The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto. Discussion regarding our financial condition and results of operations for fiscal 2019 as compared to fiscal 2018 is included in Item 7 of our Annual Report on Form 10-K for the fiscal year endedNovember 29, 2019 , filed with theSEC onJanuary 21, 2020 . ACQUISITIONS Subsequent toNovember 27, 2020 , we completed our acquisition of Workfront, a privately held company that provides a work management platform for marketers, for approximately$1.5 billion in cash consideration. Workfront will be integrated into our Digital Experience reportable segment for financial reporting purposes in the first quarter of fiscal 2021. During fiscal 2019, we acquired the remaining interest in Allegorithmic SAS ("Allegorithmic"), a privately held 3D editing and authoring software company for gaming and entertainment, for approximately$106 million in cash consideration, and integrated it into our Digital Media reportable segment. During fiscal 2018, we completed our acquisitions of Marketo, a privately held marketing cloud platform company, for approximately$4.73 billion and Magento, a privately held commerce platform company, for approximately$1.64 billion , and integrated them into our Digital Experience reportable segment. We also completed other immaterial business acquisitions during the fiscal years presented. See Note 3 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions, including pro forma financial information related to the Marketo acquisition. Pro forma information has not been presented for our other acquisitions during the fiscal years presented as the impact to our Consolidated Financial Statements was not material. CRITICAL ACCOUNTING POLICIES AND ESTIMATES In preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of theSEC , we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, business combinations and income taxes have the greatest potential impact on our 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. Revenue Recognition Our contracts with customers may include multiple goods and services. For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services. Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided. In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams. We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own. Cloud-based features that are integral to our Creative Cloud and Document Cloud offerings and that work together with the on-premise/on-device software include, but are not limited to:Creative Cloud Libraries , which enable customers to access their work, settings, preferences and other assets seamlessly across desktop and mobile devices and collaborate across teams in 42 -------------------------------------------------------------------------------- Table of Contents real time; shared reviews which enable simultaneous editing and commenting of PDFs across desktop, mobile and web; automatic cloud rendering of a design which enables it to be worked on in multiple mediums; and Sensei, Adobe's cloud-hosted artificial intelligence and machine learning framework, which enables features such as automated photo-editing, photograph content-awareness, natural language processing, optical character recognition and automated document tagging. Business Combinations We allocate the purchase price of acquired companies to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: •future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents; •historical and expected customer attrition rates and anticipated growth in revenue from acquired customers; •the acquired company's trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company's product portfolio; •the expected use of the acquired assets; and •discount rates. In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed. The estimated fair value of these obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Accounting for Income Taxes We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities. Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, we are subject to the continual examination of our income tax returns by theU.S. Internal Revenue Service and other domestic and foreign tax authorities. These tax examinations are expected to focus on our intercompany transfer pricing practices, application of tax rules, and other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from such examinations. We believe such estimates to be reasonable; however, we cannot provide assurance that the final determination of any of these examinations will not have a significant impact on the amounts provided for income taxes in our Consolidated Financial Statements. During fiscal 2020, we completed intra-entity transfers of certain intellectual property rights ("IP rights") which resulted in the establishment of deferred tax assets, net of valuation allowance, and related tax benefits of$224 million and$1.13 billion , based on the fair value of the IP rights transferred in April andNovember 2020 , respectively. The determination of the fair value involves significant judgment on future revenue growth, operating margins and discount rates. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results. The sustainability of our future tax benefits is dependent upon the acceptance of the valuation estimates and assumptions by the taxing authorities. 43 -------------------------------------------------------------------------------- Table of Contents
Recent Accounting Pronouncements
See Note 1 of our Notes to Consolidated Financial Statements for information regarding recent accounting pronouncements that are of significance, or potential significance to us.
RESULTS OF OPERATIONS Overview of 2020 For our fiscal 2020, we experienced strong demand across our Digital Media offerings consistent with the continued execution of our long-term plans with respect to this segment. In our Digital Experience segment, we continued to experience growth in software-based subscription revenue across our portfolio of offerings. During the second quarter of fiscal 2020, we began to discontinue our transaction-driven Advertising Cloud offerings, allowing us to focus our investment on strategic growth initiatives. In the fourth quarter of fiscal 2020, we moved our Advertising Cloud offerings from our Digital Experience segment into our new Publishing and Advertising segment, which combined Advertising Cloud with our previous Publishing segment. This realignment is consistent with how we manage our Digital Experience segment to better reflect the strategic shift related to Advertising Cloud and to align with our overall core value proposition of delivering on customer experience management. Digital Media In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich and immersive content. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and syncing of files across users' machines, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers. 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. 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 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. 44 -------------------------------------------------------------------------------- Table of Contents 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 fiscal 2020 was$8.72 billion , up from$7.25 billion at the end of fiscal 2019. Document Cloud ARR exiting fiscal 2020 was$1.46 billion , up from$1.08 billion at the end of fiscal 2019. Total Digital Media ARR grew to$10.18 billion at the end of fiscal 2020, up from$8.33 billion at the end of fiscal 2019. Revaluing our ending ARR for fiscal 2020 using currency rates at the beginning of fiscal 2021, our Digital Media ARR at the end of fiscal 2020 would be$10.26 billion or approximately$77 million higher than the ARR reported above. Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in fiscal 2020 was$7.74 billion , up from$6.48 billion in fiscal 2019 and representing 19% year-over-year growth. Document Cloud revenue in fiscal 2020 was$1.50 billion , up from$1.22 billion in fiscal 2019 and representing 22% year-over-year revenue growth and reflecting an increase in demand driven by the shift to remote work as well as our continued efforts to transition Document Cloud to a subscription-based model. Total Digital Media segment revenue grew to$9.23 billion in fiscal 2020, up from$7.71 billion in fiscal 2019 and representing 20% year-over-year growth. These increases were driven by strong net new user growth, including those resulting from the current work-from-home environment reflecting expanded digital engagement. Digital Experience We are a market leader in the fast-growing category addressed by our Digital Experience segment. The Adobe Experience Cloud applications, services and platform are designed to manage customer journeys, enable shoppable experiences and deliver intelligence for businesses of any size in any industry. Our differentiation and competitive advantage is strengthened by our ability to use the Adobe Experience Platform to connect our comprehensive set of solutions. Adobe Experience Cloud is focused on delivering solutions for our enterprise customers across the following strategic growth pillars: •Customer data and insights. Our solutions deliver real-time customer profiles and intelligence across the customer journey. Our offerings include Adobe Experience Platform, Adobe Analytics, Adobe Audience Manager, Customer Journey Analytics, Real-time Customer Data Platform and Intelligent Services. •Content and commerce. Our solutions to help customers manage, deliver, test, target and optimize content delivery and enable shopping experiences that scale from mid-market to enterprise businesses. Our offerings include Adobe Experience Manager, Adobe Target and Adobe Commerce.
•Customer journey management. Our solutions help businesses manage, personalize and orchestrate campaigns and customer journeys across B2E use cases. Our offerings include Adobe Campaign, Marketo Engage and Journey Orchestration.
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 45 -------------------------------------------------------------------------------- Table of Contents 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 for all fiscal years presented has been updated to reflect the Advertising Cloud segment move. Digital Experience revenue was$3.13 billion in fiscal 2020, up from$2.80 billion in fiscal 2019 which represents 12% year-over-year growth. Driving this increase was the increase in subscription revenue across our offerings which grew to$2.66 billion in fiscal 2020 from$2.28 billion in fiscal 2019, representing 17% year-over-year growth. COVID-19 UPDATE InMarch 2020 , theWorld Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic. This pandemic has had widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including physical distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes and closure of non-essential businesses. Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity. As a result, we have taken action to direct our teams to work from home, suspend travel and replace in-person events such as Adobe Summit and MAX, with digital events throughJuly 2021 . During the pandemic, digital has become the primary way for people to connect, work, learn and be entertained, and for businesses to engage with customers. This macro trend towards all things digital has increased the importance and relevance of our solutions and accelerated the tailwinds that benefit our business, which contributed to our continued growth year over year. However, while our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of the pandemic on our results of operations and overall financial performance remain uncertain. See Risk Factors for further discussion of the possible impact of the pandemic on our business. Financial Performance Summary for Fiscal 2020 •Total Digital Media ARR of approximately$10.18 billion as ofNovember 27, 2020 increased by$1.85 billion , or 22%, from$8.33 billion as ofNovember 29, 2019 . The increase in our Digital Media ARR was primarily due to new user adoption of our Creative Cloud and Document Cloud offerings. •Creative revenue of$7.74 billion increased by$1.25 billion , or 19%, during fiscal 2020, from$6.48 billion in fiscal 2019. Document Cloud revenue of$1.50 billion increased by$272 million , or 22%, during fiscal 2020, from$1.22 billion in fiscal 2019. The increases were primarily due to subscription revenue growth associated with our Creative Cloud and Document Cloud offerings. •Digital Experience revenue of$3.13 billion increased by$330 million , or 12%, during fiscal 2020, from$2.80 billion in fiscal 2019. The increase was primarily due to subscription revenue growth across our offerings. •Remaining performance obligation of$11.34 billion as ofNovember 27, 2020 increased by$1.52 billion , or 15%, from$9.82 billion as ofNovember 29, 2019 , primarily due to new contracts and renewals for our Digital Media and Digital Experience offerings. •Cost of revenue of$1.72 billion increased by$49 million , or 3%, during fiscal 2020, from$1.67 billion in fiscal 2019 primarily due to increases in hosting services and data center costs, offset in large part by decreases in Advertising Cloud media costs. •Operating expenses of$6.91 billion increased by$679 million , or 11%, during fiscal 2020, from$6.23 billion in fiscal 2019 primarily due to increases in base and incentive compensation and related benefits costs, as well as increased marketing spend. These increases were offset in part by decreases in travel-related expenses. •Net income of$5.26 billion increased by$2.31 billion , or 78%, during fiscal 2020 from$2.95 billion in fiscal 2019 primarily due to increases in revenue and the non-recurring benefit from income taxes resulting from intra-entity transfers of certain intellectual property rights. 46 -------------------------------------------------------------------------------- Table of Contents •Net cash flows from operations of$5.73 billion during fiscal 2020 increased by$1.31 billion , or 30%, from$4.42 billion during fiscal 2019 primarily due to higher net income adjusted for the net effect of non-cash items. Presentation Changes In the fourth quarter of fiscal 2020, we moved our Advertising Cloud offerings from our Digital Experience segment into our new Publishing and Advertising segment, which combined our Advertising Cloud offerings with our previous Publishing segment. This realignment is consistent with how we manage our Digital Experience segment to better reflect the strategic shift related to Advertising Cloud and to align with our overall core value proposition of delivering on customer experience management. Further, we reclassified revenue and related cost of revenue of our Advertising Cloud offerings from subscription to services and other on our Consolidated Statements of Income. Financial information for all fiscal years presented has been updated to reflect these reclassifications. There were no other updates to disclosures included in our prior year report in relation to the reclassifications. Revenue Our financial results for fiscal 2020 and 2019 are presented in accordance with Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was adopted under the modified retrospective method at the beginning of fiscal 2019. Fiscal 2018 results have not been restated which limits its comparability with other fiscal years presented. % Change % Change (dollars in millions) 2020 2019 2018 2020-2019 2019-2018 Subscription$ 11,626 $ 9,634 $ 7,604 21 % 27 % Percentage of total revenue 90 % 86 % 84 % Product 507 648 622 (22) % 4 % Percentage of total revenue 4 % 6 % 7 % Services and other 735 889 804 (17) % 11 % Percentage of total revenue 6 % 8 % 9 % Total revenue$ 12,868 $ 11,171 $ 9,030 15 % 24 % 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 fiscal 2020, 2019 and 2018 is as follows: % Change % Change (dollars in millions) 2020 2019 2018 2020-2019 2019-2018 Digital Media$ 8,813 $ 7,208 $ 5,858 22 % 23 % Digital Experience 2,660 2,280 1,600 17 % 43 % Publishing and Advertising 153 146 146 5 % * Total subscription revenue$ 11,626 $ 9,634 $ 7,604 21 % 27 %
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(*) Percentage is less than 1%. 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 47 -------------------------------------------------------------------------------- Table of Contents product revenue at the point in time the software is available to the customer, provided all other revenue recognition criteria are met. Services and Other Our services and other revenue is comprised primarily of fees related to consulting, training, maintenance and support and our advertising offerings. 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. Segments In fiscal 2020, we categorized our products into the following reportable segments: •Digital Media-Our Digital Media segment provides tools and solutions that enable individuals, teams and enterprises to create, publish, promote and monetize their digital content anywhere. Our customers include content creators, experience designers, app developers, enthusiasts, students, social media users and creative professionals, as well as marketing departments and agencies, companies and publishers. Our customers also include knowledge workers who create, collaborate on and distribute documents and creative content. •Digital Experience-Our Digital Experience segment provides products, services and solutions for creating, managing, executing, measuring, monetizing and optimizing customer experiences from analytics to commerce. Our customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers, marketing executives, information management and technology executives, product development executives, and sales and support executives. •Publishing and Advertising-Our Publishing and Advertising segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to our legacy type and OEM printing businesses. It also includes our platforms for Advertising Cloud, web conferencing, document and forms, and Primetime. Segment Information % Change % Change (dollars in millions) 2020 2019 2018 2020-2019 2019-2018 Digital Media$ 9,233 $ 7,707 $ 6,325 20 % 22 % Percentage of total revenue 72 % 69 % 70 % Digital Experience 3,125 2,795 2,073 12 % 35 % Percentage of total revenue 24 % 25 % 23 % Publishing and Advertising 510 669 632 (24) % 6 % Percentage of total revenue 4 % 6 % 7 % Total revenue$ 12,868 $ 11,171 $ 9,030 15 % 24 % Digital Media Revenue from Digital Media increased$1.53 billion during fiscal 2020 as compared to fiscal 2019, driven by increases in revenue associated with our Creative and Document Cloud offerings due to increased demand and digital engagement amid the work-from-home environment. Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during fiscal 2020 primarily due to increases in net new subscriptions across our Creative Cloud offerings. Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during fiscal 2020 primarily due to increases in subscription revenue driven by strong adoption of our Document Cloud offerings including Adobe Sign. 48 -------------------------------------------------------------------------------- Table of Contents Digital Experience Revenue from Digital Experience increased$330 million during fiscal 2020, as compared to fiscal 2019 primarily due to subscription revenue growth across our offerings of which the largest contributors were our AEM and Marketo Engage offerings. Geographical Information % Change % Change (dollars in millions) 2020 2019 2018 2020-2019 2019-2018 Americas$ 7,454 $ 6,506 $ 5,117 15 % 27 % Percentage of total revenue 58 % 58 % 57 % EMEA 3,400 2,975 2,550 14 % 17 % Percentage of total revenue 26 % 27 % 28 % APAC 2,014 1,690 1,363 19 % 24 % Percentage of total revenue 16 % 15 % 15 % Total revenue$ 12,868 $ 11,171 $ 9,030 15 % 24 % Overall revenue during fiscal 2020 increased in all geographic regions as compared to fiscal 2019 primarily due to increases in Digital Media revenue and, to a lesser extent, increases in 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 fiscal 2020 and fiscal 2019 were impacts associated with foreign currency as shown below. Our cash flow hedging program is used to mitigate a portion of the foreign currency impact to revenue. (in millions) 2020 2019 Revenue impact: Increase/(Decrease) Euro$ (24) $ (73) Australian Dollar (16) (27) British Pound (5) (27) Japanese Yen 14 2 Brazilian Real (14) (2) Other currencies (8) (11) Total revenue impact (53) (138) Hedging impact: Euro 8 30 British Pound (2) 8 Japanese Yen (2) 2 Australian Dollar (1) - Total hedging impact 3 40 Total impact$ (50) $ (98) During fiscal 2020, theU.S. Dollar strengthened largely against EMEA currencies and the Australian Dollar, which decreased revenue inU.S. Dollar equivalents. The foreign currency impact to revenue was partially offset by gains primarily from our Euro cash flow hedging program.
See Note 2 of our Notes to Consolidated Financial Statements for additional details of revenue by geography.
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Table of Contents Cost of Revenue % Change % Change (dollars in millions) 2020 2019 2018 2020-2019 2019-2018 Subscription$ 1,108 $ 926 $ 574 20 % 61 % Percentage of total revenue 9 % 8 % 6 % Product 36 40 46 (10) % (13) % Percentage of total revenue * * 1 % Services and other 578 707 575 (18) % 23 % Percentage of total revenue 4 % 6 % 6 % Total cost of revenue$ 1,722 $ 1,673 $ 1,195 3 % 40 %
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(*) Percentage is less than 1% Subscription Cost of subscription revenue consists of third-party hosting services and data center costs, royalty fees and other expenses related to operating our network infrastructure, including depreciation expense and operating lease payments associated with computer equipment, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of certain intangible assets and allocated overhead. Cost of subscription revenue increased due to the following: Components of Components of % Change % Change 2020-2019 2019-2018 Hosting services and data center costs 10 % 16 % Incentive compensation, cash and stock-based 5 5 Royalty costs 3 5 Base compensation and related benefits associated with headcount 3 5 Software licenses 2 2 Amortization of intangibles (2) 24 Various individually insignificant items (1) 4 Total change 20 % 61 % 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 Other Cost of services and other revenue is primarily comprised of employee-related and other associated costs incurred to provide consulting services, training and product support. Cost of services and other also includes media costs related to impressions purchased from third-party ad inventory sources for our transaction-based Adobe Advertising Cloud offerings, which we began to discontinue in the second quarter of fiscal 2020. Cost of services and other fluctuations were due to the following: Components of Components of % Change % Change 2020-2019 2019-2018 Media costs (9) % 10 % Base compensation and related benefits associated with headcount (7) 4 Incentive compensation, cash and stock-based (1) 6 Professional and consulting fees 3 - Various individually insignificant items (4) 3 Total change (18) % 23 % 50
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Table of Contents Operating Expenses % Change (dollars in millions) 2020 2019 2018 2020-2019 Research and development$ 2,188 $ 1,930 $ 1,538 13 % Percentage of total revenue 17 % 17 % 17 % Sales and marketing 3,591 3,244 2,621 11 % Percentage of total revenue 28 % 29 % 29 % General and administrative 968 881 745 10 % Percentage of total revenue 8 % 8 % 8 % Amortization of intangibles 162 175 91 (7) % Percentage of total revenue 1 % 2 % 1 % Total operating expenses$ 6,909 $ 6,230 $ 4,995 11 % 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 due to the following: Components of % Change 2020-2019 Incentive compensation, cash and stock-based 11 % Base compensation and related benefits associated with headcount 3 Travel (1) Total change 13 % We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced offerings and solutions. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our subscription and service offerings, applications and tools. Sales and Marketing Sales and marketing expenses consist primarily of salary and benefit expenses, amortization of contract acquisition costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses 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 due to the following: Components of % Change 2020-2019
Marketing spend related to campaigns, events and overall marketing efforts
8 % Incentive compensation, cash and stock-based 4 Transaction fees 2 Base compensation and related benefits associated with headcount 1 Professional and consulting fees (1) Travel (3) Total change 11 % 51
-------------------------------------------------------------------------------- Table of Contents 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. General and administrative expenses increased due to the following: Components of % Change 2020-2019 Incentive compensation, cash and stock-based 5 %
Charges related to cancellation of corporate events, net of recoveries
3 Bad debt expense 2 Charitable contributions 2 Base compensation and related benefits associated with headcount 1 Travel (2) Various individually insignificant items (1) Total change 10 % During fiscal 2020, we recorded net charges related to the cancellation of our corporate events due to concerns over the pandemic. Certain of these charges were reversed as we successfully negotiated the right to apply certain commitments to other events. Bad debt expense increased during fiscal 2020 primarily due to specific reserves for certain categories of customers that were more impacted by the changes in the macroeconomic environment as a result of the pandemic. Amortization of Intangibles Amortization expense decreased during fiscal 2020 as compared to fiscal 2019 primarily due to certain intangible assets from previous acquisitions, including from Marketo andOmniture , becoming fully amortized during the year. Non-Operating Income (Expense), Net % Change (dollars in millions) 2020 2019 2018 2020-2019 Interest expense$ (116) $ (157) $ (89) (26) % Percentage of total revenue (1) % (1) % (1) % Investment gains (losses), net 13 52 3 (75) % Percentage of total revenue * * * Other income (expense), net 42 42 40 ** Percentage of total revenue * * *
Total non-operating income (expense), net
(3) %
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(*) 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, were 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 fiscal 2020 as compared to fiscal 2019 primarily due to lower average interest rates on our debt instruments that were refinanced in the first quarter of fiscal 2020. 52 -------------------------------------------------------------------------------- Table of Contents Investment Gains (Losses), Net Investment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets which are classified as trading securities, and gains and losses associated with our direct and indirect investments in privately held companies. Investment gains (losses), net decreased during fiscal 2020 as compared to fiscal 2019 primarily due to the gain recognized upon our acquisition of the remaining interest in Allegorithmic inJanuary 2019 . 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. Other income (expense), remained stable during fiscal 2020 primarily due to decreases in interest income driven by lower average interest rates offset by our change in methodology of accounting for foreign currency cash flow hedges. Effective in the third quarter of fiscal 2019, option premiums, which were previously recorded in other income (expense), net, are recorded in accumulated other comprehensive income (loss). Provision for (Benefit from) Income Taxes % Change (dollars in millions) 2020 2019 2018 2020-2019 Provision for (benefit from) income taxes$ (1,084) $ 254 $ 203 ** Percentage of total revenue (8) % 2 % 2 % Effective tax rate (26) % 8 % 7 %
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(**) Percentage is not meaningful. Our effective tax rate decreased by approximately 34 percentage points during fiscal 2020 as compared to fiscal 2019. The change is primarily due to non-recurring tax benefits resulting from the intra-entity transfers of certain intellectual property rights ("IP rights") completed during fiscal 2020. Our effective tax rate for fiscal 2020 was lower than theU.S. federal statutory tax rate of 21% primarily due to tax benefits resulting from the intra-entity transfers of certain IP rights, a favorable geographic mix of earnings and tax benefits related to stock-based compensation. During fiscal 2020, we completed intra-entity transfers of certain IP rights to our Irish subsidiary in order to better align the ownership of these rights with how our business operates. The transfers did not result in taxable gains; however, our Irish subsidiary recognized deferred tax assets for the book and tax basis difference of the transferred IP rights. As a result of these transactions, we recorded deferred tax assets, net of valuation allowance, and related tax benefits of$224 million and$1.13 billion , based on the fair value of the IP rights transferred in April andNovember 2020 , respectively. The tax-deductible amortization related to the transferred IP rights will be recognized over the period of economic benefit. In years beyond fiscal 2020, the change in the geographic mix of international income resulting from these transfers is anticipated to adversely affect our effective income tax rates and cash flows. However, the adverse impact to effective rates for cash paid for income taxes will be partially offset by future deductions on the transferred IP rights. OnDecember 22, 2017 , theU.S. Tax Act was enacted into law, which significantly changed existingU.S. tax law and includes many provisions applicable to us. Certain international provisions of theU.S. Tax Act, such as a tax on global intangible low-tax income, a base erosion and anti-abuse tax and a special tax deduction for foreign-derived intangible income, took effect in fiscal 2019. As theU.S. Treasury releases regulations that impact these provisions, we account for finalized regulations in the period of enactment. 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$276 million as ofNovember 27, 2020 and is primarily attributable to certain state and foreign credits and foreign intangible assets. 53 -------------------------------------------------------------------------------- Table of Contents 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. InJune 2020 ,California enacted legislation which includes a limitation on the utilization of research and development tax credits for a three-year period beginning in fiscal 2021. The net impact of the legislation is uncertain but is anticipated to increase ourCalifornia tax and, consequently, adversely impact our effective tax rates for the three-year period beginning in fiscal 2021. See Note 10 of our Notes to Consolidated Financial Statements for further information on our provision for (benefit from) income taxes. Accounting for Uncertainty in Income Taxes The gross liabilities for unrecognized tax benefits excluding interest and penalties were$201 million ,$173 million and$196 million for fiscal 2020, 2019 and 2018, respectively. If the total unrecognized tax benefits atNovember 27, 2020 ,November 29, 2019 andNovember 30, 2018 were recognized,$136 million ,$116 million and$136 million would decrease the respective effective tax rates. The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately$26 million and$25 million for fiscal 2020 and 2019, respectively. 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$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 theEuropean Commission of theEuropean Union , we are subject to potential changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe. These countries, other governmental bodies and intergovernmental economic organizations such as theOrganization for Economic Cooperation and Development , have or could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in such jurisdictions. In the current global tax policy environment, any changes in laws, regulations and interpretations related to these assertions could adversely affect our effective tax rates, cause us to respond by making changes to our business structure, or result in other costs to us which could adversely affect our operations and financial results. Moreover, we are subject to the continual examination of our income tax returns by theU.S. Internal Revenue Service and other domestic and foreign tax authorities. These tax examinations are expected to focus on our intercompany transfer pricing practices, application of tax rules and other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from 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. 54 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES This data should be read in conjunction with our Consolidated Statements of Cash Flows. As of (in millions) November 27, 2020 November 29, 2019 Cash and cash equivalents $ 4,478 $ 2,650 Short-term investments $ 1,514 $ 1,527 Working capital $ 2,634 $ (1,696) Stockholders' equity $ 13,264 $ 10,530 Working Capital Working capital as ofNovember 27, 2020 andNovember 29, 2019 was$2.63 billion of a surplus and$1.70 billion of a deficit, respectively. During the first quarter of fiscal 2020, we refinanced our 2.25 billion term loan dueApril 30, 2020 ("Term Loan") and$900 million 4.75% senior notes dueFebruary 1, 2020 ("2020 Notes"). See the section titled "Cash Flows from Financing Activities" below. A summary of our cash flows for fiscal 2020, 2019 and 2018 is as follows: (in millions) 2020 2019 2018 Net cash provided by operating activities$ 5,727 $ 4,422 $ 4,029 Net cash used for investing activities (414) (456) (4,685) Net cash used for financing activities (3,488) (2,946) (5)
Effect of foreign currency exchange rates on cash and cash equivalents
3 (13) (2)
Net increase (decrease) in cash and cash equivalents
1,007
Our primary source of cash is receipts from revenue and, to a lesser extent, proceeds from participation in the employee stock purchase plan. The primary uses of cash are our stock repurchase program as described below, payroll-related expenses, general operating expenses including marketing, travel and office rent, and cost of revenue. 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 For fiscal 2020, net cash provided by operating activities of$5.73 billion was primarily comprised of net income adjusted for the net effect of non-cash items. The primary working capital sources of cash were net income together with increases in deferred revenue and decreases in trade receivables, which were offset in part by increases in prepaid expenses and other assets. The increase in deferred revenue was primarily driven by Digital Media offerings with cloud-enabled services, and the decrease in trade receivables was largely attributable to strong collections. The primary working capital use of cash was due to increases in prepaid expenses and other assets driven by sales commissions paid and capitalized and, to a lesser extent, increases due to the timing of billings and payments associated with certain vendors. Cash Flows from Investing Activities For fiscal 2020, net cash used for investing activities of$414 million was primarily due to ongoing capital expenditures. These cash outflows were offset in part by proceeds from sales and maturities of short-term investments, net of purchases. Cash Flows from Financing Activities For fiscal 2020, net cash used for financing activities of$3.49 billion was primarily due to payments for our treasury stock repurchases and taxes paid related to the net share settlement of equity awards, which were offset by proceeds from re-issuance of treasury stock for our employee stock purchase plan. See the section titled "Stock Repurchase Program" discussed below. InFebruary 2020 , we issued$500 million of 1.70% senior notes dueFebruary 1, 2023 ("2023 Notes"),$500 million of 1.90% senior notes dueFebruary 1, 2025 ("1.90% 2025 Notes"),$850 million of 2.15% senior notes dueFebruary 1, 2027 ("2027 Notes") and$1.30 billion of 2.30% senior notes dueFebruary 1, 2030 ("2030 Notes"). We used the proceeds to repay the Term Loan and 2020 Notes concurrently. See Note 17 of our Notes to Consolidated Financial Statements for information regarding our debt refinancing. 55 -------------------------------------------------------------------------------- Table of Contents Other Liquidity and Capital Resources Considerations Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2021 due to changes in our planned cash outlay. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the pandemic and other risks detailed in Part I, Item 1A titled "Risk Factors." While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future. However, based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital, operating resource expenditure and capital expenditure requirements for the next twelve months. Our cash equivalent and short-term investment portfolio as ofNovember 27, 2020 consisted of asset-backed securities, corporate debt securities, foreign government securities, money market mutual funds, municipal securities and time deposits. We use professional investment management firms to manage a large portion of our invested cash. We have a$1 billion senior unsecured revolving credit agreement ("Revolving Credit Agreement") with a syndicate of lenders, providing for loans to us and certain of our subsidiaries throughOctober 17, 2023 . As ofNovember 27, 2020 , there were no outstanding borrowings under this credit agreement and the entire$1 billion credit line remains available for borrowing. As ofNovember 27, 2020 , we have$4.15 billion senior notes outstanding, consisting of the 2023 Notes, 1.90% 2025 Notes, 2027 Notes, 2030 Notes and the$1 billion of 3.25% senior notes dueFebruary 1, 2025 (the "3.25% 2025 Notes," and together with the aforementioned notes, the "Notes"). The Notes rank equally with our other unsecured and unsubordinated indebtedness. We expect to continue our investing activities, including short-term and long-term investments, purchases of computer systems for research and development, sales and marketing, product support and administrative staff, and facilities expansion. As ofNovember 27, 2020 , we expect our capital investment to be approximately$550 million to$650 million , primarily to fund ourSan Jose andBangalore construction projects through fiscal 2022. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business. Subsequent toNovember 27, 2020 , we completed our acquisition of Workfront, a privately held company that provides a work management platform for marketers, for approximately$1.5 billion in cash consideration. See Note 3 of our Notes to Consolidated Financial Statements for further information regarding this acquisition. Stock Repurchase Program To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase shares in the open market or enter into structured repurchase agreements with third parties. InMay 2018 , our Board of Directors granted us an authority to repurchase up to$8 billion in common stock through the end of fiscal 2021. During fiscal 2020, 2019 and 2018, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling$3.05 billion ,$2.75 billion , and$2.05 billion , respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price ("VWAP") of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is expected to be higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us. The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. 56 -------------------------------------------------------------------------------- Table of Contents The following is a summary of our structured stock repurchases executed with large financial institutions during fiscal 2020, 2019 and 2018: (in millions, except average price per share) 2020 2019 2018 Average per Average per Average per Board approval dates Shares share Shares share Shares share January 2017 - $ - - $ - 8.7$ 230.43 May 2018 8.0$ 376.38 9.9$ 270.23 - $ - Total cost$3,024 $2,671 $2,002 For fiscal 2020, 2019 and 2018, the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us byNovember 27, 2020 ,November 29, 2019 andNovember 30, 2018 were excluded from the computation of earnings per share. As ofNovember 27, 2020 ,$255 million of prepayments remained under the agreement. Subsequent toNovember 27, 2020 , we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of$950 million . This amount will be classified as treasury stock on our Consolidated Balance Sheets. Upon completion of the$950 million stock repurchase agreement,$1.1 billion remains under ourMay 2018 authority. Further, inDecember 2020 , our Board of Directors granted us additional authority to repurchase up to$15 billion in common stock through the end of fiscal 2024. We have not drawn from our new$15 billion authority as of the issuance of these financial statements. See Item 5, Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities for share repurchases during the quarter ended November 27, 2020 . Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Our principal commitments as ofNovember 27, 2020 consist of our Notes and obligations under operating leases, royalty agreements and various service agreements. See Notes 16, 17 and 18 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments. Contractual Obligations The following table summarizes our contractual obligations as ofNovember 27, 2020 : (in millions) Payment Due by Period Less than More than Total 1 year 1-3 years 3-5 years 5 years Notes, including interest$ 4,763 $ 99 $ 693 $ 1,659 $ 2,312 Operating lease obligations 657 104 162 119 272 Purchase obligations 1,885 872 1,012 1 - Total$ 7,305 $ 1,075 $ 1,867 $ 1,779 $ 2,584 Senior Notes As ofNovember 27, 2020 , the carrying value of our Notes was$4.12 billion . Interest is payable semi-annually, in arrears onFebruary 1 andAugust 1 . AtNovember 27, 2020 , our maximum commitment for interest payments was$613 million for the remaining duration of our outstanding Notes. Covenants Our Revolving Credit Agreement contains a financial covenant requiring us not to exceed a maximum leverage ratio. As ofNovember 27, 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. 57 -------------------------------------------------------------------------------- Table of Contents Transition Taxes Liability Our transition tax liability which was accrued as a result of theU.S. Tax Act was approximately$390 million as ofNovember 27, 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. Accounting for Uncertainty in Income Taxes See Results of Operations - Provision for (Benefit from) Income Taxes above and Note 10 of our Notes to Consolidated Financial Statements for our discussion on accounting for uncertainty in income taxes. 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 underDelaware 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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