What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-01-21 compared with 2021-01-15 · 172 added, 249 removed, 284 unchanged (60% of the section changed)

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Discussion regarding our financial condition and results of operations for fiscal 2020 as compared to fiscal 2019 is included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended November 27, 2020, filed with the SEC on January 15, 2021.

Subsequent to November 27, 2020, we completed our acquisition of Workfront, a privately held company that provides a work management platform for marketers, for approximately $1.5 billion in cash consideration.

Workfront will be integrated into our Digital Experience reportable segment for financial reporting purposes in the first quarter of fiscal 2021.

During fiscal 2019, we acquired the remaining interest in Allegorithmic SAS (“Allegorithmic”), a privately held 3D editing and authoring software company for gaming and entertainment, for approximately $106 million in cash consideration, and integrated it into our Digital Media reportable segment.

During fiscal 2018, we completed our acquisitions of Marketo, a privately held marketing cloud platform company, for approximately $4.73 billion and Magento, a privately held commerce platform company, for approximately $1.64 billion, and integrated them into our Digital Experience reportable segment.

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

See Note 3 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions, including 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Cloud-based features that are integral to our Creative Cloud and Document Cloud offerings and that work together with the on-premise/on-device software include, but are not limited to:

Creative Cloud Libraries, which enable customers to access their work, settings, preferences and other assets seamlessly across desktop and mobile devices and collaborate across teams in

Creative Cloud Libraries, which enable customers to access their work, settings, preferences and other assets seamlessly across desktop and mobile devices and collaborate across teams in real time;

shared reviews which enable simultaneous editing and commenting of PDFs across desktop, mobile and web;

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

• expected costs to develop acquired technologies and patents internally into commercially viable products;

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

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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.

In addition, we are subject to the examination of our income tax returns by the U.S.

Internal Revenue Service and other domestic and foreign tax authorities.

These tax examinations are expected to focus on our intercompany transfer pricing practices, application of tax rules, and 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.

These tax examinations are expected to focus on our research and development tax credits, intercompany transfer pricing practices and other matters.

We believe such estimates to be reasonable;

however, we cannot provide assurance that the final determination of any of these examinations will not have a significant impact on the amounts provided for income taxes in our Consolidated Financial Statements.

During fiscal 2020, we completed intra-entity transfers of certain intellectual property rights (“IP rights”) which resulted in the establishment of deferred tax assets, net of valuation allowance, and related tax benefits of $ 224 million and $ 1.13 billion, based on the fair value of the IP rights transferred in April and November 2020, respectively.

The determination of the fair value involves significant judgment on future revenue growth, operating margins and discount rates.

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

The sustainability of our future tax benefits is dependent upon the acceptance of the valuation estimates and assumptions by the taxing authorities.

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.

In the fourth quarter of fiscal 2021, we completed the acquisition of Frame.io, a privately held company that provides a cloud-based video collaboration platform, for approximately $1.18 billion and we began integrating Frame.io into our Digital Media reportable segment.

In the first quarter of fiscal 2021, we completed the acquisition of Workfront, a privately held company that provides a workflow platform, for approximately $1.52 billion in cash consideration and we began integrating Workfront into our Digital Experience reportable segment.

See Note 3 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions .

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RESULTS OF OPERATIONS

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In our Digital Experience segment, we continued to experience growth in software-based subscription revenue across our portfolio of offerings.

During the second quarter of fiscal 2020, we began to discontinue our transaction-driven Advertising Cloud offerings, allowing us to focus our investment on strategic growth initiatives.

In the fourth quarter of fiscal 2020, we moved our Advertising Cloud offerings from our Digital Experience segment into our new Publishing and Advertising segment, which combined Advertising Cloud with our previous Publishing segment.

This realignment is consistent with how we manage our Digital Experience segment to better reflect the strategic shift related to Advertising Cloud and to align with our overall core value proposition of delivering on customer experience management.

Our financial results for fiscal 2021 benefited from an extra week in the first quarter of fiscal 2021 due to our 52/53 week financial calendar whereby fiscal 2021 is a 53-week year compared with fiscal 2020 and 2019 which were 52-week years.

Digital Media

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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 as a result of low cost of entry and delivery of additional features and value to Creative Cloud, as well as keeping existing customers current on our latest release.

We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by attracting new users with new features and products, continuing to acquire users with our low cost of entry and delivery of additional features and value to Creative Cloud, and delivering new features and technologies to existing customers with our latest releases.

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.

We continue to implement strategies that are designed to 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 experience 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.

In October 2021, we acquired Frame.io, a privately held company that provides a cloud-based video collaboration platform, and we began integrating Frame.io into our Digital Media segment.

We are also a market leader with our Document Cloud offerings built around our Adobe Acrobat family of products, including Adobe Acrobat Reader DC, and a set of integrated mobile apps and cloud-based document services, including Adobe Scan and Adobe Sign.

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Adobe Acrobat DC is offered both through subscription and perpetual licenses.

As part of our Creative Cloud and Document Cloud strategies, we utilize a data-driven operating model (“DDOM”) and our Adobe Experience Cloud solutions to raise awareness of our products, drive new customer acquisition, engagement and retention, and optimize customer journeys.

As a result, we observed strong growth in Digital Media revenue during fiscal 2021.

Annualized Recurring Revenue (“ARR”) is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment.

ARR should be viewed independently of revenue, deferred revenue, unbilled backlog and remaining performance obligation as ARR is a performance metric and is not intended to be combined with any of these items.

We adjust our reported ARR on an annual basis to reflect any material exchange rates changes.

Our reported ARR results in the current fiscal year are based on currency rates set at the beginning of the year and held constant throughout the year.

ARR should be viewed independently of revenue, deferred revenue and remaining performance obligations 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 exchange rate changes.

Our reported ARR results in the

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current fiscal year are based on currency rates set at the beginning of the year and held constant throughout the year.

We calculate ARR as follows:

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Total Digital Media ARR grew to $12.24 billion at the end of fiscal 2021, up from $10.26 billion at the end of fiscal 2020.

Revaluing our ending ARR for fiscal 2020 using currency rates at the beginning of fiscal 2021, our Digital Media ARR at the end of fiscal 2020 would be $10.26 billion or approximately $77 million higher than the ARR reported above.

Revaluing our ending ARR for fiscal 2021 using currency rates at the beginning of fiscal 2022, our Digital Media ARR at the end of fiscal 2021 would be $12.15 billion or approximately $86 million lower than the ARR reported above.

Our success in driving growth in ARR has positively affected our revenue growth.

Creative revenue in fiscal 2021 was $9.55 billion, up from $7.74 billion in fiscal 2020 and representing 23% year-over-year growth.

Document Cloud revenue in fiscal 2020 was $1.50 billion, up from $1.22 billion in fiscal 2019 and representing 22% year-over-year revenue growth and reflecting an increase in demand driven by the shift to remote work as well as our continued efforts to transition Document Cloud to a subscription-based model.

Document Cloud revenue in fiscal 2021 was $1.97 billion, up from $1.50 billion in fiscal 2020 and representing 32% year-over-year growth which reflected an increase in demand driven by new user acquisition for our Document Cloud subscription offerings.

Total Digital Media segment revenue grew to $11.52 billion in fiscal 2021, up from $9.23 billion in fiscal 2020 and representing 25% year-over-year growth.

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Our differentiation and competitive advantage is strengthened by our ability to use the Adobe Experience Platform to connect our comprehensive set of solutions.

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

• Customer data and insights.

Our solutions deliver real-time customer profiles and intelligence across the customer journey.

Our offerings include Adobe Experience Platform, Adobe Analytics, Adobe Audience Manager, Customer Journey Analytics, Real-time Customer Data Platform and Intelligent Services.

In December 2020, we acquired Workfront, a privately held company that provides a workflow platform, and integrated Workfront into our Digital Experience segment.

Adobe Experience Cloud delivers solutions for our customers across the following strategic growth pillars:

• Data insights and audiences.

Our solutions, including Adobe Analytics, Adobe Experience Platform, Customer Journey Analytics, Adobe Audience Manager and our Real-time Customer Data Platform, deliver robust customer profiles and AI-powered analytics across the customer journey to provide timely, relevant experiences across platforms.

• Content and commerce.

Our solutions to help customers manage, deliver, test, target and optimize content delivery and enable shopping experiences that scale from mid-market to enterprise businesses.

Our offerings include Adobe Experience Manager, Adobe Target and Adobe Commerce.

• Customer journey management.

Our solutions help businesses manage, personalize and orchestrate campaigns and customer journeys across B2E use cases.

Our offerings include Adobe Campaign, Marketo Engage and Journey Orchestration.

Our solutions help customers manage, deliver and optimize content delivery, through Adobe Experience Manager and to enable shopping experiences that scale from mid-market to enterprise businesses, with Adobe Commerce.

• Customer journeys.

Our solutions help businesses manage, test, target, personalize and orchestrate campaigns and customer journeys across B2E use cases, including through Marketo Engage, Adobe Campaign, Adobe Target and Journey Optimizer.

• Marketing workflow.

We offer Adobe Workfront, a work management platform directed toward marketers to orchestrate campaign workflows.

In addition to chief marketing officers, chief revenue officers and digital marketers, users of our Digital Experience solutions include advertisers, campaign managers, publishers, data analysts, content managers, social marketers, marketing executives and information management and technology executives.

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By combining the creativity of our Digital Media business

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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.

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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.

Digital Experience revenue for all fiscal years presented has been updated to reflect the Advertising Cloud segment move.

Digital Experience revenue was $3.87 billion in fiscal 2021, up from $3.13 billion in fiscal 2020 which represents 24% year-over-year growth.

Driving this increase was the increase in subscription revenue across our offerings which grew to $3.38 billion in fiscal 2021 from $2.66 billion in fiscal 2020, representing 27% year-over-year growth.

Also contributing to the increase in Digital Experience subscription revenue was revenue associated with Workfront’s workflow platform offerings.

We expect that the addition of Workfront, and continued demand across our portfolio of Digital Experience solutions, will drive revenue growth in future years.

COVID-19 UPDATE

In March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic.

This pandemic has had widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices.

Federal and state governments have implemented measures in an effort to contain the virus, including physical distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes and closure of non-essential businesses.

The COVID-19 pandemic continues to have widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices.

As conditions fluctuate around the world, with vaccine administration rising in certain regions, governments and organizations have responded by adjusting their restrictions and guidelines accordingly.

Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity.

As a result, we have taken action to direct our teams to work from home, suspend travel and replace in-person events such as Adobe Summit and MAX, with digital events through July 2021.

We carefully assess, and reassess, conditions on a case-by-case basis to determine when employees can safely return to our offices and resume business travel.

As a result, we have reopened our offices in areas with sustained low infection rates and are allowing fully vaccinated employees to return on a voluntary basis.

In addition, we are implementing our reimagined framework for the future of work at Adobe, which is rooted in a flexible and hybrid model enabled by a digital-first mindset.

During the pandemic, digital has become the primary way for people to connect, work, learn and be entertained, and for businesses to engage with customers.

This macro trend towards all things digital has increased the importance and relevance of our solutions and accelerated the tailwinds that benefit our business, which contributed to our continued growth year over year.

However, while our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of the pandemic on our results of operations and overall financial performance remain uncertain.

See Risk Factors for further discussion of the possible impact of the pandemic on our business.

This ongoing shift to a digital-first world has increased the importance and relevance of our solutions, which has contributed to our continued growth year over year.

However, while our revenue and earnings are relatively predictable as a result of our subscription-based business model, the duration of the pandemic and the broader implications of the macro-economic recovery on our business remain uncertain.

S ee the section titled “ Risk Factors ” in Part I, Item 1A of this report fo r further discussion of the possible impact of the pandemic on our business.

Financial Performance Summary for Fiscal 2021

• Total Digital Media ARR of approximately $10.18 billion as of November 27, 2020 increased by $1.85 billion, or 22%, from $8.33 billion as of November 29, 2019.

The increase in our Digital Media ARR was primarily due to new user adoption of our Creative Cloud and Document Cloud offerings.

• Total Digital Media ARR of approximately $12.24 billion as of December 3, 2021 increased by $1.98 billion, or 19%, from $10.26 billion as of November 27, 2020.

The change in our Digital Media ARR was primarily due to new user adoption of our Creative Cloud and Document Cloud offerings.

• Creative revenue of $9.55 billion increased by $1.81 billion, or 23%, during fiscal 2021, from $7.74 billion in fiscal 2020.

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• Digital Experience revenue of $3.87 billion increased by $742 million, or 24%, during fiscal 2021, from $3.13 billion in fiscal 2020.

The increase was primarily due to subscription revenue growth across our offerings.

• Remaining performance obligation of $11.34 billion as of November 27, 2020 increased by $1.52 billion, or 15%, from $9.82 billion as of November 29, 2019, primarily due to new contracts and renewals for our Digital Media and Digital Experience offerings.

• Cost of revenue of $1.72 billion increased by $49 million, or 3%, during fiscal 2020, from $1.67 billion in fiscal 2019 primarily due to increases in hosting services and data center costs, offset in large part by decreases in Advertising Cloud media costs.

• Operating expenses of $6.91 billion increased by $679 million, or 11%, during fiscal 2020, from $6.23 billion in fiscal 2019 primarily due to increases in base and incentive compensation and related benefits costs, as well as increased marketing spend.

These increases were offset in part by decreases in travel-related expenses.

• Net income of $5.26 billion increased by $2.31 billion, or 78%, during fiscal 2020 from $2.95 billion in fiscal 2019 primarily due to increases in revenue and the non-recurring benefit from income taxes resulting from intra-entity transfers of certain intellectual property rights.

• Net cash flows from operations of $5.73 billion during fiscal 2020 increased by $1.31 billion, or 30%, from $4.42 billion during fiscal 2019 primarily due to higher net income adjusted for the net effect of non-cash items.

Presentation Changes

In the fourth quarter of fiscal 2020, we moved our Advertising Cloud offerings from our Digital Experience segment into our new Publishing and Advertising segment, which combined our Advertising Cloud offerings with our previous Publishing segment.

Further, we reclassified revenue and related cost of revenue of our Advertising Cloud offerings from subscription to services and other on our Consolidated Statements of Income.

Financial information for all fiscal years presented has been updated to reflect these reclassifications.

There were no other updates to disclosures included in our prior year report in relation to the reclassifications.

Our financial results for fiscal 2020 and 2019 are presented in accordance with Accounting Standards Update No.

2014-09, Revenue from Contracts with Customers (Topic 606), which was adopted under the modified retrospective method at the beginning of fiscal 2019.

Fiscal 2018 results have not been restated which limits its comparability with other fiscal years presented.

The increase was primarily due to subscription revenue growth across our offerings, including from our Workfront acquisition.

• Remaining performance obligations of $13.99 billion as of December 3, 2021 increased by $2.65 billion, or 23%, from $11.34 billion as of November 27, 2020, primarily due to new contracts and renewals for our Digital Media and Digital Experience offerings, as well as impacts from our Workfront acquisition.

• Cost of revenue of $1.87 billion increased by $143 million, or 8%, during fiscal 2021, from $1.72 billion in fiscal 2020 primarily due to increases in hosting services and data center costs, partially offset by decreases in Advertising Cloud media costs.

• Operating expenses of $8.12 billion increased by $1.21 billion, or 17%, during fiscal 2021, from $6.91 billion in fiscal 2020 primarily due to increases in base and incentive compensation and related benefits costs, as well as increased marketing spend.

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• Net income of $4.82 billion decreased by $438 million, or 8%, during fiscal 2021 from $5.26 billion in fiscal 2020 primarily due to the change in provision for income taxes, which was largely driven by the non-recurring benefit from income taxes recognized in fiscal 2020 associated with our intra-entity transfers of certain intellectual property rights.

To a lesser extent, net income was also impacted by increases in operating expenses, offset by increases in revenue.

• Net cash flows from operations of $7.23 billion during fiscal 2021 increased by $1.50 billion, or 26%, from $5.73 billion in fiscal 2020 primarily due to higher net income adjusted for the net effect of non-cash items and increases in deferred revenue, partially offset by increases in trade receivables.

(dollars in millions) 2021 2020 2019 % Change

2020-2019 % Change

Subscription $ 14,573 $ 11,626 $ 9,634 25 %

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(dollars in millions) 2021 2020 2019 % Change

2020-2019 % Change

Digital Media $ 11,048 $ 8,813 $ 7,208 25 %

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Total subscription revenue $ 14,573 $ 11,626 $ 9,634 25 %

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(*) Percentage is less than 1%.

Our product revenue is comprised primarily of fees related to licenses for on-premise software purchased on a perpetual basis, for a fixed period of time or based on usage for certain of our OEM and royalty agreements.

We primarily recognize

product revenue at the point in time the software is available to the customer, provided all other revenue recognition criteria are met.

We primarily recognize product revenue at the point in time the software is available to the customer, provided all other revenue recognition criteria are met.

Services and Other

Our services and other revenue is comprised primarily of fees related to consulting, training, maintenance and support and our advertising offerings.

Our services and other revenue is comprised primarily of fees related to consulting, training, maintenance and support for certain on-premise licenses that are recognized at a point in time and our advertising offerings.

We typically sell our consulting contracts on a time-and-materials and fixed-fee basis.

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Transaction-based advertising revenue is recognized on a usage basis as we satisfy the performance obligations to our customers.

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In fiscal 2021, we categorized our products into the following reportable segments:

• Digital Media —Our Digital Media segment provides tools and solutions that enable individuals, teams and enterprises to create, publish, promote and monetize their digital content anywhere.

Our customers include content creators, experience designers, app developers, enthusiasts, students, social media users and creative professionals, as well as marketing departments and agencies, companies and publishers.

Our customers also include knowledge workers who create, collaborate on and distribute documents and creative content.

• Digital Experience —Our Digital Experience segment provides products, services and solutions for creating, managing, executing, measuring, monetizing and optimizing customer experiences from analytics to commerce.

Our customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers, marketing executives, information management and technology executives, product development executives, and sales and support executives.

• Publishing and Advertising —Our Publishing and Advertising 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 platforms for Advertising Cloud, web conferencing, document and forms, and Primetime.

• Digital Media —Our Digital Media segment provides products, services and solutions that enable individuals, teams and enterprises to create, publish and promote their content anywhere and accelerate their productivity by modernizing how they view, share, engage with and collaborate on documents and creative content.

Our customers include creative professionals, including photographers, video editors, graphic and experience designers and game developers, communicators, including content creators, students, marketers and knowledge workers, and consumers.

• Digital Experience —Our Digital Experience segment provides an integrated platform and set of applications and services that enable brands and businesses to create, manage, execute, measure, monetize and optimize customer experiences that span from analytics to commerce.

Our customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers and executives across the C-suite.

• Publishing and Advertising —Our Publishing and Advertising segment contains legacy products and services that address diverse market opportunities, including eLearning solutions, technical document publishing, web conferencing, document and forms platform, web application development, high-end printing and our Adobe Advertising Cloud offerings.

Segment Information

(dollars in millions) 2021 2020 2019 % Change

2020-2019 % Change

Digital Media $ 11,520 $ 9,233 $ 7,707 25 %

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Digital Media

Revenue from Digital Media increased $1.53 billion during fiscal 2020 as compared to fiscal 2019, driven by increases in revenue associated with our Creative and Document Cloud offerings due to increased demand and digital engagement amid the work-from-home environment.

Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during fiscal 2020 primarily due to increases in net new subscriptions across our Creative Cloud offerings.

Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during fiscal 2020 primarily due to increases in subscription revenue driven by strong adoption of our Document Cloud offerings including Adobe Sign.

Revenue by major offerings in our Digital Media reportable segment for fiscal 2021, 2020 and 2019 were as follows:

(dollars in millions) 2021 2020 2019 % Change

Creative Cloud $ 9,546 $ 7,736 $ 6,482 23 %

Document Cloud 1,974 1,497 1,225 32 %

Total Digital Media revenue $ 11,520 $ 9,233 $ 7,707 25 %

Revenue from Digital Media increased $2.29 billion during fiscal 2021 as compared to fiscal 2020, driven by increases in revenue associated with our Creative and Document Cloud subscription offerings due to continued demand amid an increasingly digital environment and expanding subscription base.

Revenue associated with our Creative offerings, which includes our Creative Cloud, increased during fiscal 2021 primarily due to increases in net new subscriptions across our Creative Cloud offerings.

Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during fiscal 2021 primarily due to increases in subscription revenue driven by strong new user acquisition of our Document Cloud offerings.

Digital Experience

Revenue from Digital Experience increased $330 million during fiscal 2020, as compared to fiscal 2019 primarily due to subscription revenue growth across our offerings of which the largest contributors were our AEM and Marketo Engage offerings.

Revenue from Digital Experience increased $742 million during fiscal 2021, as compared to fiscal 2020 primarily due to subscription revenue growth across our offerings including from our Workfront acquisition.

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Geographical Information

(dollars in millions) 2021 2020 2019 % Change

2020-2019 % Change

Americas $ 8,996 $ 7,454 $ 6,506 21 %

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Within each geographic region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above.

Included in the overall change in revenue for fiscal 2020 and fiscal 2019 were impacts associated with foreign currency as shown below.

Our cash flow hedging program is used to mitigate a portion of the foreign currency impact to revenue.

(in millions) 2020 2019

Revenue impact:

Increase/(Decrease)

Euro $ (24) $ (73)

Australian Dollar (16) (27)

British Pound (5) (27)

Japanese Yen 14 2

Brazilian Real (14) (2)

Other currencies (8) (11)

Total revenue impact

Hedging impact:

British Pound (2) 8

Japanese Yen (2) 2

Australian Dollar (1) —

Total hedging impact

Total impact $ (50) $ (98)

Included in the overall change in revenue for fiscal 2021 as compared to fiscal 2020 were impacts associated with foreign currency which were mitigated in part by our foreign currency hedging program.

During fiscal 2021, the U.S.

Dollar strengthened largely against EMEA currencies and the Australian Dollar, which decreased revenue in U.S.

Dollar equivalents.

The foreign currency impact to revenue was partially offset by gains primarily from our Euro cash flow hedging program.

Dollar primarily weakened against EMEA currencies and the Australian Dollar as compared to fiscal 2020, which increased revenue in U.S.

Dollar equivalents by $276 million.

During fiscal 2021, the foreign currency impacts to revenue were offset in part by net hedging losses from our cash flow hedging program of $18 million.

See Note 2 of our Notes to Consolidated Financial Statements for additional details of revenue by geography.

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(dollars in millions) 2021 2020 2019 % Change

2020-2019 % Change

Subscription $ 1,374 $ 1,108 $ 926 24 %

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(*) Percentage is less than 1%

Cost of subscription revenue consists of third-party hosting services and data center costs, royalty fees and other expenses related to operating our network infrastructure, including depreciation expense and operating lease payments associated with computer equipment, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of certain intangible assets and allocated overhead.

Cost of subscription revenue consists of third-party hosting services and data center costs, including expenses related to operating our network infrastructure.

Cost of subscription revenue also includes compensation costs associated with network operations, implementation, account management and technical support personnel, royalty fees, software costs and amortization of certain intangible assets.

Cost of subscription revenue increased due to the following:

Components of

2020-2019 Components of

Hosting services and data center costs 12 %

Base compensation and related benefits associated with headcount 5

Incentive compensation, cash and stock-based 4

Royalty costs 3

Base compensation and related benefits associated with headcount 3 5

Software licenses 2 2

Amortization of intangibles (2) 24

Various individually insignificant items (1) 4

Total change 24 %

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

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Cost of product revenue is primarily comprised of third-party royalties, amortization of certain intangible assets, localization costs and the costs associated with the manufacturing of our products.

Services and Other

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

Cost of services and other also includes media costs related to impressions purchased from third-party ad inventory sources for our transaction-based Adobe Advertising Cloud offerings, which we began to discontinue in the second quarter of fiscal 2020.

Cost of services and other fluctuations were due to the following:

Components of

2020-2019 Components of

Media costs (9) % 10 %

Base compensation and related benefits associated with headcount (7) 4

Incentive compensation, cash and stock-based (1) 6

Professional and consulting fees 3 —

Various individually insignificant items (4) 3

Total change (18) % 23 %

Cost of services and other revenue is primarily comprised of compensation and contracted costs incurred to provide consulting services, training and product support, and hosting services and data center costs.

Cost of services and other also includes media costs related to impressions purchased from third-party ad inventory sources for our transaction-based Adobe Advertising Cloud offerings.

Cost of services and other decreased during fiscal 2021 as compared to fiscal 2020 mainly due to lower media costs related to Advertising Cloud offerings that were discontinued beginning in the second quarter of fiscal 2020.

Operating Expenses

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Research and Development

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

Research and development expenses consist primarily of compensation and contracted costs associated with software development, third-party hosting services and data center costs, related facilities costs and expenses associated with computer equipment and software used in development activities.

Research and development expenses increased due to the following:

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Base compensation and related benefits associated with headcount 6

Professional and consulting fees 2

Total change 16 %

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Sales and Marketing

Sales and marketing expenses consist primarily of salary and benefit expenses, amortization of contract acquisition costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel.

Sales and marketing expenses consist primarily of compensation costs, amortization of contract acquisition costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel.

Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows and events, public relations and other market development programs.

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Sales and marketing expenses increased due to the following:

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Incentive compensation, cash and stock-based 5

Transaction fees 2

Base compensation and related benefits associated with headcount 3

Professional and consulting fees (1)

Transaction fees 2

Total change 20 %

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 consist primarily of compensation and contracted costs, 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.

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Incentive compensation, cash and stock-based 9 %

Charges related to cancellation of corporate events, net of recoveries 3

Bad debt expense 2

Charitable contributions 2

Base compensation and related benefits associated with headcount 4

Bad debt expense (4)

Software licenses 2

Various individually insignificant items 1

Total change 12 %

During fiscal 2020, we recorded net charges related to the cancellation of our corporate events due to concerns over the pandemic.

Certain of these charges were reversed as we successfully negotiated the right to apply certain commitments to other events.

Bad debt expense increased during fiscal 2020 primarily due to specific reserves for certain categories of customers that were more impacted by the changes in the macroeconomic environment as a result of the pandemic.

Amortization of Intangibles

Amortization expense decreased during fiscal 2020 as compared to fiscal 2019 primarily due to certain intangible assets from previous acquisitions, including from Marketo and Omniture, becoming fully amortized during the year.

Amortization expense increased during fiscal 2021 as compared to fiscal 2020 primarily due to amortization expense associated with intangible assets purchased through our acquisition of Workfront.

The increase in amortization expense is offset in part by the impact of certain intangible assets from previous acquisitions, including Marketo and Omniture, becoming fully amortized in fiscal 2020.

Non-Operating Income (Expense), Net

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Interest expense represents interest associated with our debt instruments.

Interest on our Notes is payable semi-annually, in arrears, on February 1 and August 1.

Interest on our Term Loan, which was terminated in the first quarter of fiscal 2020, was payable periodically at the end of each interest period.

Floating interest payments on the interest rate swaps, which matured in the first quarter of fiscal 2020, were paid monthly and the fixed-rate interest receivable on the swaps was received semi-annually concurrent with the Notes interest payments.

Interest on our senior notes is payable semi-annually, in arrears, on February 1 and August 1.

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Interest expense decreased during fiscal 2021 as compared to fiscal 2020 primarily due to lower average interest rates on our debt instruments that were refinanced in the first quarter of fiscal 2020.

See Note 17 of our Notes to Consolidated Financial Statements for further details regarding our debt instruments.

Investment Gains (Losses), Net

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

Investment gains (losses), net decreased during fiscal 2020 as compared to fiscal 2019 primarily due to the gain recognized upon our acquisition of the remaining interest in Allegorithmic in January 2019.

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

Other Income (Expense), Net

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Other income (expense), net also includes realized gains and losses on fixed income investments and foreign exchange gains and losses.

Other income (expense), remained stable during fiscal 2020 primarily due to decreases in interest income driven by lower average interest rates offset by our change in methodology of accounting for foreign currency cash flow hedges.

Effective in the third quarter of fiscal 2019, option premiums, which were previously recorded in other income (expense), net, are recorded in accumulated other comprehensive income (loss).

Other income (expense), decreased during fiscal 2021 primarily due to decreases in interest income driven by lower average interest rates and increases in foreign exchange losses.

Provision for (Benefit from) Income Taxes

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(**) Percentage is not meaningful.

Our effective tax rate decreased by approximately 34 percentage points during fiscal 2020 as compared to fiscal 2019.

The change is primarily due to non-recurring tax benefits resulting from the intra-entity transfers of certain intellectual property rights (“IP rights”) completed during fiscal 2020.

Our effective tax rate increased by approximately 41 percentage points during fiscal 2021 as compared to fiscal 2020.

The higher effective tax rate was primarily due to the non-recurring tax benefits recognized during fiscal 2020 as a result of the change in our corporate tax trading structure, and the corresponding change in geographic mix of international income in fiscal 2021.

Our effective tax rate for fiscal 2021 was lower than the U.S.

federal statutory tax rate of 21% primarily due to tax benefits resulting from the intra-entity transfers of certain IP rights, a favorable geographic mix of earnings and tax benefits related to stock-based compensation.

federal statutory tax rate of 21% primarily due to tax benefits related to stock-based compensation.

During fiscal 2020, we completed intra-entity transfers of certain IP rights to our Irish subsidiary in order to better align the ownership of these rights with how our business operates.

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however, our Irish subsidiary recognized deferred tax assets for the book and tax basis difference of the transferred IP rights.

As a result of these transactions, we recorded deferred tax assets, net of valuation allowance, and related tax benefits of $224 million and $1.13 billion, based on the fair value of the IP rights transferred in April and November 2020, respectively.

The tax-deductible amortization related to the transferred IP rights will be recognized over the period of economic benefit.

In years beyond fiscal 2020, the change in the geographic mix of international income resulting from these transfers is anticipated to adversely affect our effective income tax rates and cash flows.

However, the adverse impact to effective rates for cash paid for income taxes will be partially offset by future deductions on the transferred IP rights.

On December 22, 2017, the U.S.

Tax Act was enacted into law, which significantly changed existing U.S.

tax law and includes many provisions applicable to us.

Certain international provisions of the U.S.

Tax Act, such as a tax on global intangible low-tax income, a base erosion and anti-abuse tax and a special tax deduction for foreign-derived intangible income, took effect in fiscal 2019.

Treasury releases regulations that impact these provisions, we account for finalized regulations in the period of enactment.

As a result of these transactions, we recorded deferred tax assets, net of valuation allowance, and related tax benefits totaling $1.35 billion, based on the fair value of the IP rights transferred.

The tax-deductible amortization related to the transferred IP rights is recognized over the period of economic benefit.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized.

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On the basis of this evaluation, we continue to maintain a valuation allowance to reduce our deferred tax assets to the amount realizable.

The total valuation allowance was $276 million as of November 27, 2020 and is primarily attributable to certain state and foreign credits and foreign intangible assets.

The total valuation allowance was $335 million as of December 3, 2021, primarily attributable to certain state credits and foreign intangible assets.

We are a United States-based multinational company subject to tax in multiple U.S.

and foreign tax jurisdictions.

A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries.

The current U.S.

tax law provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax.

As we repatriate the undistributed foreign earnings for use in the U.S., the distributions will generally not be subject to further U.S.

In June 2020, California enacted legislation which includes a limitation on the utilization of research and development tax credits for a three-year period beginning in fiscal 2021.

The net impact of the legislation is uncertain but is anticipated to increase our California tax and, consequently, adversely impact our effective tax rates for the three-year period beginning in fiscal 2021.

See Note 10 of our Notes to Consolidated Financial Statements for further information on our provision for (benefit from) income taxes.

tax law subjects the earnings of certain foreign subsidiaries to U.S.

tax and generally allows an exemption from taxation for distributions from foreign subsidiaries.

In the current global tax policy environment, the U.S.

Treasury and other domestic and foreign governing bodies continue to consider, and in some cases introduce, changes in regulations applicable to corporate multinationals such as Adobe.

As regulations are issued, we account for finalized regulations in the period of enactment.

See Note 10 of our Notes to Consolidated Financial Statements for further informatio n regarding o ur provision for (benefit from) income taxes.

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Accounting for Uncertainty in Income Taxes

The gross liabilities for unrecognized tax benefits excluding interest and penalties were $289 million, $201 million and $173 million for fiscal 2021, 2020 and 2019, respectively.

If the total unrecognized tax benefits at November 27, 2020, November 29, 2019 and November 30, 2018 were recognized, $136 million, $116 million and $136 million would decrease the respective effective tax rates.

The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $26 million and $25 million for fiscal 2020 and 2019, respectively.

If the total unrecognized tax benefits at December 3, 2021, November 27, 2020 and November 29, 2019 were recognized, $199 million, $136 million and $116 million would decrease the respective effective tax rates.

The combined amounts of accrued interest and penalties related to tax positions taken on our tax returns were approximately $22 million and $26 million for fiscal 2021 and 2020, respectively.

These amounts were included in long-term income taxes payable in their respective years.

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Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $5 million over the next 12 months.

In addition, in countries where we conduct business and in jurisdictions in which we are subject to tax, including those covered by governing bodies that enact tax laws applicable to us, such as the European Commission of the European Union, we are subject to potential changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe.

In addition, in the United States and other countries where we conduct business and in jurisdictions in which we are subject to tax, including those covered by governing bodies that enact tax laws applicable to us, such as the European Commission of the European Union, we are subject to potential changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe.

These countries, other governmental bodies and intergovernmental economic organizations such as the Organization for Economic Cooperation and Development, have or could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in such jurisdictions.

In the current global tax policy environment, any changes in laws, regulations and interpretations related to these assertions could adversely affect our effective tax rates, cause us to respond by making changes to our business structure, or result in other costs to us which could adversely affect our operations and financial results.

Moreover, we are subject to the continual examination of our income tax returns by the U.S.

Moreover, we are subject to the examination of our income tax returns by the U.S.

Internal Revenue Service and other domestic and foreign tax authorities.

These tax examinations are expected to focus on our intercompany transfer pricing practices, application of tax rules and other matters.

These tax examinations are expected to focus on our research and development tax credits, intercompany transfer pricing practices and other matters.

We cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

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LIQUIDITY AND CAPITAL RESOURCES

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

(in millions) November 27, 2020 November 29, 2019

(in millions) December 3, 2021 November 27, 2020

Cash and cash equivalents $ 3,844 $ 4,478

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Stockholders’ equity $ 14,797 $ 13,264

Working Capital

Working capital as of November 27, 2020 and November 29, 2019 was $2.63 billion of a surplus and $1.70 billion of a deficit, respectively.

During the first quarter of fiscal 2020, we refinanced our 2.25 billion term loan due April 30, 2020 (“Term Loan”) and $900 million 4.75% senior notes due February 1, 2020 (“2020 Notes”).

See the section titled “Cash Flows from Financing Activities” below.

A summary of our cash flows for fiscal 2021, 2020 and 2019 is as follows:

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Net increase (decrease) in cash and cash equivalents $ (634) $ 1,828 $ 1,007

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.

Our primary source of cash is receipts from revenue.

Our 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 sources of cash include proceeds from participation in the employee stock purchase plan.

Other uses of cash include business acquisitions, purchases of property and equipment and payments for taxes related to net share settlement of equity awards.

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For fiscal 2021, net cash provided by operating activities of $7.23 billion was primarily comprised of net income adjusted for the net effect of non-cash items.

The primary working capital sources of cash were net income together with increases in deferred revenue and decreases in trade receivables, which were offset in part by increases in prepaid expenses and other assets.

The increase in deferred revenue was primarily driven by Digital Media offerings with cloud-enabled services, and the decrease in trade receivables was largely attributable to strong collections.

The primary working capital use of cash was due to increases in prepaid expenses and other assets driven by sales commissions paid and capitalized and, to a lesser extent, increases due to the timing of billings and payments associated with certain vendors.

The primary working capital sources of cash were net income together with increases in deferred revenue driven by Digital Media and Digital Experience offerings.

The primary working capital use of cash were increases in prepaid expenses and other assets together with increases in trade receivables.

The increases in prepaid expenses and other assets were driven by sales commissions paid and capitalized and the timing of billings and payments associated with certain vendors.

The increases in trade receivables were attributable to the timing of billings.

Cash Flows from Investing Activities

For fiscal 2020, net cash used for investing activities of $414 million was primarily due to ongoing capital expenditures.

These cash outflows were offset in part by proceeds from sales and maturities of short-term investments, net of purchases.

For fiscal 2021, net cash used for investing activities of $3.54 billion was primarily due to our acquisition of Workfront, Frame.io and ongoing capital expenditures.

See Note 3 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions.

Cash Flows from Financing Activities

For fiscal 2020, net cash used for financing activities of $3.49 billion was primarily due to payments for our treasury stock repurchases and taxes paid related to the net share settlement of equity awards, which were offset by proceeds from re-issuance of treasury stock for our employee stock purchase plan.

See the section titled “Stock Repurchase Program” discussed below.

In February 2020, we issued $500 million of 1.70% senior notes due February 1, 2023 (“2023 Notes”), $500 million of 1.90% senior notes due February 1, 2025 (“1.90% 2025 Notes”), $850 million of 2.15% senior notes due February 1, 2027 (“2027 Notes”) and $1.30 billion of 2.30% senior notes due February 1, 2030 (“2030 Notes”).

We used the proceeds to repay the Term Loan and 2020 Notes concurrently.

See Note 17 of our Notes to Consolidated Financial Statements for information regarding our debt refinancing.

Other Liquidity and Capital Resources Considerations

For fiscal 2021, net cash used for financing activities of $4.30 billion was primarily due to payments for our common stock repurchases and taxes paid related to the net share settlement of equity awards, which were offset by proceeds from re-issuance of common stock mainly for our employee stock purchase plan.

See the section titled “Stock Repurchase Program” below.

Liquidity and Capital Resources Considerations

Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2022 due to changes in our planned cash outlay.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the pandemic and other risks detailed in Part I, Item 1A titled “Risk Factors.” While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future.

However, based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital, operating resource expenditure and capital expenditure requirements for the next twelve months.

Our cash equivalent and short-term investment portfolio as of November 27, 2020 consisted of asset-backed securities, corporate debt securities, foreign government securities, money market mutual funds, municipal securities and time deposits.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the pandemic and other risks detailed in the section titled “Risk Factors” in Part I, Item 1A of this report.

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, operating resource expenditure and capital expenditure requirements for the next twelve months.

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Our cash equivalent and short-term investment portfolio as of December 3, 2021 consisted of asset-backed securities, corporate debt securities, money market funds, municipal securities, time deposits and U.S.

Treasury securities.

We use professional investment management firms to manage a large portion of our invested cash.

We have a $1 billion senior unsecured revolving credit agreement (“Revolving Credit Agreement”) with a syndicate of lenders, providing for loans to us and certain of our subsidiaries through October 17, 2023.

As of November 27, 2020, there were no outstanding borrowings under this credit agreement and the entire $1 billion credit line remains available for borrowing.

As of November 27, 2020, we have $4.15 billion senior notes outstanding, consisting of the 2023 Notes, 1.90% 2025 Notes, 2027 Notes, 2030 Notes and the $1 billion of 3.25% senior notes due February 1, 2025 (the “3.25% 2025 Notes,” and together with the aforementioned notes, the “Notes”).

The Notes rank equally with our other unsecured and unsubordinated indebtedness.

We expect to continue our investing activities, including short-term and long-term investments, purchases of computer systems for research and development, sales and marketing, product support and administrative staff, and facilities expansion.

As of November 27, 2020, we expect our capital investment to be approximately $550 million to $650 million, primarily to fund our San Jose and Bangalore construction projects through fiscal 2022.

As of December 3, 2021, we expect our capital investment to be approximately $180 million to $220 million, primarily to fund our San Jose and Bangalore construction projects during fiscal 2022.

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.

See Note 3 of our Notes to Consolidated Financial Statements for further information regarding this acquisition .

Stock Repurchase Program

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase shares in the open market or enter into structured repurchase agreements with third parties.

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

During fiscal 2020, 2019 and 2018, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $3.05 billion, $2.75 billion, and $2.05 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 expected to be higher than the foregone return on our cash prepayments to the financial institutions.

There were no explicit commissions or fees on these structured repurchases.

Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

The financial institutions agree to deliver shares to us at monthly intervals during the contract term.

The parameters used to calculate the number of shares deliverable are:

the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount.

The following is a summary of our structured stock repurchases executed with large financial institutions during fiscal 2020, 2019 and 2018:

(in millions, except average price per share)

2020 2019 2018

Board approval dates Shares Average per share Shares Average per share Shares Average per share

January 2017 — $ — — $ — 8.7 $ 230.43

May 2018 8.0 $ 376.38 9.9 $ 270.23 — $ —

Total cost $3,024 $2,671 $2,002

For fiscal 2020, 2019 and 2018, 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 27, 2020, November 29, 2019 and November 30, 2018 were excluded from the computation of earnings per share.

As of November 27, 2020, $255 million of prepayments remained under the agreement.

Subsequent to November 27, 2020, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $950 million.

This amount will be classified as treasury stock on our Consolidated Balance Sheets.

Upon completion of the $950 million stock repurchase agreement, $1.1 billion remains under our May 2018 authority.

Further, in December 2020, our Board of Directors granted us additional authority to repurchase up to $15 billion in common stock through the end of fiscal 2024.

We have not drawn from our new $15 billion authority as of the issuance of these financial statements.

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 27, 2020 .

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of November 27, 2020 consist of our Notes and obligations under operating leases, royalty agreements and various service agreements.

See Notes 16, 17 and 18 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments.

Contractual Obligations

The following table summarizes our contractual obligations as of November 27, 2020:

(in millions) Payment Due by Period

Total Less than

1 year 1-3 years 3-5 years More than

Notes, including interest $ 4,763 $ 99 $ 693 $ 1,659 $ 2,312

Operating lease obligations 657 104 162 119 272

Purchase obligations 1,885 872 1,012 1 —

Total $ 7,305 $ 1,075 $ 1,867 $ 1,779 $ 2,584

As of November 27, 2020, the carrying value of our Notes was $4.12 billion.

Interest is payable semi-annually, in arrears on February 1 and August 1.

At November 27, 2020, our maximum commitment for interest payments was $613 million for the remaining duration of our outstanding Notes.

Revolving Credit Agreement

As of December 3, 2021, there were no outstanding borrowings under this credit agreement and the entire $1 billion credit line remains available for borrowing.

Our Revolving Credit Agreement contains a financial covenant requiring us not to exceed a maximum leverage ratio.

As of November 27, 2020, we were in compliance with this covenant.

As of December 3, 2021, we were in compliance with this covenant.

We believe this covenant will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan.

Our Notes do not contain any financial covenants.

Under the terms of our 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.

Transition Taxes Liability

Our transition tax liability which was accrued as a result of the U.S.

Tax Act was approximately $390 million as of November 27, 2020 and is payable in installments through fiscal 2026.

Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax.

As we repatriate the undistributed foreign earnings for use in the U.S., the distributions will generally not be subject to further U.S.

Accounting for Uncertainty in Income Taxes

See Results of Operations - Provision for (Benefit from) Income Taxes above and Note 10 of our Notes to Consolidated Financial Statements for our discussion on accounting for uncertainty in income taxes.

We have certain royalty commitments associated with the licensing of certain offerings.

Royalty expense is generally based on a dollar amount per unit sold or a percentage of the underlying revenue.

We have $4.15 billion senior notes outstanding, which rank equally with our other unsecured and unsubordinated indebtedness.

As of December 3, 2021, the carrying value of our senior notes was $4.12 billion and our maximum commitment for interest payments was $514 million for the remaining duration of our outstanding senior notes.

Interest is payable semi-annually, in arrears on February 1 and August 1.

Our senior notes do not contain any financial covenants.

See Note 17 of our Notes to Consolidated Financial Statements for further details regarding our debt.

Contractual Obligations

Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business.

As of December 3, 2021, the value of our non-cancellable unconditional purchase obligations was $1.38 billion.

See N ote 16 of ou r Notes to Consolidated Financial Statements for additional information re garding our pur chase obligations.

We lease certain facilities and data centers under non-cancellable operating lease arrangements that expire at various dates through 2031.

As of December 3, 2021, the value of our obligations under operating leases was $604 million.

See Note 1 8 of our Notes to Consolidated Financial Statements for additional information regarding ou r lease obligations.

Our transition tax liability related to historical undistributed foreign earnings, which was accrued as a result of the U.S.

Tax Act, was approximately $349 million as of December 3, 2021 and is payable in installments through fiscal 2026.

As we repatriate foreign earnings for use in the United States, the distributions will generally be exempt from federal income taxes under current U.S.

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 May 2018, our Board of Directors granted authority to repurchase up to $8 billion in our common stock, which we fully utilized during fiscal 2021.

In December 2020, our Board of Directors granted additional authority to repurchase up to $15 billion in our common stock through the end of fiscal 2024.

During fiscal 2021, 2020 and 2019, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $3.95 billion, $3.05 billion and $2.75 billion, respectively.

We repurchased approximately 7.2 million shares at an average price of $536.17 per share in fiscal 2021, 8.0 million shares at an average price of $376.38 per share in fiscal 2020, and 9.9 million shares at an average price of $270.23 per share in fiscal 2019.

Subsequent to December 3, 2021, as part of the December 2020 stock repurchase authority, we entered into an accelerated share repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $2.4 billion and received an initial delivery of 3.2 million shares, which represents approximately 75% of our prepayment.

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remaining balance will be settled during our third quarter of fiscal 2022.

Upon completion of the $2.4 billion accelerated share repurchase agreement, $10.7 billion remains under our December 2020 authority.

See section titled "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" in Part I, Item 5 of this report for stock repurchases during the quarter ended December 3, 2021 and Note 14 of our Notes to Consolidated Financial S tatements for fu rther details regarding our stock repurchase program .

Indemnifications

In the normal course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions.

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 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.

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 limits our exposure and enables us to recover a portion of any future amounts paid.

however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis