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    ADBE   US00724F1012

ADOBE INC.

(ADBE)
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ADOBE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

09/28/2022 | 04:06pm EST

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, fluctuations in foreign currency
exchange rates, strategic investments, 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
titled "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 the U.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 the Americas; Europe, Middle East and Africa
("EMEA"); and Asia-Pacific ("APAC").

Adobe was originally incorporated in California in October 1983 and was
reincorporated in Delaware in May 1997. Our executive offices and principal
facilities are located at 345 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 our SEC filings from our website free of charge, as well as
from the SEC 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 third quarter of 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 content and
immersive 3D experiences. 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'
machines, machine learning and artificial intelligence, access to marketplace,
social and

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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 Adobe 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, 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.

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


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 the third quarter of fiscal 2022 was $11.15 billion, up
from $10.22 billion at the end of fiscal 2021. Document Cloud ARR exiting the
third quarter of fiscal 2022 was $2.25 billion, up from $1.93 billion at the end
of fiscal 2021. Total Digital Media ARR grew to $13.40 billion at the end of the
third quarter of fiscal 2022, up from $12.15 billion at the end of fiscal 2021.

Our success in driving growth in ARR has positively affected our revenue growth.
Creative revenue in the third quarter of fiscal 2022 was $2.63 billion, up from
$2.37 billion in the third quarter of fiscal 2021, representing 11%
year-over-year

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growth. Document Cloud revenue in the third quarter of fiscal 2022 was $607
million, up from $493 million in the third quarter of fiscal 2021, representing
23% year-over-year growth. Total Digital Media segment revenue grew to $3.23
billion in the third quarter of fiscal 2022, up from $2.87 billion in the third
quarter of fiscal 2021, representing 13% 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 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:


•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 $1.12 billion in the third quarter of fiscal
2022, up from $985 million in the third quarter of fiscal 2021, representing 14%
year-over-year growth. Driving this increase was the increase in subscription
revenue, which grew to $981 million in the third quarter of fiscal 2022 from
$864 million in the third quarter of fiscal 2021, representing 14%
year-over-year growth.

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 the
nine months ended September 2, 2022, and may continue to negatively impact our
financial results in the fourth quarter of fiscal 2022.

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 Risk
Factors for further discussion of the possible impact of these macroeconomic
issues on our business.

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                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and pursuant to the rules and regulations of the SEC, we make
assumptions, judgments and estimates that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosures of contingent assets
and liabilities. We base our assumptions, judgments and estimates on historical
experience and various other factors that we believe to be reasonable under the
circumstances. Actual results could differ materially from these estimates under
different assumptions or conditions. 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 nine months ended September 2, 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 ended December 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 OPERATIONS

Financial Performance Summary


•Total Digital Media ARR of approximately $13.40 billion as of September 2, 2022
increased by $1.24 billion, or 10%, from $12.15 billion as of December 3, 2021.
The change in our Digital Media ARR is 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 during the three months ended September 2, 2022 of $2.63
billion increased by $253 million, or 11%, compared to the year-ago period.
Document Cloud revenue during the three months ended September 2, 2022 of $607
million increased by $114 million, or 23%, 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 $1.12 billion during the three months ended
September 2, 2022 increased by $135 million, or 14%, compared to the year-ago
period. The increase was primarily due to subscription revenue growth across our
offerings.

•Remaining performance obligations of $14.11 billion as of September 2, 2022
increased by $115 million, or 1%, from $13.99 billion as of December 3, 2021
primarily due to new contracts and renewals for our Digital Media offerings,
partially offset by the impact of foreign currency exchange rate fluctuations.

•Cost of revenue of $546 million during the three months ended September 2, 2022
increased by $79 million, or 17%, compared to the year-ago period 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 $2.40 billion during the three months ended September 2, 2022 increased by $376 million, or 19%, 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.

•Cash flows from operations of $5.51 billion during the nine months ended September 2, 2022 increased by $349 million, or 7%, compared to the year-ago period primarily due to higher net income adjusted for the net effect of non-cash items.

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Revenue for the Three and Nine Months Ended September 2, 2022 and September 3, 2021


Revenue for the nine months ended September 3, 2021 benefited from an extra week
in the first quarter of fiscal 2021 due to our 52/53 week financial calendar
whereby fiscal 2022 is a 52-week year compared with fiscal 2021 which was a
53-week year.

 (dollars in millions)               Three Months                               Nine Months
                                  2022          2021        % Change        2022           2021         % Change
 Subscription                  $ 4,128       $ 3,657            13  %    $ 12,156       $ 10,761            13  %
 Percentage of total revenue        93  %         93  %                     

93 % 92 %

 Product                           126           119             6  %         417            427            (2) %
 Percentage of total revenue         3  %          3  %                         3  %           4  %
 Services and other                179           159            13  %         508            487             4  %
 Percentage of total revenue         4  %          4  %                         4  %           4  %
 Total revenue                 $ 4,433       $ 3,935            13  %    $ 13,081       $ 11,675            12  %


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 and nine months ended September 2, 2022 and September 3, 2021 is as
follows:

   (dollars in millions)              Three Months                             Nine Months
                                   2022         2021        % Change        2022          2021        % Change
   Digital Media                 $ 3,116      $ 2,757           13  %    $  9,190      $  8,156           13  %
   Digital Experience                981          864           14  %       2,874         2,493           15  %
   Publishing and Advertising         31           36          (14) %          92           112          (18) %
   Total subscription revenue    $ 4,128      $ 3,657           13  %    $ 12,156      $ 10,761           13  %


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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Segment Information

 (dollars in millions)               Three Months                               Nine Months
                                  2022          2021        % Change        2022           2021         % Change
 Digital Media                 $ 3,232       $ 2,865            13  %    $  9,542       $  8,511            12  %
 Percentage of total revenue        73  %         73  %                     

73 % 73 %

 Digital Experience              1,120           985            14  %       3,272          2,857            15  %
 Percentage of total revenue        25  %         25  %                     

25 % 24 %

 Publishing and Advertising         81            85            (5) %         267            307           (13) %
 Percentage of total revenue         2  %          2  %                         2  %           3  %
 Total revenue                 $ 4,433       $ 3,935            13  %    $ 13,081       $ 11,675            12  %



Digital Media

Revenue by major offerings in our Digital Media reportable segment for the three
and nine months ended September 2, 2022 and September 3, 2021 were as follows:

    (dollars in millions)              Three Months                            Nine Months
                                    2022         2021        % Change       2022         2021        % Change
    Creative Cloud                $ 2,625      $ 2,372           11  %    $ 7,778      $ 7,069           10  %
    Document Cloud                    607          493           23  %      1,764        1,442           22  %
    Total Digital Media revenue   $ 3,232      $ 2,865           13  %    $ 9,542      $ 8,511           12  %


Revenue from Digital Media increased $367 million and $1.03 billion during the
three and nine months ended September 2, 2022 as compared to the three and nine
months ended September 3, 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.

Digital Experience

Revenue from Digital Experience increased $135 million and $415 million during
the three and nine months ended September 2, 2022 as compared to the three and
nine months ended September 3, 2021 primarily due to net new additions across
our subscription offerings.

Geographical Information

 (dollars in millions)               Three Months                               Nine Months
                                  2022          2021        % Change        2022           2021         % Change
 Americas                      $ 2,600       $ 2,242            16  %    $  7,570       $  6,651            14  %
 Percentage of total revenue        59  %         57  %                     

58 % 57 %

 EMEA                            1,143         1,061             8  %       3,436          3,139             9  %
 Percentage of total revenue        26  %         27  %                     

26 % 27 %

 APAC                              690           632             9  %       2,075          1,885            10  %
 Percentage of total revenue        15  %         16  %                        16  %          16  %
 Total revenue                 $ 4,433       $ 3,935            13  %    $ 13,081       $ 11,675            12  %



Overall revenue during the three and nine months ended September 2, 2022
increased in all geographic regions as compared to the three and nine months
ended September 3, 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 and nine months ended
September 2, 2022 as compared to the three and nine months ended September 3,
2021 were impacts associated with foreign currency which were mitigated in part
by our foreign currency hedging program. During the three and nine months ended
September 2, 2022 as compared to the year-ago periods, the U.S. Dollar
strengthened against foreign currencies, including the Euro and the Japanese
Yen, which decreased revenue in U.S. Dollar equivalents by $156 million and $273
million, respectively. For the three and nine months ended

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September 2, 2022, the foreign currency impacts to revenue were offset in part
by net hedging gains from our cash flow hedging program of $54 million and $105
million, respectively.

Cost of Revenue for the Three and Nine Months Ended September 2, 2022 and September 3, 2021

    (dollars in millions)             Three Months                         
  Nine Months
                                    2022        2021       % Change        2022          2021        % Change
    Subscription                  $ 413       $ 344            20  %    $ 1,216       $   996            22  %
    Percentage of total revenue       9  %        9  %                     

9 % 9 %

    Product                           8          10           (20) %         27            29            (7) %
    Percentage of total revenue          *           *                           *             *
    Services and other              125         113            11  %        354           333             6  %
    Percentage of total revenue       3  %        3  %                     
  3  %          3  %
    Total cost of revenue         $ 546       $ 467            17  %    $ 1,597       $ 1,358            18  %

_________________________________________

(*) 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 and nine months ended
September 2, 2022 as compared to the three and nine months ended September 3,
2021 primarily due to the following:

                                                     Components of      Components of
                                                       % Change           % Change
                                                       2022-2021          2022-2021
                                                          QTD                YTD
    Hosting services and data center costs                     8  %              11  %
    Amortization of intangibles                                6                  5

    Base compensation and related benefits                     3                  3
    Incentive compensation, cash and stock-based               1                  1
    Royalty costs                                              2                  2

    Total change                                              20  %              22  %


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.

Cost of services and other revenue increased during the three and nine months ended September 2, 2022 as compared to the three and nine months ended September 3, 2021 primarily due to increases in professional fees and compensation costs.

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Operating Expenses for the Three and Nine Months Ended September 2, 2022 and
September 3, 2021

 (dollars in millions)               Three Months                               Nine Months
                                  2022          2021         % Change        2022          2021         % Change
 Research and development      $   775       $   651             19  %    $ 2,214       $ 1,883             18  %
 Percentage of total revenue        17  %         17  %                     

17 % 16 %

 Sales and marketing             1,266         1,068             19  %      3,671         3,190             15  %
 Percentage of total revenue        29  %         27  %                     

28 % 27 %

 General and administrative        319           265             20  %        879           811              8  %
 Percentage of total revenue         7  %          7  %                     

7 % 7 %


 Amortization of intangibles        43            43              -  %        127           132             (4) %
 Percentage of total revenue         1  %          1  %                         1  %          1  %
 Total operating expenses      $ 2,403       $ 2,027             19  %    $ 6,891       $ 6,016             15  %


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 and nine months ended September 2, 2022 as compared to the three and nine months ended September 3, 2021 primarily due to the following:

                                                     Components of      Components of
                                                       % Change           % Change
                                                       2022-2021          2022-2021
                                                          QTD                YTD
     Incentive compensation, cash and stock-based              8  %               7  %
     Base compensation and related benefits                    8                  7

     Professional and consulting fees                          1                  2

     Various individually insignificant items                  2                  2
     Total change                                             19  %              18  %


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 and nine months ended
September 2, 2022 as compared to the three and nine months ended September 3,
2021 primarily due to the following:
                                                                            Components of                  Components of
                                                                               % Change                       % Change
                                                                              2022-2021                      2022-2021
                                                                                 QTD                            YTD

Marketing spend related to campaigns, events and overall marketing efforts

                                                                                    7  %                           5  %
Base compensation and related benefits                                                     5                              4
Incentive compensation, cash and stock-based                                               3                              3
Professional and consulting fees                                                           2                              2

Various individually insignificant items                                                   2                              1
Total change                                                                              19  %                          15  %


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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 computer
equipment and software used in the administration of the business, charitable
contributions and various forms of insurance.

General and administrative expenses increased during the three and nine months ended September 2, 2022 as compared to the three and nine months ended September 3, 2021 primarily due to the following:


                                                     Components of      Components of
                                                       % Change           % Change
                                                       2022-2021          2022-2021
                                                          QTD                YTD
    Charitable contributions                                   6  %               2  %
    Base compensation and related benefits                     5                  3
    Incentive compensation, cash and stock-based               5                  2

    Bad debt expense                                           3                  1

    Various individually insignificant items                   1                  -
    Total change                                              20  %               8  %


Amortization of Intangibles

Amortization expenses decreased during the nine months ended September 2, 2022
as compared to the nine months ended September 3, 2021 primarily due to certain
intangible assets from previous acquisitions becoming fully amortized in fiscal
2021. The decrease in amortization expense was partially offset by increases to
amortization expense primarily 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 and Nine Months Ended September 2, 2022 and September 3, 2021


 (dollars in millions)                    Three Months                                             Nine Months
                                      2022             2021             % Change              2022             2021             % Change
Interest expense                   $   (28)         $   (27)                    4  %       $   (84)         $   (85)                   (1) %
Percentage of total revenue             (1) %            (1) %                                  (1) %            (1) %
Investment gains (losses), net          (6)               7                       **           (23)              20                       **
Percentage of total revenue                 *                *                                      *                *
Other income (expense), net              6               (3)                      **             5                1                       **
Percentage of total revenue                 *                *                                      *                *
Total non-operating income
(expense), net                     $   (28)         $   (23)                      **       $  (102)         $   (64)                      **

_________________________________________

(*)  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 February 1 and August 1.

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 and Nine Months Ended September 2, 2022
and September 3, 2021

(dollars in millions)             Three Months                          Nine Months
                                2022        2021       % Change       2022        2021       % Change
Provision for income taxes    $ 320       $ 206            55  %    $ 911       $ 648            41  %
Percentage of total revenue       7  %        5  %                      7  %        6  %
Effective tax rate               22  %       15  %                     20  %       15  %


Our effective tax rates increased by approximately seven percentage points and
five percentage points for the three and nine months ended September 2, 2022,
respectively, as compared to the three and nine months ended September 3, 2021,
primarily due to lower tax benefits related to stock-based compensation during
the three and nine months ended September 2, 2022.

Our effective tax rate for the three months ended September 2, 2022 was higher
than the U.S. federal statutory tax rate of 21% primarily due to the impact of
state taxes, partially offset by the U.S. federal research tax credit. Our
effective tax rate for the nine months ended September 2, 2022 was lower than
the U.S. federal statutory tax rate of 21%, primarily due to the impact of the
U.S. federal research tax credit and tax benefits related to stock-based
compensation, partially offset by state taxes.

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 $427 million as of
September 2, 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 $307 million and $289 million as of September 2, 2022 and September 3, 2021, respectively. If the total unrecognized tax benefits at September 2, 2022 and September 3, 2021 were recognized, $198 million and $204 million would decrease the respective effective tax rates.


As of September 2, 2022 and September 3, 2021, the combined amounts of accrued
interest and penalties related to tax positions taken on our tax returns were
approximately $14 million and $23 million, respectively. These amounts were
included in long-term income taxes payable in their respective years.

The timing of the resolution of income tax examinations is highly uncertain as
are the amounts and timing of tax payments that are part of any audit settlement
process. These events could cause large fluctuations in the balance 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 $15 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.

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Moreover, we are subject to examinations by the U.S. Internal Revenue Service
and other domestic and foreign taxing authorities. Although we believe our
worldwide provision for income taxes and other tax liabilities are reasonable,
the determination of certain positions requires significant judgement, of which
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)                  September 2, 2022       December 3, 2021
Cash and cash equivalents     $            3,870      $          3,844
Short-term investments        $            1,894      $          1,954
Working capital               $            1,051      $          1,737
Stockholders' equity          $           14,373      $         14,797

A summary of our cash flows is as follows:


                                                                                  Nine Months Ended
(in millions)                                                       September 2, 2022           September 3, 2021
Net cash provided by operating activities                         $            5,513          $            5,164
Net cash used for investing activities                                          (501)                     (1,798)
Net cash used for financing activities                                        (4,914)                     (3,223)

Effect of foreign currency exchange rates on cash and cash equivalents

                                                                      (72)                          2
Net change in cash and cash equivalents                           $               26          $              145


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 $5.51 billion for the nine months
ended September 2, 2022 was primarily comprised of net income adjusted for the
net effect of non-cash items and changes in operating assets and liabilities.
The primary working capital sources of cash were net income, together with
decreases in trade receivables driven by strong collections. The primary working
capital uses of cash were decreases in accrued expenses and other liabilities
largely driven by the payment of accrued bonuses and operating leases.

Cash Flows from Investing Activities


Net cash used for investing activities of $501 million for the nine months ended
September 2, 2022 was primarily due to ongoing capital expenditures and business
acquisitions.

Cash Flows from Financing Activities


Net cash used for financing activities of $4.91 billion for the nine months
ended September 2, 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.


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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 of September 2, 2022
consisted of asset-backed securities, corporate debt securities, foreign
government securities, money market funds, municipal securities, time deposits,
U.S. agency securities and U.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.

Subsequent to September 2, 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, cash equivalent and short-term
investment balances on hand and, if necessary, a term loan. 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.   See
Note 3 of our notes to condensed consolidated financial statements for further
information regarding our     intended     acquisition of Figma.

Revolving Credit Agreement

On June 30, 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 September 2, 2022, there were no outstanding
borrowings under the Revolving Credit Agreement and the entire $1.5 billion
credit line remains available for borrowing.

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 $4.15 billion senior notes outstanding, which rank equally with our
other unsecured and unsubordinated indebtedness. As of September 2, 2022, the
carrying value of our senior notes was $4.13 billion and our maximum commitment
for interest payments was $416 million for the remaining duration of our
outstanding senior notes. Interest is payable semi-annually, in arrears, on
February 1 and August 1. Our senior notes do not contain any financial
covenants.   See Note 14 of our notes to condensed 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 condensed consolidated balance sheets.
As of September 2, 2022, the carrying value of our current debt was $500
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.

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Contractual Obligations


Our principal commitments as of September 2, 2022 consisted of purchase
obligations resulting from agreements to purchase goods and services in the
ordinary course of business and obligations under operating lease arrangements.
During the second quarter of fiscal 2022, we restructured certain of our
long-term supplier commitments that increased our minimum purchase obligations
by $4.75 billion through May 2029. There have been no other material changes to
our non-cancellable unconditional purchase obligations during the nine months
ended September 2, 2022.

Other

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 September 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. tax law. 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 are
currently evaluating the 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
shares in the open market or enter into structured repurchase agreements with
third parties. In December 2020, our Board of Directors granted authority to
repurchase up to $15 billion in common stock through the end of fiscal 2024.

During the nine months ended September 2, 2022, we repurchased a total of 10.7
million shares, including approximately 5.4 million shares at an average price
of $429.13 through structured repurchase agreements entered into during fiscal
2021 and the nine months ended September 2, 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 third 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 $1.2 billion. As of September 2, 2022, $400 million of
prepayment remained under our outstanding structured stock repurchase agreement.

Subsequent to September 2, 2022, as part of the December 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 $1.75
billion. Upon completion of the $1.75 billion stock repurchase agreement, $6.55
billion remains under our December 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 under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or occurrences while the
officer or director is or was serving at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the
officer's or director's lifetime. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited; however, we have director and officer insurance coverage that reduces
our exposure and enables us to recover a portion of any future amounts paid.

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