What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-01-17 compared with 2022-01-21 · 121 added, 146 removed, 310 unchanged (46% of the section changed)

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

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.

Discussion regarding our financial condition and results of operations for fiscal 2021 as compared to fiscal 2020 is included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 3, 2021, filed with the SEC on January 21, 2022.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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;

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

automatic cloud rendering of a design which enables it to be worked on in multiple mediums;

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• 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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Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year.

In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.

Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities.

Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities.

Significant judgment is required in determining our current provision for income taxes and deferred tax assets or liabilities.

We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.

Our assumptions, judgments and estimates relative to the current provision for income taxes take into account our interpretation and application of current tax laws and possible outcomes of current and future examinations conducted by domestic and foreign tax authorities.

We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities.

In addition, we are subject to the 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 research and development tax credits, intercompany transfer pricing practices 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 these examinations.

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.

We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and associated reserves.

To the extent that the final determination of any of these examinations is different from the amounts recorded, such differences will affect the provision for income taxes and the effective tax rate in the period in which such determination is made.

Recent Accounting Pronouncements

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

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RESULTS OF OPERATIONS

Overview of 2022

For our fiscal 2021, we experienced strong demand across our Digital Media offerings consistent with the continued execution of our long-term plans with respect to this segment.

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

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.

For our fiscal 2022, we experienced strong demand across our Digital Media and Digital Experience offerings, driven by the ongoing shift towards a digital-first world.

As we execute on our long-term growth initiatives, we have continued to experience growth in software-based subscription revenue across our portfolio of offerings.

Digital Media

In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich and immersive content.

Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and syncing of files across users’ machines, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers.

Starting in December 2021, Creative Cloud includes Adobe Express, a web and mobile application designed to enable a broad spectrum of users, including novice content creators, communicators and creative professionals, to create, edit and customize content quickly and easily with content-first, task-based solutions.

Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and

syncing of files across users’ devices, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers.

We offer Creative Cloud for individuals, students, teams and enterprises.

We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by 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 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 like Adobe Express that make creative tools accessible to first-time creators and communicators, and delivering new features and technologies to existing customers with our latest releases such as share for review.

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.

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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.

These strategies include increasing the value Creative Cloud users receive, such as offering new desktop, web 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.

Acrobat provides reliable creation and exchange of electronic documents, regardless of platform or application source type.

Document Cloud, which we believe enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat DC and Adobe Sign, and a set of integrated services enabling users to create, review, approve, sign and track documents whether on a desktop or mobile device.

Adobe Acrobat DC 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.

We are also a market leader with our Document Cloud offerings built around our Adobe Acrobat family of products, with a set of integrated mobile apps and cloud-based document services which enable users to create, review, approve, sign and track documents regardless of platform or application source type.

Document Cloud, which enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat, Adobe Acrobat Sign and Adobe Scan.

Adobe Acrobat is offered both through subscription and perpetual licenses.

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

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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.

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 for measurement purposes.

We calculate ARR as follows:

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Document Cloud ARR

In March 2022, in response to the Russia-Ukraine war, we announced a halt of all new sales of our products and services in Russia and Belarus.

As a result, we reduced our Digital Media ARR balance by $75 million, which represented our Digital Media ARR for existing business in Russia and Belarus.

While we continued to provide Digital Media services in Ukraine, we also reduced our Digital Media ARR balance by an additional $12 million, which represented our Digital Media business in Ukraine.

This resulted in a total ARR reduction of $87 million taken at the beginning of the second quarter of fiscal 2022.

Creative ARR exiting fiscal 2022 was $11.60 billion, up from $10.22 billion at the end of fiscal 2021.

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Creative revenue in fiscal 2022 was $10.46 billion, up from $9.55 billion in fiscal 2021 and representing 10% year-over-year growth.

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.

These increases were driven by strong net new user growth, including those resulting from the current work-from-home environment reflecting expanded digital engagement.

Document Cloud revenue in fiscal 2022 was $2.38 billion, up from $1.97 billion in fiscal 2021 and representing 21% year-over-year growth.

Total Digital Media segment revenue grew to $12.84 billion in fiscal 2022, up from $11.52 billion in fiscal 2021 and representing 11% year-over-year growth driven by strong net new user growth.

Digital Experience

We are a market leader in the fast-growing category addressed by our Digital Experience segment.

The Adobe Experience Cloud applications, services and platform are designed to manage customer journeys, enable shoppable experiences and deliver intelligence for businesses of any size in any industry.

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

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

The Adobe Experience Cloud applications, services and platform are designed to manage customer journeys, enable personalized experiences at scale and deliver intelligence for businesses of any size in any industry.

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

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

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• Content and commerce.

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.

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

• Customer journeys.

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These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings.

By combining the creativity of our Digital Media business

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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.

By combining the creativity of our Digital Media business with the science of our Digital Experience business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.

We utilize a direct sales force to market and license our Digital Experience solutions, as well as an extensive ecosystem of partners, including marketing agencies, systems integrators and independent software vendors that help license and deploy our solutions to their customers.

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Driving this increase was the increase in subscription revenue across our offerings which grew to $3.88 billion in fiscal 2022 from $3.38 billion in fiscal 2021, representing 15% 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

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.

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 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.

Macroeconomic Conditions

As a corporation with an extensive global footprint, we are subject to risks and exposures from foreign currency exchange rate fluctuations caused by significant events with macroeconomic impacts, including, but not limited to, the Russia-Ukraine war, COVID-19 pandemic and actions taken by central banks to counter inflation.

We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape.

Foreign currency exchange rate fluctuations have negatively impacted our revenue and earnings during fiscal 2022, and are expected to continue to negatively impact our financial results in fiscal 2023.

While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, remain uncertain.

See the section titled “Risk Factors” in Part I, Item 1A of this report for further discussion of the possible impact of these macroeconomic issues on our business.

Financial Performance Summary for Fiscal 2022

• 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.

• Total Digital Media ARR of approximately $13.97 billion as of December 2, 2022 increased by $1.82 billion, or 15%, from $12.15 billion as of December 3, 2021.

The change in our Digital Media ARR was primarily due to new user adoption of our Creative Cloud and Document Cloud offerings, partially offset by an $87 million ARR reduction taken in March 2022 in response to the Russia-Ukraine war.

• Creative revenue of $10.46 billion increased by $913 million, or 10%, during fiscal 2022, from $9.55 billion in fiscal 2021.

Document Cloud revenue of $2.38 billion increased by $409 million, or 21%, during fiscal 2022, from $1.97 billion in fiscal 2021.

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• Digital Experience revenue of $4.42 billion increased by $555 million, or 14%, during fiscal 2022, from $3.87 billion in fiscal 2021.

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.

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

• Remaining performance obligations of $15.19 billion as of December 2, 2022 increased by $1.20 billion, or 9%, from $13.99 billion as of December 3, 2021, primarily due to new contracts and renewals for our Digital Media and Digital Experience offerings, partially offset by the impact of foreign currency exchange rate fluctuations.

• Cost of revenue of $2.17 billion increased by $300 million, or 16%, during fiscal 2022, from $1.87 billion in fiscal 2021 primarily due to increases in hosting services and data center costs, as well as increases in base and incentive compensation and related benefits costs.

• Operating expenses of $9.34 billion increased by $1.23 billion, or 15%, during fiscal 2022, from $8.12 billion in fiscal 2021 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.

• Cash flows from operations of $7.84 billion during fiscal 2022 increased by $608 million, or 8%, from $7.23 billion in fiscal 2021 primarily due to higher net income after adjustment for non-cash items.

Revenue 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 was a 53-week year compared with fiscal 2022 and 2020 which were 52-week years.

(dollars in millions) 2022 2021 2020 % Change

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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.

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

These revenues are recognized as the services are performed for time-and-materials contracts and on a relative performance basis for fixed-fee contracts.

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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 2022, we categorized our products into the following reportable segments:

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Total Digital Media revenue $ 12,842 $ 11,520 $ 9,233 11 %

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.

Revenue from Digital Media increased $1.32 billion during fiscal 2022 as compared to fiscal 2021, driven by increases in revenue associated with our Creative and Document Cloud subscription offerings due to continued demand amid an increasingly digital environment and strong customer acquisition and engagement, partially offset by the impact of foreign currency exchange rate fluctuations.

Digital Experience

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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Revenue from Digital Experience increased $555 million during fiscal 2022 as compared to fiscal 2021 primarily due to net new additions across our subscription offerings, partially offset by the impact of foreign currency exchange rate fluctuations.

Geographical Information

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During fiscal 2022, the U.S.

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.

Dollar primarily strengthened against EMEA and APAC foreign currencies as compared to fiscal 2021, which decreased revenue in U.S.

Dollar equivalents by approximately $486 million.

During fiscal 2022, the foreign currency impacts to revenue were offset in part by net hedging gains from our cash flow hedging program of $176 million.

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

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Hosting services and data center costs 9 %

Base compensation and related benefits associated with headcount 5

Amortization of intangibles 4

Base compensation and related benefits 3

Incentive compensation, cash and stock-based 1

Royalty costs 2

Various individually insignificant items 1

Total change 20 %

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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.

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

Services and Other

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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.

Cost of services and other revenue increased during fiscal 2022 as compared to fiscal 2021 primarily due to increases in compensation costs and professional fees.

Operating Expenses

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Incentive compensation, cash and stock-based 7 %

Base compensation and related benefits associated with headcount 6

Base compensation and related benefits 7

Professional and consulting fees 2

Various individually insignificant items 2

Total change 18 %

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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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Marketing spend related to campaigns, events and overall marketing efforts 5 %

Base compensation and related benefits 4

Incentive compensation, cash and stock-based 3

Base compensation and related benefits associated with headcount 3

Transaction fees 2

Various individually insignificant items 3

Total change 15 %

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Components of

Professional and consulting fees 4 %

Incentive compensation, cash and stock-based 4

Base compensation and related benefits associated with headcount 4

Bad debt expense (4)

Software licenses 2

Base compensation and related benefits 3

Charitable contributions 2

Charges related to cancellation of corporate events, net of recoveries (2)

Various individually insignificant items 1

Total change 12 %

Amortization of Intangibles

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.

Professional and consulting fees increased from fiscal 2022 as compared to fiscal 2021 primarily due to incurred transaction costs associated with our planned acquisition of Figma.

Non-Operating Income (Expense), Net

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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

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

Other income (expense), increased during fiscal 2022 primarily due to increases in interest income driven by higher average interest rates.

Provision for (Benefit from) Income Taxes

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Effective tax rate 21 % 15 % (26) %

_________________________________________

(**) Percentage is not meaningful.

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 related to stock-based compensation.

Our effective tax rate increased by approximately six percentage points during fiscal 2022 as compared to fiscal 2021, primarily due to lower tax benefits related to stock-based compensation in fiscal 2022.

Our effective tax rate for fiscal 2022 was the same as the U.S.

federal statutory tax rate primarily due to the impact of the U.S.

federal research tax credit, largely offset by state taxes.

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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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.

In making such a determination, we considered all available positive and negative evidence, including our past operating results, forecasted earnings, future taxable income and prudent and feasible tax planning strategies.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized based on evaluation of all available positive and negative evidence.

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 $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.

The total valuation allowance was $402 million as of December 2, 2022, primarily related to certain state credits.

We are a United States-based multinational company subject to tax in multiple domestic and foreign tax jurisdictions.

The current U.S.

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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.

In the current global tax policy environment, the 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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See Note 10 of our Notes to Consolidated Financial Statements for further information regarding our provision for (benefit from) income taxes.

Accounting for Uncertainty in Income Taxes

The gross liabilities for unrecognized tax benefits excluding interest and penalties were $321 million, $289 million and $201 million for fiscal 2022, 2021 and 2020, 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.

If the total unrecognized tax benefits as of December 2, 2022, December 3, 2021 and November 27, 2020 were recognized, $203 million, $199 million and $136 million would decrease the respective effective tax rates.

As of December 2, 2022 and December 3, 2021, the combined amounts of accrued interest and penalties related to tax positions taken on our tax returns were approximately $17 million and $22 million, respectively.

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

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We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both.

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

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 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 research and development tax credits, intercompany transfer pricing practices and other matters.

Although the timing of resolution, settlement and closing of audits is not certain, it is reasonably possible that the underlying unrecognized tax benefits may decrease by up to $25 million over the next 12 months.

Our future effective tax rates may be materially affected by changes in the tax rates in jurisdictions where our income is earned, changes in jurisdictions in which our profits are determined to be earned and taxed, changes in the valuation of our deferred tax assets and liabilities, changes in or interpretation of tax rules and regulations in the jurisdictions in which we do business, or unexpected changes in business and market conditions that could reduce certain tax benefits.

In addition, the United States and other countries and jurisdictions in which we conduct business, including those covered by governing bodies that enact tax laws applicable to us, such as the European Commission of the European Union, could make changes to relevant tax, accounting or other laws and interpretations thereof that have a material impact to us.

These countries, 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 and, in some cases, have proposed or enacted new laws that are contrary to the way in which rules and regulations have historically been interpreted and applied.

In the current global tax policy environment, any changes in laws, regulations and interpretations 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 examination of our income tax returns by domestic and foreign tax authorities.

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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Our policy is to record interest and penalties related to unrecognized tax benefits in income tax expense.

We believe our tax estimates to be reasonable;

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

(in millions) December 2, 2022 December 3, 2021

Cash and cash equivalents $ 4,236 $ 3,844

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Effect of foreign currency exchange rates on cash and cash equivalents (51) (26) 3

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

Net change in cash and cash equivalents $ 392 $ (634) $ 1,828

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.

Our primary uses of cash are our stock repurchase program as described below and general business expenses including payroll, marketing and third-party hosting services.

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

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For fiscal 2022, net cash provided by operating activities of $7.84 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 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.

The primary working capital sources of cash were increases in deferred revenue driven by Digital Media and Digital Experience offerings, partially offset by increases in trade receivables attributable to the timing of billings.

Cash Flows from Investing Activities

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.

For fiscal 2022, net cash used for investing activities of $570 million was primarily due to ongoing capital expenditures and business acquisitions.

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

Cash Flows from Financing Activities

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.

For fiscal 2022, net cash used for financing activities of $6.83 billion was primarily due to payments for our common stock repurchases and taxes paid related to the net share settlement of equity awards, offset in part by proceeds from re-issuance of treasury stock mainly for our employee stock purchase plan.

See the section titled “Stock Repurchase Program” below.

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Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2023 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 the section titled “Risk Factors” in Part I, Item 1A of this report.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, 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.

Our cash equivalent and short-term investment portfolio as of December 2, 2022 consisted of asset-backed securities, corporate debt securities, foreign government securities, money market funds, municipal securities, time deposits, U.S.

securities and U.S.

Treasury securities.

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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 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.

On September 15, 2022, we entered into a definitive agreement under which we intend to acquire Figma, Inc.

(“Figma”) for approximately $20 billion, comprised of approximately half cash and half stock, subject to customary purchase price adjustments.

Approximately 6 million additional restricted stock units will be granted to Figma’s Chief Executive Officer and employees that will vest over four years subsequent to closing.

The transaction is subject to regulatory approvals and customary closing conditions, and is expected to close in 2023.

We will be required to pay Figma a reverse termination fee of $1 billion if the transaction fails to receive regulatory clearance, assuming all other closing conditions have been satisfied or waived, or if it fails to close within 18 months from September 15, 2022.

We expect to finance the cash portion of the consideration using cash on hand and short-term debt instruments.

While the transaction is pending, at a minimum we expect to maintain share repurchases sufficient to offset the dilution of equity issuances to our employees.

Revolving Credit Agreement

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.

During 2022, we entered into a credit agreement (the “Revolving Credit Agreement”) with a syndicate of lenders, providing for a five-year $1.5 billion senior unsecured revolving credit facility through June 30, 2027, which replaces our previous five-year $1 billion senior unsecured revolving credit agreement dated as of October 17, 2018.

Subject to the agreement of lenders, we may obtain up to an additional $500 million in commitments, for a maximum aggregate commitment of $2 billion.

As of December 2, 2022, there were no outstanding borrowings under this credit agreement and the entire $1.5 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 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.

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.

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

During the first quarter of fiscal 2022, we reclassified the senior notes due February 1, 2023 as current debt in our Consolidated Balance Sheets.

As of December 2, 2022, the carrying value of our current debt was $500 million, net of the related discount and issuance costs.

We intend to repay the current portion of our debt on or before the due date.

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.

As of December 2, 2022, the value of our non-cancellable unconditional purchase obligations was $6.09 billion, primarily relating to contracts with vendors for third-party hosting and data center services.

See Note 16 of our Notes to Consolidated Financial Statements for additional information regarding our purchase obligations.

We lease certain facilities and data centers under non-cancellable operating lease arrangements that expire at various dates through 2032.

As of December 2, 2022, the value of our obligations under operating leases was $548 million.

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

See Note 18 of our Notes to Consolidated Financial Statements for additional information regarding our 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 $313 million as of December 2, 2022 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.

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

In addition, the U.S.

Tax Act requires companies to capitalize and amortize research and development expenditures starting fiscal 2023.

If not modified, we anticipate an adverse impact to our effective rates for income taxes paid, which will be partially offset by the increase in the foreign-derived intangible income deduction, for fiscal 2023 and beyond.

The Inflation Reduction Act enacted on August 16, 2022 introduced new provisions including a corporate book minimum tax effective for us beginning in fiscal 2024 and an excise tax on net stock repurchases made after December 31, 2022.

We continue to monitor developments and evaluate impacts, if any, of these provisions to our results of operations and cash flows.

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.

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

During fiscal 2022, we repurchased a total of 15.7 million shares, including approximately 10.4 million shares at an average price of $375.03 through structured repurchase agreements entered into during fiscal 2021 and fiscal 2022, as well as 5.3 million shares at an average purchase price of $451.55 through an accelerated share repurchase agreement entered into during the first quarter of fiscal 2022.

During the fourth quarter of fiscal 2022, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $1.75 billion.

As of December 2, 2022, $583 million of prepayment remained under our outstanding structured stock repurchase agreement.

Subsequent to December 2, 2022, 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 $1.4 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 $1.4 billion accelerated share repurchase agreement, $5.15 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 .

See section titled “ Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ” in Part I I , Item 5 of this report for stock repurchases during the quarter ended December 2, 2022 and Note 14 of our Notes to Consolidated Financial Statements for further details regarding our stock repurchase program.

Indemnifications

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What changed 10-K

Item 7. Management’s Discussion and Analysis