7,193 | — | — | 7,193 | |||||||||||||||||||
| Short-term fixed income securities: | |||||||||||||||||||||||
| Asset-backed securities | 6 | — | — | 6 | |||||||||||||||||||
| Corporate debt securities | 146 | — | (1) | 145 | |||||||||||||||||||
| U.S. agency securities | 13 | — | — | 13 | |||||||||||||||||||
| U.S. Treasury securities | 159 | — | (1) | 158 | |||||||||||||||||||
| Total short-term investments | 324 | — | (2) | 322 | |||||||||||||||||||
| Total cash, cash equivalents and short-term investments | $ | 7,517 | $ | — | $ | (2) | $ | 7,515 |
Cash, cash equivalents and short-term investments consisted of the following as of December 1, 2023:
| (in millions) | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Cash | $ | 618 | $ | — | $ | — | $ | 618 | |||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | 6,498 | — | — | 6,498 | |||||||||||||||||||
| Time deposits | 25 | — | — | 25 | |||||||||||||||||||
| Total cash equivalents | 6,523 | — | — | 6,523 | |||||||||||||||||||
| Total cash and cash equivalents | 7,141 | — | — | 7,141 | |||||||||||||||||||
| Short-term fixed income securities: | |||||||||||||||||||||||
| Asset-backed securities | 15 | — | — | 15 | |||||||||||||||||||
| Corporate debt securities | 438 | — | (4) | 434 | |||||||||||||||||||
| U.S. agency securities | 13 | — | (1) | 12 | |||||||||||||||||||
| U.S. Treasury securities | 247 | — | (7) | 240 | |||||||||||||||||||
| Total short-term investments | 713 | — | (12) | 701 | |||||||||||||||||||
| Total cash, cash equivalents and short-term investments | $ | 7,854 | $ | — | $ | (12) | $ | 7,842 |
See Note 5 for further information regarding the fair value of our financial instruments.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table summarizes the estimated fair value of short-term fixed income debt securities classified as short-term investments based on stated effective maturities as of August 30, 2024:
| (in millions) | Estimated Fair Value | ||||||||||
| Due within one year | $ | 308 | |||||||||
| Due between one and two years | 14 | ||||||||||
| Total | $ | 322 |
We review our debt securities classified as short-term investments on a regular basis for impairment. For debt securities in unrealized loss positions, we determine whether any portion of the decline in fair value below the amortized cost basis is due to credit-related factors if we neither intend to sell nor anticipate that it is more likely than not that we will be required to sell prior to recovery of the amortized cost basis. We consider factors such as the extent to which the market value has been less than the cost, any noted failure of the issuer to make scheduled payments, changes to the rating of the security and other relevant credit-related factors in determining whether or not a credit loss exists. During the nine months ended August 30, 2024 and September 1, 2023, we did not recognize an allowance for credit-related losses on any of our investments.
NOTE 5. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The fair value of our financial assets and liabilities at August 30, 2024 was determined using the following inputs:
| (in millions) | Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 6,622 | $ | 6,622 | $ | — | $ | — | |||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Asset-backed securities | 6 | — | 6 | — | |||||||||||||||||||
| Corporate debt securities | 145 | — | 145 | — | |||||||||||||||||||
| U.S. agency securities | 13 | — | 13 | — | |||||||||||||||||||
| U.S. Treasury securities | 158 | — | 158 | — | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Foreign currency derivatives | 9 | — | 9 | — | |||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Deferred compensation plan assets | 266 | 266 | — | — | |||||||||||||||||||
| Foreign currency derivatives | 1 | — | 1 | — | |||||||||||||||||||
| Total assets | $ | 7,220 | $ | 6,888 | $ | 332 | $ | — |
| Liabilities: | |||||||||||||||||||||||
| Accrued expenses: | |||||||||||||||||||||||
| Foreign currency derivatives | $ | 42 | $ | — | $ | 42 | $ | — | |||||||||||||||
| Other liabilities: | |||||||||||||||||||||||
| Foreign currency derivatives | 9 | — | 9 | — | |||||||||||||||||||
| Total liabilities | $ | 51 | $ | — | $ | 51 | $ | — |
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The fair value of our financial assets and liabilities at December 1, 2023 was determined using the following inputs:
| (in millions) | Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 6,498 | $ | 6,498 | $ | — | $ | — | |||||||||||||||
| Time deposits | 25 | 25 | — | — | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Asset-backed securities | 15 | — | 15 | — | |||||||||||||||||||
| Corporate debt securities | 434 | — | 434 | — | |||||||||||||||||||
| U.S. agency securities | 12 | — | 12 | — | |||||||||||||||||||
| U.S. Treasury securities | 240 | — | 240 | — | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Foreign currency derivatives | 52 | — | 52 | — | |||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Deferred compensation plan assets | 206 | 206 | — | — | |||||||||||||||||||
| Total assets | $ | 7,482 | $ | 6,729 | $ | 753 | $ | — |
| Liabilities: | |||||||||||||||||||||||
| Accrued expenses: | |||||||||||||||||||||||
| Foreign currency derivatives | $ | 4 | $ | — | $ | 4 | $ | — | |||||||||||||||
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 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 funds, time deposits and deferred compensation plan assets, which consist of money market and other mutual funds, are based on quoted prices in active markets at the measurement date.
Our over-the-counter foreign currency 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 other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The fair value of our senior notes was $5.53 billion as of August 30, 2024, based on observable market prices in less active markets and categorized as Level 2. See Note 14 for further details regarding our debt.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
We may use derivatives to partially offset our business exposure to foreign currency and interest rate risk on expected future cash flows and certain existing assets and liabilities. We do not use any of our derivative instruments for trading purposes.
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 amounts recognized for derivative instruments under master netting arrangements. We also enter into collateral security agreements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds.
Cash Flow Hedges
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 and forward contracts to hedge a portion of our forecasted foreign currency denominated revenue and expenses. These foreign exchange contracts, carried at fair value, have maturities of up to 24 months.
As of August 30, 2024, we had net derivative losses on our foreign currency cash flow hedges expected to be recognized within the next 36 months, of which $52 million of net losses are expected to be recognized into revenue within the next 12 months.
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.
Fair value asset derivatives are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion, and fair value liability derivatives are included in accrued expenses for the current portion and other liabilities for the long-term portion on our condensed consolidated balance sheets. The fair value of derivative instruments as of August 30, 2024 and December 1, 2023 were as follows:
| (in millions) | 2024 | 2023 | |||||||||||||||||||||
| 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 | $ | 5 | $ | — | $ | 42 | $ | — | |||||||||||||||
| Foreign exchange forward contracts | 3 | 49 | 1 | — | |||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Foreign exchange forward contracts | 2 | 2 | 9 | 4 | |||||||||||||||||||
| Total derivatives | $ | 10 | $ | 51 | $ | 52 | $ | 4 |
Gains and losses on derivative instruments, net of tax, recognized in our condensed consolidated statements of comprehensive income for the three and nine months ended August 30, 2024 were primarily associated with our foreign exchange forward contracts, for which we recognized $40 million of net losses in both periods. Gains and losses on derivative instruments, net of tax, for the three and nine months ended September 1, 2023 were immaterial.
For the three and nine months ended August 30, 2024 and September 1, 2023, the effects of derivative instruments on our condensed consolidated statements of income were immaterial.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 7. GOODWILL AND OTHER INTANGIBLES
Goodwill as of August 30, 2024 and December 1, 2023 was $12.81 billion and $12.81 billion, respectively. During the second quarter of fiscal 2024, we completed our annual goodwill impairment test associated with our reporting units and determined there was no impairment of goodwill.
Other intangible assets subject to amortization as of August 30, 2024 and December 1, 2023 were as follows:
| (in millions) | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
| Customer contracts and relationships | $ | 1,205 | $ | (713) | $ | 492 | $ | 1,204 | $ | (619) | $ | 585 | |||||||||||||||||||||||
| Purchased technology | 877 | (664) | 213 | 984 | (647) | 337 | |||||||||||||||||||||||||||||
| Trademarks | 376 | (250) | 126 | 376 | (217) | 159 | |||||||||||||||||||||||||||||
| Other | 36 | (9) | 27 | 22 | (15) | 7 | |||||||||||||||||||||||||||||
| Other intangibles, net | $ | 2,494 | $ | (1,636) | $ | 858 | $ | 2,586 | $ | (1,498) | $ | 1,088 |
Amortization expense related to other intangibles was $84 million and $252 million for the three and nine months ended August 30, 2024, respectively. Comparatively, amortization expense related to other intangibles was $92 million and $284 million for the three and nine months ended September 1, 2023, respectively. Of these amounts, $41 million and $125 million were included in cost of revenue for the three and nine months ended August 30, 2024, respectively, and $50 million and $158 million were included in cost of revenue for the three and nine months ended September 1, 2023, respectively.
As of August 30, 2024, the estimated aggregate amortization expense in future periods was as follows:
| (in millions) | ||||||||
| Fiscal Year | Other Intangibles (1) | |||||||
| Remainder of 2024 | $ | 83 | ||||||
| 2025 | 303 | |||||||
| 2026 | 151 | |||||||
| 2027 | 109 | |||||||
| 2028 | 66 | |||||||
| Thereafter | 126 | |||||||
| Total expected amortization expense | $ | 838 |
(1)Excludes capitalized in-process research and development which is considered indefinite lived until the completion or abandonment of the associated research and development efforts.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8. ACCRUED EXPENSES
Accrued expenses as of August 30, 2024 and December 1, 2023 consisted of the following:
| (in millions) | 2024 | 2023 | |||||||||
| Accrued compensation and benefits | $ | 504 | $ | 535 | |||||||
| Accrued bonuses | 447 | 547 | |||||||||
| Accrued corporate marketing | 149 | 132 | |||||||||
| Sales and use taxes | 111 | 122 | |||||||||
| Refund liabilities | 107 | 111 | |||||||||
| Other | 530 | 495 | |||||||||
| Accrued expenses | $ | 1,848 | $ | 1,942 |
Other primarily includes general business accruals, accrued hosting fees, royalties payable and accrued interest expense.
NOTE 9. STOCK-BASED COMPENSATION
Restricted Stock Units
Restricted stock unit activity for the nine months ended August 30, 2024 was as follows:
| Number of Shares (in millions) | Weighted Average Grant Date Fair Value | Aggregate Fair Value (1) (in millions) | |||||||||||||||
| Beginning outstanding balance | 7.8 | $ | 418.63 | ||||||||||||||
| Awarded | 2.9 | $ | 586.20 | ||||||||||||||
| Released | (2.6) | $ | 441.45 | ||||||||||||||
| Forfeited | (0.4) | $ | 449.34 | ||||||||||||||
| Ending outstanding balance | 7.7 | $ | 472.50 | $ | 4,436 | ||||||||||||
| Expected to vest | 7.1 | $ | 471.45 | $ | 4,100 |
(1) The aggregate fair value is calculated using the closing stock price as of August 30, 2024 of $574.41.
The total fair value of restricted stock units vested during the nine months ended August 30, 2024 was $1.42 billion.
Performance Shares
In the first quarter of fiscal 2024, the Executive Compensation Committee of our Board of Directors (the “ECC”) approved the 2024 Performance Share Program, the terms of which are similar to the 2023 Performance Share Program that is still outstanding. For information regarding our outstanding Performance Share Programs, including the terms, see “Note 12. Stock-Based Compensation” of our Annual Report on Form 10-K for the fiscal year ended December 1, 2023.
As of August 30, 2024, the performance shares awarded under our 2024, 2023 and 2022 Performance Share Programs remained outstanding and unvested.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Performance share activity for the nine months ended August 30, 2024 was as follows:
| Number of Shares (in millions) | Weighted Average Grant Date Fair Value | Aggregate Fair Value (1) (in millions) | |||||||||||||||
| Beginning outstanding balance | 0.5 | $ | 465.71 | ||||||||||||||
| Awarded | 0.2 | $ | 645.40 | ||||||||||||||
| Released | (0.1) | $ | 455.65 | ||||||||||||||
| Forfeited | (0.1) | $ | 487.20 | ||||||||||||||
| Ending outstanding balance | 0.5 | $ | 536.74 | $ | 301 | ||||||||||||
| Expected to vest | 0.5 | $ | 534.50 | $ | 277 |
(1) The aggregate fair value is calculated using the closing stock price as of August 30, 2024 of $574.41.
Under our Performance Share Programs, participants generally have the ability to receive up to 200% of the target number of shares originally granted. Shares released during the nine months ended August 30, 2024 resulted from 83% achievement of target for the 2021 Performance Share Program, as certified by the ECC in the first quarter of fiscal 2024.
The total fair value of performance shares vested during the nine months ended August 30, 2024 was $63 million.
Employee Stock Purchase Plan Shares
Employees purchased 1.2 million shares at an average price of $298.53 and 1.1 million shares at an average price of $286.31 for the nine months ended August 30, 2024 and September 1, 2023, respectively. The intrinsic value of shares purchased during the nine months ended August 30, 2024 and September 1, 2023 was $324 million and $185 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.
Compensation Costs
As of August 30, 2024, there was $3.28 billion of unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock-based awards and purchase rights which will be recognized over a weighted average period of 2.32 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Total stock-based compensation costs included in our condensed consolidated statements of income for the three and nine months ended August 30, 2024 and September 1, 2023 were as follows:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Cost of revenue | $ | 30 | $ | 30 | $ | 90 | $ | 88 | |||||||||||||||
| Research and development | 241 | 224 | 704 | 657 | |||||||||||||||||||
| Sales and marketing | 140 | 130 | 403 | 375 | |||||||||||||||||||
| General and administrative | 63 | 58 | 195 | 171 | |||||||||||||||||||
| Total | $ | 474 | $ | 442 | $ | 1,392 | $ | 1,291 |
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) and activity, net of related taxes, were as follows:
| (in millions) | December 1, 2023 | Increase / Decrease | Reclassification Adjustments | August 30, 2024 | |||||||||||||||||||
| Net unrealized gains / losses on available-for-sale securities | $ | (12) | $ | 10 | $ | — | (1) | $ | (2) | ||||||||||||||
| Net unrealized gains / losses on derivative instruments designated as hedging instruments | (26) | (59) | 9 | (2) | (76) | ||||||||||||||||||
| Cumulative foreign currency translation adjustments | (247) | 16 | — | (231) | |||||||||||||||||||
| Total accumulated other comprehensive income (loss), net of taxes | $ | (285) | $ | (33) | $ | 9 | $ | (309) |
(1)Reclassification adjustments for gains / losses on available-for-sale securities are classified in other income (expense), net.
(2)Reclassification adjustments for gains / losses on foreign currency hedges are classified in revenue or operating expenses, depending on the nature of the underlying transaction, 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 nine months ended August 30, 2024 and September 1, 2023 were immaterial.
NOTE 11. 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 our shares in the open market or enter into structured repurchase agreements with third parties. In December 2020, our Board of Directors granted authority to repurchase up to $15 billion in our common stock, which became fully utilized during the nine months ended August 30, 2024. In March 2024, our Board of Directors granted additional authority to repurchase up to $25 billion in our common stock through March 14, 2028.
During the nine months ended August 30, 2024 and September 1, 2023, we entered into accelerated share repurchase agreements (“ASRs”) with large financial institutions whereupon we provided them with prepayments totaling $7 billion and $1.4 billion, respectively. Under the terms of our ASRs, the financial institutions agree to deliver a portion of shares to us at contract inception and the remaining shares at settlement. The total number of shares delivered and average purchase price paid per share are determined upon settlement based on the Volume Weighted Average Price (“VWAP”) over the term of the ASR, less an agreed upon discount.
During the nine months ended September 1, 2023, we also entered into structured stock repurchase agreements with a large financial institution whereupon we provided them with prepayments totaling $2 billion. Under the terms of our structured stock repurchase agreements, the financial institutions agree to deliver shares to us at monthly intervals during the respective contract terms, and the number of shares delivered each month are determined based on the total notional amount of the contracts, the number of trading days in the intervals and the VWAP during the intervals, less an agreed upon discount.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Share repurchase activity for the nine months ended August 30, 2024 and September 1, 2023 was as follows:
| Number of Shares Delivered (in millions) | Average Price Paid Per Share | |||||||||||||
| Nine months ended August 30, 2024 | ||||||||||||||
| Structured stock repurchase agreement entered into in fiscal 2023 | 0.6 | $ | 626.68 | |||||||||||
| ASR entered into in December 2023 | 3.5 | $ | 578.11 | |||||||||||
| ASR entered into in March 2024 | 5.2 | $ | 475.94 | |||||||||||
| ASR entered into in June 2024 | 3.6 | $ | — | (1) | ||||||||||
| Total shares delivered | 12.9 | |||||||||||||
| Nine months ended September 1, 2023 | ||||||||||||||
| Structured stock repurchase agreements entered into in fiscal 2022 and the nine months ended September 1, 2023 | 5.7 | $ | 396.43 | |||||||||||
| ASR entered into in December 2022 | 4.0 | $ | 348.46 | |||||||||||
| Total shares delivered | 9.7 |
(1) During the nine months ended August 30, 2024, we received the initial delivery of shares under the ASR entered into in June 2024, which remained outstanding as of August 30, 2024. Subsequent to August 30, 2024, the outstanding ASR was settled which resulted in total repurchases of 4.6 million shares at an average price of $546.30.
Prepayments for stock repurchases are classified as treasury stock, a component of stockholders’ equity on our condensed consolidated balance sheets, at the payment date, though only shares physically delivered to us by the end of the respective period are excluded from the computation of net income per share. As of August 30, 2024, a portion of the $2.5 billion prepayment under the ASR entered into in June 2024 was evaluated as an unsettled forward contract indexed to our own stock, classified within stockholders’ equity.
Subsequent to August 30, 2024, as part of the March 2024 stock repurchase authority, we entered into an ASR with a large financial institution whereupon we provided them with a prepayment of $2.5 billion and received an initial delivery of 3.6 million shares, which represents approximately 75% of our prepayment. Upon completion of this $2.5 billion ASR, $17.65 billion remains under our March 2024 stock repurchase authority.
NOTE 12. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended August 30, 2024 and September 1, 2023:
| Three Months | Nine Months | ||||||||||||||||||||||
| (in millions, except per share data) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net income | $ | 1,684 | $ | 1,403 | $ | 3,877 | $ | 3,945 | |||||||||||||||
| Shares used to compute basic net income per share | 445.3 | 456.4 | 449.1 | 457.7 | |||||||||||||||||||
| Dilutive potential common shares from stock plans and programs | 2.3 | 3.1 | 2.7 | 1.5 | |||||||||||||||||||
| Shares used to compute diluted net income per share | 447.6 | 459.5 | 451.8 | 459.2 | |||||||||||||||||||
| Basic net income per share | $ | 3.78 | $ | 3.07 | $ | 8.63 | $ | 8.62 | |||||||||||||||
| Diluted net income per share | $ | 3.76 | $ | 3.05 | $ | 8.58 | $ | 8.59 | |||||||||||||||
| Anti-dilutive potential common shares | 2.0 | 0.5 | 1.8 | 3.5 |
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENCIES
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
We are subject to legal proceedings, claims, including claims relating to intellectual property, commercial, employment and other matters, and investigations, including government investigations, that arise in the ordinary course of our business. Some of these disputes, legal proceedings and investigations 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 or 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 the Audit Committee of the Board of Directors.
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. As of August 30, 2024, accrued provisions for legal proceedings were immaterial. Unless otherwise specifically disclosed in this note, we have determined that no 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 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, results of operations or cash flows could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.
Since June 2022, we have been cooperating with the Federal Trade Commission (the “FTC”) staff in response to a Civil Investigative Demand seeking information regarding our disclosure and subscription cancellation practices relative to the Restore Online Shoppers’ Confidence Act (“ROSCA”). In November 2023, the FTC staff asserted that they had the authority to enter into consent negotiations to determine if a settlement regarding their investigation of these issues could be reached. On March 20, 2024, we were informed that the FTC had voted to authorize a filing of the case. The FTC then referred the case to the Department of Justice (the “DOJ”), and on June 17, 2024, the DOJ filed a civil complaint in the United States District Court for the Northern District of California, naming Adobe and certain of our employees as defendants. The complaint alleges that Adobe failed to clearly and conspicuously disclose material terms, failed to obtain express informed consent and failed to provide a simple cancellation mechanism regarding our disclosure and subscription cancellation practices in violation of ROSCA and the FTC Act. The DOJ is seeking injunctive relief, civil penalties, equitable monetary relief and other relief. The defense or resolution of this matter could involve significant monetary costs or penalties and have a significant impact on our financial results and operations. There can be no assurance that we will be successful in negotiating a favorable settlement or in litigation. Any remedies or compliance requirements could adversely affect our ability to operate our business or have a materially adverse impact on our financial results. At this stage, we are unable to estimate a reasonably possible financial loss or range of any potential financial loss, if any, as a result of this litigation.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On October 20, 2023, a securities class action captioned Pembroke Pines Firefighters & Police Officers Pension Fund et al v. Adobe, Inc. et al, Case No. 1:23-cv-09260, was filed in the U.S. District Court for the Southern District of New York (the “Securities Action”) naming Adobe and certain of our current and former officers as defendants. The Securities Action purports to be brought on behalf of purchasers of the Company’s stock between July 23, 2021 and September 22, 2022 (the “Class Period”). The complaint, which was amended on February 23, 2024, alleges that certain public statements made by Adobe during the Class Period related to competition from Figma and the adequacy of Adobe’s existing offerings to counter harms Adobe may have faced due to Figma’s growing market position were materially false and misleading. The Securities Action seeks unspecified compensatory damages, attorneys’ fees and costs, and extraordinary equitable and/or injunctive relief.
On November 16, 2023, a shareholder derivative action captioned Shah v. Narayen et al, Case No. 1:23-cv-01315, was filed in the U.S. District Court for the District of Delaware (the “Shah Action”), purportedly on behalf of Adobe. On January 3, 2024, a second shareholder derivative action captioned Gervat v. Narayen et al, Case No. 1:24-cv-00006, was filed in the U.S. District Court for the District of Delaware (the “Gervat Action”), purportedly on behalf of Adobe. On January 24, 2024, the Court consolidated the Shah and Gervat Actions (together, the “Consolidated Derivative Action”). On January 18, 2024, a shareholder derivative action captioned Sbriglio v. Narayen et al., Case No. 24-cv-429458, was filed in California Superior Court (the “Sbriglio Action”), purportedly on behalf of Adobe. On January 29, 2024, a shareholder derivative action captioned Roy v. Narayen et al., No. 1:24-cv-00633, was filed in the U.S. District Court for the Southern District of New York, (the “Roy Action,” and together with the Consolidated Derivative Action and the Sbriglio Action, the “Derivative Actions”), purportedly on behalf of Adobe. The Derivative Actions are based largely on the same alleged facts and circumstances as the Securities Action, and name certain of our current and former officers and members of our Board of Directors as defendants and Adobe as a nominal defendant. The Derivative Actions together allege claims for breach of fiduciary duty and/or aiding and abetting breach of fiduciary duties, unjust enrichment, waste of corporate assets, abuse of control, and violations of Section 10(b) (and Rule 10b-5 promulgated thereunder), Section 20(a), and/or Section 21D of the Securities Exchange Act of 1934, as amended, and seek recovery of unspecified damages, restitution, and attorney’s fees and costs, as well as disgorgement of profits and certain payments and benefits, in the case of the Gervat Action, and improvements to Adobe’s corporate governance and internal procedures, in the case of the Shah Action, on behalf of Adobe.
We dispute the allegations of wrongdoing in the Securities Action and the Derivative Actions and intend to vigorously defend ourselves in these matters. In view of the complexity and ongoing and uncertain nature of the outstanding proceedings and inquiries, at this time we are unable to estimate a reasonably possible financial loss or range of financial loss, if any, that we may incur to resolve or settle the Securities Action and the Derivative Actions.
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)
NOTE 14. DEBT
The carrying value of our borrowings as of August 30, 2024 and December 1, 2023 were as follows:
| (dollars in millions) | Issuance Date | Due Date | Effective Interest Rate | 2024 | 2023 | ||||||||||||||||||||||||||||||||||||
| 1.90% 2025 Notes | February 2020 | February 2025 | 2.07% | $ | 500 | $ | 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 | 850 | ||||||||||||||||||||||||||||||||||||
| 4.85% 2027 Notes | April 2024 | April 2027 | 5.03% | 500 | — | ||||||||||||||||||||||||||||||||||||
| 4.80% 2029 Notes | April 2024 | April 2029 | 4.93% | 750 | — | ||||||||||||||||||||||||||||||||||||
| 2.30% 2030 Notes | February 2020 | February 2030 | 2.69% | 1,300 | 1,300 | ||||||||||||||||||||||||||||||||||||
| 4.95% 2034 Notes | April 2024 | April 2034 | 5.03% | 750 | — | ||||||||||||||||||||||||||||||||||||
| Total debt outstanding, at par | $ | 5,650 | $ | 3,650 | |||||||||||||||||||||||||||||||||||||
| Less: Current portion of debt, at par | (1,500) | — | |||||||||||||||||||||||||||||||||||||||
| Unamortized discount and debt issuance costs | (22) | (16) | |||||||||||||||||||||||||||||||||||||||
| Carrying value of long-term debt | $ | 4,128 | $ | 3,634 | |||||||||||||||||||||||||||||||||||||
| Current portion of debt, at par | $ | 1,500 | $ | — | |||||||||||||||||||||||||||||||||||||
| Unamortized discount and debt issuance costs | (1) | — | |||||||||||||||||||||||||||||||||||||||
| Carrying value of current debt | $ | 1,499 | $ | — |
Senior Notes
In January 2015, we issued $1 billion of senior notes due February 1, 2025. The related discount and issuance costs are amortized to interest expense over the term of the notes using the effective interest method. Interest is payable semi-annually, in arrears, on February 1 and August 1.
In February 2020, we issued $500 million of senior notes due February 1, 2025, $850 million of senior notes due February 1, 2027 and $1.30 billion of senior notes due February 1, 2030. The related discount and issuance costs are amortized to interest expense over the respective terms of the notes using the effective interest method. Interest is payable semi-annually, in arrears, on February 1 and August 1.
In April 2024, we issued $500 million of senior notes due April 4, 2027, $750 million of senior notes due April 4, 2029 and $750 million of senior notes due April 4, 2034. Our total proceeds were approximately $1.99 billion, net of an issuance discount of $3 million and total issuance costs of $9 million. The related discount and issuance costs are amortized to interest expense over the respective terms of the notes using the effective interest method. Interest is payable semi-annually, in arrears, on April 4 and October 4.
During the first quarter of fiscal 2024, we reclassified the senior notes due February 1, 2025 as current debt in our condensed consolidated balance sheets. As of August 30, 2024, the carrying value of our current debt was $1.50 billion, net of the related discount and issuance costs. Though we intend to refinance the current portion of our debt on or before the due date, the timing of the refinancing may be impacted by market conditions.
Our senior notes rank equally with our other unsecured and unsubordinated indebtedness, and do not contain financial covenants. We may redeem the notes at any time, subject to a make-whole premium.
For the senior notes issued in January 2015 and February 2020, 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. In addition, these notes include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances.
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Revolving Credit Agreement
In June 2022, we entered into a credit agreement (the “Revolving Credit Agreement”), providing for a five-year $1.5 billion senior unsecured revolving credit facility, which replaced our previous five-year $1 billion senior unsecured revolving credit agreement entered into in October 2018. 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 $2 billion. At our election, loans under the Revolving Credit Agreement will bear interest at either (i) term Secured Overnight Financing Rate (“SOFR”), plus a margin, (ii) adjusted daily SOFR, plus a margin, (iii) alternative currency rate, plus a margin, or (iv) base rate, which is defined as the highest of (a) the federal funds rate plus 0.50%, (b) the agent’s prime rate, or (c) term SOFR plus 1.00%. The margin for term SOFR, adjusted daily SOFR and alternative currency rate loans is based on our debt ratings, and ranges from 0.460% to 0.900%. 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 0.040% to 0.100% 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 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 transactions, dispositions and other matters, all subject to certain exceptions.
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 August 30, 2024, there were no outstanding borrowings under this Revolving Credit Agreement.
Commercial Paper Program
In September 2023, we established a commercial paper program under which we may issue unsecured commercial paper up to a total of $3 billion outstanding at any time, with maturities of up to 397 days from the date of issue. The net proceeds from the issuance of commercial paper are expected to be used for general corporate purposes, which may include working capital, capital expenditures, acquisitions, stock repurchases, refinancing indebtedness or any other general corporate purposes. As of August 30, 2024, there were no outstanding borrowings under the commercial paper program.
Term Loan Credit Agreement
In January 2023, we entered into a delayed draw term loan credit agreement (the “Term Loan Credit Agreement”), providing for a senior unsecured term loan of up to $3.5 billion for the purpose of partially funding the purchase price for our intended acquisition of Figma and the related fees and expenses. During the nine months ended August 30, 2024, we entered into a mutual termination agreement with Figma to terminate the previously announced merger agreement. Consequently, the Term Loan Credit Agreement was terminated. There were no outstanding borrowings under the Term Loan Credit Agreement at the time of termination.
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