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, the amount of recurring revenue and revenue
growth. 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. You should carefully
review the risks described herein and in other documents we file from time to
time with the
BUSINESS OVERVIEW
Founded in 1982,
OPERATIONS OVERVIEW
For our first quarter of fiscal 2020, we reported strong financial results consistent with the continued execution of our long-term plans for our two strategic growth areas, Digital Media and Digital Experience, while continuing to market and license a broad portfolio of products and solutions. In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich and immersive content. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and syncing of files across users' machines, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers. We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by acquiring new users as a result of low cost of entry and delivery of additional features and value to Creative Cloud, as well as keeping existing customers current on our latest release. We 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.
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We continue to implement strategies that will accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new desktop and mobile applications, as well as targeted promotions and offers that attract past customers and potential users to try out and ultimately subscribe to Creative Cloud. 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 Adobe 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. Annualized Recurring Revenue ("ARR") is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue, unbilled backlog and remaining performance obligation as ARR is a performance metric and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any material exchange rates changes. Our reported ARR results in the current fiscal year are based on currency rates set at the beginning of the year and held constant throughout the year. 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 2020 was $7.58 billion , up from
$7.25 billion at the end of fiscal 2019. Document Cloud ARR exiting the first
quarter of fiscal 2020 was $1.15 billion , up from $1.08 billion at the end of
fiscal 2019. Total Digital Media ARR grew to $8.73 billion at the end of the
first quarter of fiscal 2020, up from $8.33 billion at the end of fiscal 2019.
Our success in driving growth in ARR has positively affected our revenue growth.
Creative revenue in the first quarter of fiscal 2020 was $1.82 billion , up from
$1.49 billion in the first quarter of fiscal 2019, representing 22%
year-over-year growth. Document Cloud revenue in the first quarter of fiscal
2020 was $351 million , up from $282 million in the first quarter of fiscal 2019
as we continue to transition Document Cloud to a subscription-based model. Total
Digital Media segment revenue grew to $2.17 billion in the first quarter of
fiscal 2020, up from $1.78 billion in the first quarter of fiscal 2019,
representing 22% year-over-year growth.
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 the following sets of solutions for our
customers:
• Data and insights. Our solutions deliver real-time customer profiles and
intelligence across the customer journey. Our offerings include Adobe
Analytics, Adobe Audience Manager, Adobe Experience Platform, Customer
Journey Analytics and Real-time Customer Data Platform.
• Content and commerce. We offer solutions to help customers manage,
deliver, test, target and optimize content delivery and enable shopping
experiences that scale from mid-market to enterprise businesses. Our
offerings include Adobe Experience Manager, Adobe Target and Magento
Commerce.
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• Customer journey management. Our solutions help businesses manage,
personalize and orchestrate campaigns and customer journeys across B2E
use cases. Our offerings include Adobe Campaign, Marketo Engage and
Journey Orchestration.
• Advertising. Adobe Advertising Cloud delivers an end-to-end platform for
managing advertising across traditional TV and digital formats, and
simplifies the delivery of video, display and search advertising across
channels and screens. Adobe Sensei enables machine learning and
predictive intelligence and helps automate digital media buying to
traditional TV advertising as well as ad creation.
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
COVID-19 UPDATE
In
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our condensed consolidated financial statements in accordance with
GAAP and pursuant to the rules and regulations of the
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There have been no significant changes in our critical accounting policies and
estimates during the three months ended
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 $8.73 billion as of February 28,
2020 increased by $400 million , or 5%, from $8.33 billion as of
November 29, 2019 . The change in our Digital Media ARR is primarily due
to new user adoption of our Creative Cloud and Adobe Document Cloud
offerings.
• Creative revenue during the three months ended February 28, 2020 of $1.82
billion increased by $323 million , or 22% compared to the year-ago
period. The increase was primarily due to the increase in subscription
revenue associated with our Creative Cloud offerings.
• Digital Experience revenue of $858 million during the three months ended
February 28, 2020 increased by $115 million , or 15%, compared to the
year-ago period. The increase was primarily due to the increase in
subscription revenue across our offerings.
• Our total deferred revenue of $3.61 billion as of February 28, 2020
increased by $113 million , or 3%, from $3.50 billion as of November 29,
2019 primarily due to increases in new contracts and the timing of
renewals for offerings with hosted services.
• Cost of revenue of $452 million during the three months ended
February 28, 2020 increased by $55 million , or 14%, compared to the
year-ago period primarily due to increases in hosting services and data
center costs.
• Operating expenses of $1.70 billion during the three months ended
February 28, 2020 increased by $193 million , or 13%, compared to the
year-ago period primarily due to increases in base compensation and
related benefits costs and stock-based compensation expense associated
with headcount growth. To a lesser extent, charges related to
cancellation of corporate events also contributed to the overall increase
in operating expenses.
• Net income of $955 million during the three months ended February 28,
2020 increased by $281 million , or 42%, compared to the year-ago period
primarily due to increases in revenue and, to a lesser extent, the
benefit from income taxes in the current quarter, which were offset in
part by increases in operating expenses and cost of revenue.
• Net cash flow from operations of $1.32 billion during the three months
ended February 28, 2020 increased by $312 million , or 31%, compared to
the year-ago period primarily due to higher net income adjusted for the
net effect of non-cash items.
Revenue for the Three Months Ended
Three Months
2020 2019 % Change
Subscription $ 2,825 $ 2,305 23 %
Percentage of total revenue 91 % 88 %
Product 143 171 (16 )%
Percentage of total revenue 5 % 7 %
Services and support 123 125 (2 )%
Percentage of total revenue 4 % 5 %
Total revenue $ 3,091 $ 2,601 19 %
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Subscription Revenue by Segment
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
our agreements with customers, beginning with commencement of service.
Subscription revenue related to certain offerings, where fees are based on a
number of transactions or impressions per month 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. Subscription revenue by reportable segment for the three months
ended February 28, 2020 and March 1, 2019 is as follows:
(dollars in millions) Three Months
2020 2019 % Change
Digital Media $ 2,058 $ 1,664 24 %
Digital Experience 739 612 21 %
Publishing 28 29 (3 )%
Total subscription revenue
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.
Our services and support revenue is comprised of consulting, training and
maintenance and support, primarily related to the licensing of our enterprise
offerings. Our support revenue also includes technical support and developer
support to partners and developer organizations related to our desktop products.
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 to receive desktop product
upgrades and enhancements or technical support, depending on the offering, are
generally recognized ratably over the term of the arrangement as we satisfy the
performance obligations to our customers.
Segment Information
(dollars in millions) Three Months
2020 2019 % Change
Digital Media $ 2,169 $ 1,777 22 %
Percentage of total revenue 70 % 68 %
Digital Experience 858 743 15 %
Percentage of total revenue 28 % 29 %
Publishing 64 81 (21 )%
Percentage of total revenue 2 % 3 %
Total revenue $ 3,091 $ 2,601 19 %
Digital Media
Revenue from Digital Media increased $392 million during the three months ended
February 28, 2020 , as compared to the three months ended March 1, 2019 driven by
increases in revenue associated with our Creative and Document Cloud offerings.
Revenue associated with our Creative offerings, which includes our Creative
Cloud, perpetually licensed Creative and stock photography offerings, increased
during the three months ended February 28, 2020 as compared to the year-ago
period primarily due to increases in net new subscriptions across our Creative
Cloud offerings. Adobe Document Cloud revenue, which includes our Acrobat
product family and Adobe Sign service, increased during the three months ended
February 28, 2020 as compared to the year-ago period primarily due to increases
in Document Cloud subscription revenue driven by strong adoption of our Document
Cloud offerings.
Digital Experience
Revenue from Digital Experience increased $115 million during the three months
ended February 28, 2020 , as compared to the three months ended March 1, 2019
primarily due to increases in subscription revenue across our offerings.
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Geographical Information
(dollars in millions) Three Months
2020 2019 % Change
Americas $ 1,797 $ 1,510 19 %
Percentage of total revenue 58 % 58 %
EMEA 817 703 16 %
Percentage of total revenue 27 % 27 %
APAC 477 388 23 %
Percentage of total revenue 15 % 15 %
Total revenue $ 3,091 $ 2,601 19 %
Overall revenue during the three months ended
Three Months
Revenue impact: Increase/(Decrease)
Euro $ (18 )
British Pound (1 )
Japanese Yen 2
Australian Dollar (6 )
Other currencies (4 )
Total revenue impact (27 )
Hedging impact:
Euro 7
British Pound (1 )
Japanese Yen 1
Total hedging impact 7
Total impact $ (20 )
During the three months ended
2020 2019 % Change
Subscription $ 355 $ 288 23 %
Percentage of total revenue 11 % 11 %
Product 7 12 (42 )%
Percentage of total revenue * *
Services and support 90 97 (7 )%
Percentage of total revenue 3 % 4 %
Total cost of revenue $ 452 $ 397 14 %
_________________________________________
(*) Percentage is less than 1%.
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Subscription
Cost of subscription revenue consists of third-party royalties and expenses
related to operating our network infrastructure, including depreciation expense,
data center costs, salaries and related expenses of network operations,
implementation, account management and technical support personnel, amortization
of certain intangible assets and allocated overhead. We enter into contracts
with third parties for hosting services and use of data center facilities. Our
data center costs largely consist of the amounts we pay to these third parties
for rack space, power and similar items. Cost of subscription revenue also
includes media costs related to impressions purchased from third-party ad
inventory sources.
Cost of subscription revenue increased during the three months ended
Components of
% Change
Hosting services and data center costs 8 %
Media costs 7
Royalty costs 6
Incentive compensation, cash and stock-based 5 Various individually insignificant items (3 ) Total change
23 %
Product
Cost of product revenue is primarily comprised of third-party royalties, amortization related to purchased intangibles and acquired rights to use technology, excess and obsolete inventory, localization costs and the costs associated with the manufacturing of our products. Services and Support Cost of services and support revenue is primarily comprised of employee-related costs and other costs incurred to provide consulting services, training and product support. Operating Expenses for the Three Months EndedFebruary 28, 2020 andMarch 1, 2019 (dollars in millions) Three Months 2020 2019 % Change
Research and development
857 781 10 %
Percentage of total revenue 28 % 30 %
General and administrative 271 216 25 %
Percentage of total revenue 9 % 8 %
Amortization of intangibles 42 47 (11 )%
Percentage of total revenue 1 % 2 %
Total operating expenses $ 1,702 $ 1,509 13 %
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Research and Development
Research and development expenses consist primarily of salary and benefit
expenses for software developers, contracted development efforts, third party
fees for hosting services, related facilities costs and expenses associated with
computer equipment used in software development.
Research and development expenses increased during the three months ended
February 28, 2020 as compared to the three months ended March 1, 2019 due to the
following:
Components of
% Change
Incentive compensation, cash and stock-based 10 %
Base compensation and related benefits associated with headcount 5 Seminars and events
(3 )
Various individually insignificant items 2
Total change 14 %
The decrease in seminars and events during the three months ended
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 salary and benefit expenses, amortization of contract acquisitions 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, public relations and other market development programs. Sales and marketing expenses increased during the three months endedFebruary 28, 2020 as compared to the three months endedMarch 1, 2019 due to the following: Components of % Change
Marketing spend related to campaigns, events and overall marketing efforts
4 %
Incentive compensation, cash and stock-based 3
Base compensation and related benefits associated with headcount 1
Various individually insignificant items 2
Total change 10 %
General and Administrative General and administrative expenses consist primarily of compensation and benefit expenses, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.
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General and administrative expenses increased during the three months ended
Components of
% Change
Charges related to cancellation of corporate events 18 %
Software licenses 3
Incentive compensation, cash and stock-based 2
Base compensation and related benefits associated with headcount 2 Total change
25 %
During the three months ended February 28, 2020 , we recorded charges related to
the cancellation of corporate events including Adobe Summit due to concerns over
COVID-19.
Amortization of Intangibles
Amortization expenses decreased during the three months ended February 28, 2020
as compared to the three months ended March 1, 2019 primarily due to certain
acquired intangible assets becoming fully amortized during the quarter.
Non-Operating Income (Expense), Net for the Three Months Ended February 28, 2020
and March 1, 2019
(dollars in millions) Three Months
2020 2019 % Change
Interest expense $ (33 ) $ (41 ) (20 )%
Percentage of total revenue (1 )% (2 )%
Investment gains (losses), net (3 ) 44 **
Percentage of total revenue * 2 %
Other income (expense), net 18 4 **
Percentage of total revenue 1 % *
Total non-operating income (expense), net
_________________________________________
(*) Percentage is less than 1%.
(**) Percentage is not meaningful.
Interest Expense Interest expense represents interest associated with our debt instruments. Interest on our Notes is payable semi-annually, in arrears, onFebruary 1 andAugust 1 . Interest on our Term Loan, which was terminated in the first quarter of fiscal 2020, was payable periodically at the end of each interest period. Floating interest payments on the interest rate swaps, which matured in the first quarter of fiscal 2020, was paid monthly and the fixed-rate interest receivable on the swaps was received semi-annually concurrent with the Notes interest payments. Interest expense decreased during the three months endedFebruary 28, 2020 as compared to the three months endedMarch 1, 2019 primarily due to lower average interest rates. See 14 of our notes to condensed consolidated financial statements for further details regarding our debt instruments. Investment Gains (Losses), Net Investment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets which are classified as trading securities, and gains and losses associated with our direct and indirect investments in privately held companies. Investment gains decreased during the three months endedFebruary 28, 2020 as compared to the three months endedMarch 1, 2019 primarily due to the gain recognized upon our acquisition of the remaining interest in Allegorithmic inJanuary 2019 . 35
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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.
Provision for (Benefit from) Income Taxes for the Three Months Ended
February 28, 2020 and March 1, 2019
(dollars in millions) Three Months
2020 2019 % Change
Provision for (benefit from) income taxes
(1 )% 1 %
Effective tax rate (4 )% 4 %
Our effective tax rate decreased by approximately 8 percentage points for the
three months ended
We are aUnited States -based multinational company subject to tax in multipleU.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. The currentU.S. tax law provides an exemption from federal income taxes for distributions from foreign subsidiaries made afterDecember 31, 2017 , including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax. As we repatriate the undistributed foreign earnings for use in theU.S. , the distributions will generally not be subject to furtherU.S. federal tax. During this fiscal year, we anticipate making changes to our international trading structure that will better align our ownership of certain intellectual property rights with how our business operates. Under the current rules, these changes, if completed, will result in the recording of a tax benefit in the fiscal 2020 effective income tax rate related to the transferred intellectual property which is deductible in future periods. The net impact of such changes is uncertain but is anticipated to adversely affect our effective income tax rate and cash flows in years beyond fiscal 2020. However, we expect cash paid for income taxes will be at a lower effective rate than our effective income tax rate for the provision for income taxes due to the future deductions on the transferred intellectual property. Accounting for Uncertainty in Income Taxes The gross liabilities for unrecognized tax benefits excluding interest and penalties were$163 million and$194 million as ofFebruary 28, 2020 andMarch 1, 2019 , respectively. If the total unrecognized tax benefits atFebruary 28, 2020 andMarch 1, 2019 were recognized in the future,$107 million and$134 million would decrease the respective effective tax rates. The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately$23 million and$24 million for the three months endedFebruary 28, 2020 andMarch 1, 2019 , 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, 36
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we can only determine a range of estimated potential decreases in underlying
unrecognized tax benefits ranging from $0 to approximately $20 million over the
next 12 months.
In addition, in countries where we conduct business and in jurisdictions in
which we are subject to tax, including those covered by governing bodies that
enact tax laws applicable to us, such as the European Commission of the European
Union , we are subject to potential changes in relevant tax, accounting and other
laws, regulations and interpretations, including changes to tax laws applicable
to corporate multinationals such as Adobe. 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 or result in other costs to us which could adversely affect our
operations and financial results.
Moreover, we are subject to the continual examination of our income tax returns
by the IRS and other domestic and foreign tax authorities. These tax
examinations are expected to focus on our intercompany transfer pricing
practices as well as other matters. We regularly assess the likelihood of
outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes and have reserved for 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
This data should be read in conjunction with our condensed consolidated statements of cash flows.
As of
(in millions) February 28, 2020 November 29, 2019
Cash and cash equivalents $ 2,688 $ 2,650
Short-term investments $ 1,483 $ 1,527
Working capital $ 1,227 $ (1,696 )
Stockholders' equity $ 10,465 $ 10,530
Working Capital
Working capital was
Three Months Ended
(in millions) February 28, 2020 March 1, 2019
Net cash provided by operating activities $ 1,325 $ 1,013
Net cash used for investing activities (48 ) (132 )
Net cash used for financing activities (1,233 ) (784 )
Effect of foreign currency exchange rates on cash and cash equivalents
(6 ) (1 )
Net increase in cash and cash equivalents $ 38 $ 96
Our primary source of cash is receipts from revenue and, to a lesser extent,
proceeds from participation in the employee stock purchase plan. The primary
uses of cash are our stock repurchase program as described below,
payroll-related expenses, general operating expenses including marketing, travel
and office rent, and cost of revenue. 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 $1.32 billion for the three months
ended February 28, 2020 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, which were offset in part by increases in prepaid expenses and
other assets. Decreases in trade receivables were largely attributable to strong
collections during the quarter.
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The increase in deferred revenue was primarily driven by increases related to
Digital Experience hosted services. The primary working capital use of cash was
due to increases in prepaid expenses and other assets driven by sales
commissions paid and capitalized, increases in prepaid payroll related to
employee benefits and increases in prepaid expenses due to the timing of
billings and payments associated with certain vendors.
Cash Flows from Investing Activities
Net cash used for investing activities of $48 million for the three months ended
February 28, 2020 was primarily due to ongoing capital expenditures. These cash
outflows were offset in part by proceeds from sales and maturities of short-term
investments, net of purchases.
Cash Flows from Financing Activities
Net cash used for financing activities was $1.23 billion for the three months
ended February 28, 2020 . In February 2020 , we issued $500 million of 1.70%
senior notes due February 1, 2023 ("2023 Notes"), $500 million of 1.90% senior
notes due February 1, 2025 ("1.90% 2025 Notes"), $850 million of 2.15% senior
notes due February 1, 2027 ("2027 Notes") and $1.30 billion of 2.30% senior
notes due February 1, 2030 ("2030 Notes"). We used the proceeds to repay the
Term Loan and 2020 Notes concurrently. See Note 14 of our notes to condensed
consolidated financial statements for information regarding our debt
refinancing.
Other financing activities during the three months ended February 28, 2020
include payments for our treasury stock repurchases and taxes paid related to
the net share settlement of equity awards. See the section titled "Stock
Repurchase Program" below.
We expect to continue our investing activities, including short-term and
long-term investments, facilities expansion and purchases of computer systems
for research and development, sales and marketing, product support and
administrative staff. 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.
Other Liquidity and Capital Resources Considerations
Our existing cash, cash equivalents and investment balances may fluctuate during
fiscal 2020 due to changes in our planned cash outlay, including changes in
incremental costs such as direct costs and integration costs related to our
acquisitions.
Cash from operations could also be affected by various risks and uncertainties,
including, but not limited to, the effects of the COVID-19 pandemic and other
risks detailed in Part II, Item 1A titled "Risk Factors". However, based on our
current business plan and revenue prospects, we believe that our existing cash,
cash equivalents and investment balances, our anticipated cash flows from
operations and our available credit facility will be sufficient to meet our
working capital and operating resource expenditure requirements for the next
twelve months.
We have a $1 billion senior unsecured revolving credit agreement ("Revolving
Credit Agreement") with a syndicate of lenders, providing for loans to us and
certain of our subsidiaries through October 17, 2023 . As of February 28, 2020 ,
there were no outstanding borrowings under this Credit Agreement and the entire
$1 billion credit line remains available for borrowing.
As of February 28, 2020 , we have $4.15 billion senior notes outstanding,
consisting of the 2023 Notes, 1.90% 2025 Notes, 2027 Notes, 2030 Notes, and the
$1 billion of 3.25% senior notes due February 1, 2025 ("3.25% 2025 Notes," and
together with the aforementioned notes, "Notes"). The Notes rank equally with
our other unsecured and unsubordinated indebtedness.
Our short-term investment portfolio is primarily invested in corporate debt
securities, asset-backed securities and municipal securities. We use
professional investment management firms to manage a large portion of our
invested cash.
Stock Repurchase Program
To facilitate our stock repurchase program, designed to return value to our
stockholders and minimize dilution from stock issuances, we may repurchase
shares in the open market or enter into structured repurchase agreements with
third parties. In May 2018 , our Board of Directors granted us an authority to
repurchase up to $8 billion in common stock through the end of fiscal 2021.
During the three months ended February 28, 2020 and March 1, 2019 , we entered
into several structured stock repurchase agreements with large financial
institutions, whereupon we provided them with prepayments totaling $850 million
and $500 million , respectively. We enter into these agreements in order to take
advantage of repurchasing shares at a guaranteed discount to the Volume Weighted
Average Price ("VWAP") of our common stock over a specified period of time. We
only enter into such
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transactions when the discount that we receive is higher than the expected
foregone return on our cash prepayments to the financial institutions. There
were no explicit commissions or fees on these structured repurchases. Under the
terms of the agreements, there is no requirement for the financial institutions
to return any portion of the prepayment to us.
The financial institutions agree to deliver shares to us at monthly intervals
during the contract term. The parameters used to calculate the number of shares
deliverable are: the total notional amount of the contract, the number of
trading days in the contract, the number of trading days in the interval and the
average VWAP of our stock during the interval less the agreed upon discount.
During the three months ended February 28, 2020 , we repurchased approximately
2.4 million shares at an average price of $332.59 through structured repurchase
agreements entered into during fiscal 2019 and the three months ended
February 28, 2020 . During the three months ended March 1, 2019 , we repurchased
approximately 2.1 million shares at an average price of $237.13 through
structured repurchase agreements entered into during fiscal 2018 and the three
months ended March 1, 2019 .
For the three months ended February 28, 2020 , the prepayments were classified as
treasury stock on our condensed consolidated balance sheets at the payment date,
though only shares physically delivered to us by February 28, 2020 were excluded
from the computation of earnings per share. As of February 28, 2020 , $284
million of prepayment remained under this agreement.
Subsequent to February 28, 2020 , as part of the May 2018 stock repurchase
authority, we entered into a structured stock repurchase agreement with a large
financial institution whereupon we provided them with a prepayment of $850
million . Upon completion of the $850 million stock repurchase agreement, $3.4
billion remains under our May 2018 authority.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Our principal commitments as of February 28, 2020 consist of our Notes and
obligations under operating leases, royalty agreements and various service
agreements. Except as discussed below, there have been no other material changes
in those obligations during the three months ended February 28, 2020. See
Notes 13 , 14 and 15 of our notes to condensed consolidated financial
statements for more detailed information regarding our contractual
commitment s.
Contractual Obligations
In February 2020 , we issued the 2023 Notes, 1.90% 2025 Notes, 2027 Notes, and
2030 Notes. Concurrently, we settled our outstanding Term Loan and the 2020
Notes. The following table updates our Notes obligations as of February 28,
2020 :
(in millions) Payment Due by Period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Notes, including interest
As ofFebruary 28, 2020 , the carrying value of our Notes was$4.11 billion . Interest is payable semi-annually, in arrears onFebruary 1 andAugust 1 . AtFebruary 28, 2020 , our maximum commitment for interest payments was$662 million for the remaining duration of our outstanding Notes. Covenants Our Revolving Credit Agreement contain a financial covenant requiring us not to exceed a maximum leverage ratio. As ofFebruary 28, 2020 , we were in compliance with this covenant. We believe this covenant will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan. Our Notes do not contain any financial covenants. Under the terms of our Revolving Credit Agreement, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists. We do not anticipate paying any cash dividends in the foreseeable future. Transition Taxes Liability Our transition tax liability which was accrued as a result of theU.S. Tax Act was approximately$427 million as ofFebruary 28, 2020 and is payable in installments through fiscal 2026. TheU.S. Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made afterDecember 31, 2017 , including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax. As we repatriate the undistributed foreign earnings for use in theU.S. , the distributions will generally not be subject to furtherU.S. federal tax. 39
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Table of Contents
Accounting for Uncertainty in Income Taxes
See Results of Operations, Provision for (Benefit from) Income Taxes above for
our discussion on accounting for uncertainty in income taxes.
Royalties
We have certain royalty commitments associated with the licensing of certain
offerings. Royalty expense is generally based on a dollar amount per unit sold
or a percentage of the underlying revenue.
Indemnifications
In the normal course of business, we provide indemnifications of varying scope
to customers and channel partners against claims of intellectual property
infringement made by third parties arising from the use of our products and from
time to time, we are subject to claims by our customers under these
indemnification provisions. Historically, costs related to these indemnification
provisions have not been significant and we are unable to estimate the maximum
potential impact of these indemnification provisions on our future results of
operations.
To the extent permitted under Delaware law, we have agreements whereby we
indemnify our directors and officers for certain events or occurrences while the
director or officer is or was serving at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the
director's or officer's lifetime. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited; however, we have director and officer insurance coverage that limits
our exposure and enables us to recover a portion of any future amounts paid.
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