ADOBE INC. 
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto.
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans, future growth, market opportunities, strategic initiatives, industry positioning, customer acquisition and retention, the amount of annualized recurring revenue, revenue growth and anticipated impacts on our business of the ongoing COVID-19 pandemic and related public health measures. In addition, when used in this report, the words "will," "expects," "could," "would," "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to," "continues" and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. Each of the forward-looking statements we make in this report involves risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" in Part II, Item 1A of this report. The risks described herein and in other documents we file from time to time with theU.S. Securities and Exchange Commission (the "SEC"), including our Annual Report on Form 10-K for fiscal 2021, should be carefully reviewed. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document, except as required by law. BUSINESS OVERVIEW Founded in 1982, Adobe is one of the largest and most diversified software companies in the world. We offer a line of products and services used by creative professionals, including photographers, video editors, graphic and experience designers and game developers; communicators, including content creators, students, marketers and knowledge workers; businesses of all sizes; and consumers for creating, managing, delivering, measuring, optimizing, engaging and transacting with compelling content and experiences across personal computers, smartphones, other electronic devices and digital media formats. We market our products and services directly to enterprise customers through our sales force and local field offices. We license our products to end users through app stores and our own website at www.adobe.com. We offer many of our products via a Software-as-a-Service ("SaaS") model or a managed services model (both of which are referred to as hosted or cloud-based) as well as through term subscription and pay-per-use models. We also distribute certain products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, software developers and original equipment manufacturers ("OEMs"). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. Our products run on desktop and laptop computers, smartphones, tablets, other devices and the web, depending on the product. We have operations in theAmericas ;Europe ,Middle East andAfrica ("EMEA"); andAsia-Pacific ("APAC"). Adobe was originally incorporated inCalifornia inOctober 1983 and was reincorporated inDelaware inMay 1997 . Our executive offices and principal facilities are located at345 Park Avenue ,San Jose, California 95110-2704. Our telephone number is 408-536-6000 and our website is www.adobe.com. Investors can obtain copies of ourSEC filings from our website free of charge, as well as from theSEC website at www.sec.gov. The information posted to our website is not incorporated into this Quarterly Report on Form 10-Q. OPERATIONS OVERVIEW For our first quarter of fiscal 2022, 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 first quarter of fiscal 2021 financial results benefited from an extra week in the quarter due to our 52/53 week financial calendar whereby fiscal 2021 was a 53-week year compared with fiscal 2022 which is a 52-week year. 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 content and immersive 3D experiences. Starting inDecember 2021 , Creative Cloud includes Creative Cloud 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 25 -------------------------------------------------------------------------------- Table of Contents and syncing of files across users' machines, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers. We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by attracting new users with new features and products like Creative Cloud Express that make creative tools accessible to first-time creators and communicators, continuing to acquire users with 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 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. 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, and it continues to contribute strong growth in the business. Annualized Recurring Revenue ("ARR") is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue and 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 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: Annual Value of Creative Cloud Subscriptions and Services Creative ARR + Annual Creative ETLA Contract Value Annual Value of Document Cloud Subscriptions and Services Document Cloud ARR + Annual Document Cloud ETLA Contract Value Creative ARR Digital Media ARR + Document Cloud ARR Creative ARR exiting the first quarter of fiscal 2022 was$10.54 billion , up from$10.22 billion at the end of fiscal 2021. Document Cloud ARR exiting the first quarter of fiscal 2022 was$2.03 billion , up from$1.93 billion at the end of fiscal 2021. Total Digital Media ARR grew to$12.57 billion at the end of the first quarter of fiscal 2022, up from$12.15 billion at the end of fiscal 2021. InMarch 2022 , in response to theRussia -Ukraine war, we announced a halt of all new sales of our products and services inRussia andBelarus . As a result, subsequent toMarch 4, 2022 , we reduced our Digital Media ARR balance by$75 million , which represented our Digital Media ARR for existing business inRussia andBelarus . While we will continue to provide 26 -------------------------------------------------------------------------------- Table of Contents Digital Media services inUkraine , we also reduced our Digital Media ARR balance by an additional$12 million , which represented our Digital Media business inUkraine . After the total ARR reduction of$87 million , the balance of our Digital Media ARR entering the second quarter of fiscal 2022 was$12.48 billion . Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in the first quarter of fiscal 2022 was$2.55 billion , up from$2.38 billion in the first quarter of fiscal 2021, representing 7% year-over-year growth. Document Cloud revenue in the first quarter of fiscal 2022 was$562 million , up from$480 million in the first quarter of fiscal 2021, representing 17% year-over-year growth. Total Digital Media segment revenue grew to$3.11 billion in the first quarter of fiscal 2022, up from$2.86 billion in the first quarter of fiscal 2021, representing 9% 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.
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 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. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings. By combining the creativity of our Digital Media business with the science of our Digital Experience business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop. We utilize a direct sales force to market and license our 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. 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 was$1.06 billion in the first quarter of fiscal 2022, up from$934 million in the first quarter of fiscal 2021, representing 13% year-over-year growth. Driving this increase was the increase in subscription revenue, which grew to$932 million in the first quarter of fiscal 2022 from$812 million in the first quarter of fiscal 2021, representing 15% year-over-year growth. In response to theRussia -Ukraine war, we reduced our Digital Media ARR by$87 million subsequent to the end of our first quarter of fiscal 2022. We continue to monitor the evolving impacts of this conflict and its effects on the global economy and geopolitical landscape. In addition, the COVID-19 pandemic continues to have widespread and unpredictable impacts on global societies, economies, financial markets and business practices. 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 remain uncertain. See Risk Factors for further discussion of the possible impact of these macroeconomic issues on our business. 27 -------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES In preparing our condensed consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and pursuant to the rules and regulations of theSEC , we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, business combinations and income taxes have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates, and consequently, we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. There have been no significant changes in our critical accounting policies and estimates during the three months endedMarch 4, 2022 , as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 3, 2021 .
Recent Accounting Pronouncements
See Note 1 of our notes to condensed consolidated financial statements for
information regarding recent accounting pronouncements that are of significance
or potential significance to us.
RESULTS OF OPERATIONSOur results of operations for the first quarter of fiscal 2021 were favorably impacted by an extra week due to our first quarter of fiscal 2021 having 14 weeks as compared to 13 weeks in the first quarter of fiscal 2022.
Financial Performance Summary
•Total Digital Media ARR of approximately$12.57 billion as ofMarch 4, 2022 increased by$418 million , or 3%, from$12.15 billion as ofDecember 3, 2021 . The change in our Digital Media ARR is primarily due to new user adoption of our Creative Cloud and Document Cloud offerings. •Creative revenue during the three months endedMarch 4, 2022 of$2.55 billion increased by$169 million , or 7%, compared to the year-ago period. Document Cloud revenue during the three months endedMarch 4, 2022 of$562 million increased by$82 million , or 17%, compared to the year-ago period. The increases were primarily due to subscription revenue growth associated with our Creative Cloud and Document Cloud offerings. •Digital Experience revenue of$1.06 billion during the three months endedMarch 4, 2022 increased by$123 million , or 13%, compared to the year-ago period. The increase was primarily due to subscription revenue growth across our offerings.
•Remaining performance obligations of
•Cost of revenue of$512 million during the three months endedMarch 4, 2022 increased by$65 million , or 15%, compared to the year-ago period primarily due to increases in hosting services and data center costs and, to a lesser extent, increases in amortization of intangibles mainly from our Frame.io acquisition in the fourth quarter of fiscal 2021. •Operating expenses of$2.17 billion during the three months endedMarch 4, 2022 increased by$166 million , or 8%, compared to the year-ago period primarily due to increases in base and incentive compensation and related benefits costs, as well as increased marketing spend.
•Net income of
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•Cash flows from operations of
Revenue for the Three Months Ended
(dollars in millions) Three Months
2022 2021 % Change
Subscription $ 3,958 $ 3,584 10 %
Percentage of total revenue 93 % 92 %
Product 145 155 (6) %
Percentage of total revenue 3 % 4 %
Services and other 159 166 (4) %
Percentage of total revenue 4 % 4 %
Total revenue $ 4,262 $ 3,905 9 %
Subscription
Our subscription revenue is comprised primarily of fees we charge for our
subscription and hosted service offerings, and related support, including
Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud
services. We primarily recognize subscription revenue ratably over the term of
agreements with our customers, beginning with commencement of service.
Subscription revenue related to certain offerings, where fees are based on a
number of transactions and invoicing is aligned to the pattern of performance,
customer benefit and consumption, are recognized on a usage basis.
We have the following reportable segments: Digital Media, Digital Experience,
and Publishing and Advertising. Subscription revenue by reportable segment for
the three months ended March 4, 2022 and March 5, 2021 is as follows:
(dollars in millions) Three Months
2022 2021 % Change
Digital Media $ 2,995 $ 2,731 10 %
Digital Experience 932 812 15 %
Publishing and Advertising 31 41 (24) %
Total subscription revenue $ 3,958 $ 3,584 10 %
Product
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.
Services and Other
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. These revenues are recognized as the services are performed for
time-and-materials contracts and on a relative performance basis for fixed-fee
contracts. Training revenues are recognized as the services are performed. Our
maintenance and support offerings, which entitle customers, partners and
developers to receive desktop product upgrades and enhancements or technical
support, depending on the offering, are generally recognized ratably over the
term of the arrangement. Transaction-based advertising revenue is recognized on
a usage basis as we satisfy the performance obligations to our customers.
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Table of ContentsSegment Information
(dollars in millions) Three Months
2022 2021 % Change
Digital Media $ 3,110 $ 2,859 9 %
Percentage of total revenue 73 % 73 %
Digital Experience 1,057 934 13 %
Percentage of total revenue 25 % 24 %
Publishing and Advertising 95 112 (15) %
Percentage of total revenue 2 % 3 %
Total revenue $ 4,262 $ 3,905 9 %
Digital Media
Revenue by major offerings in our Digital Media reportable segment for the three
months ended
(dollars in millions) Three Months
2022 2021 % Change
Creative Cloud $ 2,548 $ 2,379 7 %
Document Cloud 562 480 17 %
Total $ 3,110 $ 2,859 9 %
Revenue from Digital Media increased
Digital Experience
Revenue from Digital Experience increased
Geographical Information
(dollars in millions) Three Months
2022 2021 % Change
Americas $ 2,446 $ 2,224 10 %
Percentage of total revenue 57 % 57 %
EMEA 1,136 1,052 8 %
Percentage of total revenue 27 % 27 %
APAC 680 629 8 %
Percentage of total revenue 16 % 16 %
Total revenue $ 4,262 $ 3,905 9 %
Overall revenue during the three months ended March 4, 2022 increased in all
geographic regions as compared to the three months ended March 5, 2021 primarily
due to increases in Digital Media and Digital Experience revenue. Within each
geographic region, the fluctuations in revenue by reportable segment were
attributable to the factors noted in the segment information above.
Included in the overall change in revenue for the three months ended March 4,
2022 as compared to the three months ended March 5, 2021 were impacts associated
with foreign currency which were mitigated in part by our foreign currency
hedging program. During the three months ended March 4, 2022 , the U.S. Dollar
primarily strengthened against the Euro and APAC currencies as compared to the
year-ago period, which decreased revenue in U.S. Dollar equivalents by $33
million . For the three months ended March 4, 2022 , the foreign currency impacts
to revenue were offset in part by net hedging gains from our cash flow hedging
program of $18 million .
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Cost of Revenue for the Three Months Ended
(dollars in millions) Three Months
2022 2021 % Change
Subscription $ 393 $ 324 21 %
Percentage of total revenue 9 % 8 %
Product 10 10 - %
Percentage of total revenue * *
Services and other 109 113 (4) %
Percentage of total revenue 3 % 3 %
Total cost of revenue $ 512 $ 447 15 %
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(*) Percentage is less than 1%.
Subscription
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 during the three months endedMarch 4, 2022 as compared to the three months endedMarch 5, 2021 due to the following: Components of % Change Hosting services and data center costs 10 % Amortization of intangibles
5
Base compensation and related benefits associated with headcount
3
Incentive compensation, cash and stock-based
1
Various individually insignificant items 2 Total change 21 % Product
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
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.
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Operating Expenses for the Three Months Ended March 4, 2022 and March 5, 2021
(dollars in millions) Three Months
2022 2021 % Change
Research and development $ 701 $ 620 13 %
Percentage of total revenue 16 % 16 %
Sales and marketing 1,158 1,049 10 %
Percentage of total revenue 27 % 27 %
General and administrative 269 290 (7) %
Percentage of total revenue 6 % 7 %
Amortization of intangibles 42 45 (7) %
Percentage of total revenue 1 % 1 %
Total operating expenses $ 2,170 $ 2,004 8 %
Research and 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 during the three months ended
Components of
% Change
Incentive compensation, cash and stock-based 5 %
Base compensation and related benefits 5
Professional and consulting fees 2
Various individually insignificant items 1
Total change 13 %
We believe that investments in research and development, including the
recruiting and hiring of software developers, are critical to remain competitive
in the marketplace and are directly related to continued timely development of
new and enhanced offerings and solutions. We will continue to focus on long-term
opportunities available in our end markets and make significant investments in
the development of our subscription and service offerings, applications and
tools.
Sales and Marketing
Sales and marketing expenses consist primarily of 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. Sales and marketing expenses increased during the three months endedMarch 4, 2022 as compared to the three months endedMarch 5, 2021 primarily due to the following: Components of % Change
Marketing spend related to campaigns, events and overall marketing efforts
5 %
Incentive compensation, cash and stock-based 2
Base compensation and related benefits 1
Professional and consulting fees 2
Total change 10 %
General and Administrative
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
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Table of Contentscomputer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.
General and administrative expenses decreased during the three months endedMarch 4, 2022 as compared to the three months endedMarch 5, 2021 primarily due to the following: Components of % Change Charitable contributions (3) %
Charges related to cancellation of corporate events, net of recoveries
(3)
Professional and consulting fees 3
Incentive compensation, cash and stock-based (3)
Base compensation and related benefits 1
Facilities (2)
Total change (7) %
We recorded higher net charges related to the cancellation of corporate events
during the three months ended March 5, 2021 as compared to the current period,
as we shifted our in-person customer events to virtual-only experiences.
Amortization of Intangibles
Amortization expenses decreased during the three months endedMarch 4, 2022 as compared to the three months endedMarch 5, 2021 primarily due to certain intangible assets from previous acquisitions becoming fully amortized in fiscal 2021. The decrease in amortization expense is partially offset by increases to amortization expense associated with intangible assets purchased through our acquisition of Frame.io during the fourth quarter of fiscal 2021.
Non-Operating Income (Expense), Net for the Three Months Ended
(dollars in millions) Three Months
2022 2021 % Change
Interest expense $ (28) $ (30) (7) %
Percentage of total revenue (1) % (1) %
Investment gains (losses), net (9) 5 **
Percentage of total revenue * *
Other income (expense), net - 4 **
Percentage of total revenue * *
Total non-operating income (expense), net $ (37) $ (21) **
_________________________________________
(*) Percentage is less than 1%. (**) Percentage is not meaningful.
Interest Expense
Interest expense represents interest associated with our debt instruments.
Interest on our senior notes is payable semi-annually, in arrears, on
Investment Gains (Losses), Net
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
Other income (expense), net consists primarily of interest earned on cash, cash
equivalents and short-term fixed income investments. Other income (expense), net
also includes realized gains and losses on fixed income investments and foreign
exchange gains and losses.
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Provision for Income Taxes for the Three Months Ended March 4, 2022 and March 5,
2021
(dollars in millions) Three Months
2022 2021 % Change
Provision for income taxes $ 277 $ 172 61 %
Percentage of total revenue 6 % 4 %
Effective tax rate 18 % 12 %
Our effective tax rates increased by approximately 6 percentage points for the
three months ended March 4, 2022 , as compared to the three months ended March 5,
2021 , primarily due to lower tax benefits related to stock-based compensation
during the three months ended March 4, 2022 .
Our effective tax rate for the three months ended March 4, 2022 was lower than
the U.S. federal statutory tax rate of 21% primarily due to tax benefits related
to stock-based compensation.
We recognize deferred tax assets to the extent that we believe these assets are
more likely than not to be realized. In making such a determination, we
considered all available positive and negative evidence, including our past
operating results, forecasted earnings, future taxable income and prudent and
feasible tax planning strategies. On the basis of this evaluation, we continue
to maintain a valuation allowance to reduce our deferred tax assets to the
amount realizable. The total valuation allowance was $361 million as of March 4,
2022 , primarily attributable to certain state credits.
We are a United States -based multinational company subject to tax in multiple
U.S. and foreign tax jurisdictions. The current U.S. 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.
Accounting for Uncertainty in Income Taxes
The gross liabilities for unrecognized tax benefits excluding interest and penalties were$298 million and$244 million as ofMarch 4, 2022 andMarch 5, 2021 , respectively. If the total unrecognized tax benefits atMarch 4, 2022 andMarch 5, 2021 were recognized,$203 million and$179 million would decrease the respective effective tax rates.
As of
The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of our tax assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from$0 to approximately$10 million over the next 12 months. In addition, inthe 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 theEuropean Commission of theEuropean 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 theOrganization 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 theU.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 34 -------------------------------------------------------------------------------- Table of Contents examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from these examinations. We cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position. LIQUIDITY AND CAPITAL RESOURCES Cash Flows This data should be read in conjunction with our condensed consolidated statements of cash flows. As of (in millions) March 4, 2022 December 3, 2021 Cash and cash equivalents$ 2,739 $ 3,844 Short-term investments$ 1,962 $ 1,954 Working capital $ 279 $ 1,737 Stockholders' equity$ 13,775 $ 14,797
A summary of our cash flows is as follows:
Three Months Ended
(in millions) March 4, 2022 March 5, 2021
Net cash provided by operating activities $ 1,769 $ 1,772
Net cash used for investing activities (260) (1,558)
Net cash used for financing activities (2,604) (1,244)
Effect of foreign currency exchange rates on cash and cash equivalents
(10) 4
Net change in cash and cash equivalents $
(1,105)
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.
Cash Flows from Operating Activities
Net cash provided by operating activities of$1.77 billion for the three months endedMarch 4, 2022 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 decreases in trade receivables and an increase in deferred revenue primarily from our Digital Experience offerings. Decreases in trade receivables were largely attributable to strong collections and the timing of billings during the quarter. The primary working capital uses of cash were decreases in accrued expenses and other liabilities together with increases in prepaid expenses and other assets. The decreases in accrued expenses and other liabilities were largely driven by the payment of accrued bonuses. The increases in prepaid expenses and other assets were primarily due to sales commissions paid and capitalized and the timing of billings and payments associated with certain vendors.
Cash Flows from Investing Activities
Net cash used for investing activities of$260 million for the three months endedMarch 4, 2022 was due to a business acquisition closed during the quarter, ongoing capital expenditures, and purchases of short-term investments, net of proceeds from sales and maturities.
Cash Flows from Financing Activities
Net cash used for financing activities of$2.60 billion for the three months endedMarch 4, 2022 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. 35 -------------------------------------------------------------------------------- Table of Contents
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, risks detailed in Part II, Item 1A titled "Risk Factors." 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 ofMarch 4, 2022 consisted of asset-backed securities, corporate debt securities, foreign government securities, money market funds, municipal securities, time deposits andU.S. Treasury securities. We use professional investment management firms to manage a large portion of our invested cash. 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. 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.
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 throughOctober 17, 2023 . As ofMarch 4, 2022 , 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 ofMarch 4, 2022 , 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. We do not anticipate paying any cash dividends in the foreseeable future.
Senior Notes
We have
During the first quarter of fiscal 2022, we reclassified the senior notes dueFebruary 1, 2023 as current debt in our condensed consolidated balance sheets. As ofMarch 4, 2022 , the carrying value of our current debt was$499 million , net of the related discount and issuance costs. We intend to refinance the current portion of our debt on or before the due date.
Contractual Obligations
Our principal commitments as ofDecember 3, 2021 consisted of purchase obligations resulting from agreements to purchase goods and services in the ordinary course of business and obligations under operating lease arrangements. There have been no material changes in those obligations during the three months endedMarch 4, 2022 . Other Our transition tax liability related to historical undistributed foreign earnings, which was accrued as a result of theU.S. Tax Act was approximately$349 million as ofMarch 4, 2022 and is payable in installments through fiscal 2026. As we repatriate foreign earnings for use inthe United States , the distributions will generally be exempt from federal income taxes under currentU.S. tax law. In addition, theU.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.
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.
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During the three months endedMarch 4, 2022 , we entered into an accelerated share repurchase agreement ("ASR") 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 of our common stock. Under the terms of the ASR, the total number of shares delivered and average purchase price paid per share will be determined upon settlement, which is expected to occur during our third quarter of fiscal 2022. During the three months endedMarch 4, 2022 , we repurchased a total of 3.8 million shares, including approximately 0.6 million shares at an average price of$635.15 through a structured repurchase agreement entered into during fiscal 2021, as well as 3.2 million shares through the ASR. Subsequent toMarch 4, 2022 , as part of theDecember 2020 stock repurchase authority, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of$1.2 billion . Upon completion of the$1.2 billion stock repurchase agreement,$9.5 billion remains under ourDecember 2020 authority.
See Note 11 of our notes to condensed consolidated financial statements for further details regarding our stock repurchase program.
Indemnifications
In the ordinary course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. To the extent permitted underDelaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.
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